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At one end in corporate taxes is GE. At the other, the NY Times

COMMENTARY | April 11, 2011

General Electric, as the Times reported, paid zero in income taxes last year, and, as David Cay Johnston reports, a lot lower rate over a ten-year period than smaller corporations, such as the Times. Regressivity is the rule.


By David Cay Johnston
johnstonstake@tax.org

Just as the individual income tax falls more heavily on the affluent than the super-rich, so too does the corporate income tax. The giants of American business pay at lower effective cash rates than much smaller corporations.

That regressivity is an important aspect of the general trend in U.S. tax policy, which at both the federal and state levels is focused on pushing burdens down the income ladder.

But the broader issue has gotten zero attention in the hubbub that began March 24 with The New York Times exposé on General Electric Co.'s income taxes.

GE itself has said it paid no tax federal income tax last year, but complains it was maligned -- although it has been unable to point to a single factual error in the Times. We'll get to the dispute over how GE was treated, its response, and its statement that it is "scrupulous" about its worldwide tax compliance. But first let's look at the distribution of corporate income taxes, starting with a comparison of two of the best-known brand names in the country: GE and the New York Times Co.

Warning: You may want to take a deep breath right now because the numbers that follow may leave you gasping for air.

GE made a nearly $194 billion profit over the last 10 years and paid nearly $23 billion in income taxes. That's a real tax rate of 11.8 percent, about one-third the statutory rate of 35 percent.

The New York Times Co. made less than $2 billion in profit over the same 10 years and paid almost $1.4 billion in income taxes. That's a real tax rate of 71 percent, paid in cold, hard cash.

So the newspaper company that exposed GE paid more than twice the posted U.S. corporate rate, and its real tax rate was more than six times GE's real tax rate.

Had GE been taxed at the same rate as the New York Times Co. over that decade, it would have paid $115 billion more in corporate income taxes. That is more than half the $191 billion that all corporations paid in U.S. income taxes in 2010, White House budget data show.

At the posted 35 percent corporate income tax rate, GE would have paid $45 billion more in taxes.

Why did the New York Times Co. pay such a high tax rate?

The main reasons include its 1991 purchase of The Boston Globe for $1.1 billion and its 2005 purchase of about.com for $410 million. The Globe, about.com, and some other properties came with boatloads of intangibles that do not qualify as tax-deductible expenses.

There are other big differences between GE and the New York Times Co. when it comes to taxes. For one, GE lobbies heavily for tax breaks. Last year GE spent $39 million lobbying in Washington. That is more than $73,000 for each representative and senator. It is also four times what GE spent in the late 1990s. And while correlation is not causation, as GE's lobbying spending has zoomed, its tax rate for accounting purposes has trended downward. Indeed, in 2010 it was a quarter of what it was in 2001, both down years for the economy.

In contrast, the New York Times Co. "does not generally lobby and has not lobbied on tax matters," spokeswoman Abbe Serphos said. She added that "organizations that we belong to may or may not have taken positions on proposed tax legislation."

The newspaper company is an extreme example when it comes to tax burdens. But the vast disparity between two companies with lots of money invested in machinery provides an excellent contrast to examine the distribution of tax bills by taxpayer size.

Individual income tax burdens rise until about the $10 million level and then they fall off. At the very, very top the current tax rate is zero, because Congress lets hedge fund managers and others earn now but delay for years or decades paying a 15 percent tax on their compensation for successfully investing other people's money. In this, hedge fund managers and GE are at one in sharing the current burdens of our civilization.

[See PDF document: Comparing Tax Burdens -- The New York Times Co. vs. General Electric.]

Those taxpayers with the highest incomes, the top 400, have seen their real income tax rate fall from 30 percent in 1992 to 16.6 percent in 2007. That is a drop of more than two-fifths. Even if you take into account the charitable gifts of the Top 400, their 2007 effective income tax rate was 18.1 percent.

A single taxpayer who does not itemize this year will hit an effective tax rate of 18.1 percent at $74,000.

The same pattern of taxes being progressive to a point and then becoming regressive shows up in corporate income taxes.

In 2008, for example, the top one-tenth of 1 percent of corporations paid an effective tax rate of 14.7 percent of their profits, while the next 8,269 corporations with assets between $250 million and $2.5 billion paid 15.2 percent. That both GE and the New York Times Co. are in the top group and pay such widely disparate real tax rates shows how averages need to be viewed in context.

Now what happens when we look at actual cash paid when measured against not book profits reported to shareholders, but taxable profits measured under the code? The disparity between the corporate Gargantuans and the Lilliputians is much greater.

The top one-tenth of 1 percent of corporations paid at a 21.2 percent effective rate, while companies with as little as $500,000 in assets paid more.

Corporations in the $250 million to $2.5 billion class paid more than 29 percent. Corporations with assets of $5 million to $250 million all paid 32 percent or more, which is half again as much as the really big companies and very close to the statutory rate.

Perhaps more significant, the 2.2 million corporations with between $1 and $500,000 of assets paid 19 percent, not much less than the Gargantuans.

In other words, your local mom and pop enterprises selling shoes, bending metal, or offering up ham and eggs for breakfast bear a tax burden nearly equal to the megacorporations. Those small businesses own less than one-half of 1 percent of all corporate assets, while the megafirms own 79 percent of all corporate assets.

Corporate rates at the top (with some notable exceptions like the New York Times Co.) fall off because most of those firms spend big to lobby for provisions for their benefit as opposed to industrial or general benefit. The rates at the top, including GE's, reflect all the favors very large firms win through lobbying, campaign contributions by executives, and subtle favors like jobs for friendly lawmakers when they retire or get voted out.

GE has complained that it was the victim of "a particularly distorted and misleading account" in the Times. Yet GE itself has told news organizations that it paid no federal income taxes in 2010, and it made no complaint when Forbes ran a similar report a year ago.

The Columbia Journalism Review's Ryan Chittum, who writes daily about follies and foul-ups in the nation's financial pages, looked into GE's complaints. Chittum wrote that GE failed to establish any factual error in reporter David Kocieniewski's account, which in its display and the rubric identifying a series has all the earmarks of a big Times push for a Pulitzer and other prizes.

GE also said that it "pays what it owes under the law and is scrupulous about its compliance with tax obligations in all jurisdictions. We are committed to acting with integrity in relation to our tax obligations."

"Scrupulous" is an interesting word, especially in the context of GE asserting that it is compliant in all jurisdictions around the world.

But that is not what multiple GE managers found over a period of years at its light bulb manufacturing operation in Brazil. At least three times, GE's Brazilian managers reported that the company was escaping state-level VAT by claiming it sold vast quantities of light bulbs and other equipment in tax-free or reduced taxed zones in the Amazon, where electric lights are less common than piranha.

GE even got legal opinions -- based on its hypothetical -- that the company had exactly no legal defense in the event its executives were charged in Brazil. See Johnston, "Blame It on Rio: GE's Brazilian Headache," Tax Notes Int'l, June 30, 2008, p. 1067, Doc 2008-13620 , or 2008 WTD 126-1.)

Maybe the Times's coverage of GE and its nearly 1,000-employee tax department will spur serious inquiry into the company's conduct at home and abroad. And if not now, then maybe the next time the political winds change on Capitol Hill.

Your thoughts? E-mail me at JohnstonsTake@tax.org.

 This column was first published by Tax Analysts in Tax Notes. © Tax Analysts 2011. All rights reserved.



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