Why GE's Tax Reducing Strategies Are Legit

Mar.27.11 | About: General Electric (GE)

The New York Times has a long front-page news article calling for General Electric (NYSE:GE) to pay more taxes. Regular readers of the coverage here of both General Electric and taxes know that I am critical of General Electric's efforts to use its political clout for special subsidies and that-- as a general matter-- I favor a tax code with simple low rates (or even a single flat rate) that treats everyone the same rather than favoring certain companies or groups or behaviors.

The Times does a pretty good job of explaining how GE achieves its low tax rate using outside lobbyists and an in-house 975-person (!) tax department that "includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress."

For all that, though, the Times article has some significant flaws. For one thing, three critics of GE's tax maneuvers quoted in the article — "Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center," "Robert S. McIntyre, director of the liberal group Citizens for Tax Justice," and "Martin A. Sullivan, a tax economist for the trade publication Tax Analysts" — work for non-profit organizations that are themselves tax exempt. For the non-profits who don't pay taxes to be complaining that GE doesn't pay any taxes is pretty rich.

In addition, the Times article seems to have a problem with the idea of countries competing for business with low tax rates: "As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster....Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.'s accumulated offshore profits have risen to $92 billion from $15 billion." The article makes it seem like this is some kind of scandal or special favor that GE won by giving charity to schools in Rep. Charlie Rangel's district or by hiring former government officials as lobbyists.

But why should GE, or any other company, have to pay U.S. tax on money earned outside the U.S.? It makes perfect sense, from the perspective of the company and its shareholders, to keep the money outside America until the American politicians wake up and lower American tax rates to the point at which they are competitive with those in Singapore or Ireland.

GE choosing not to pay tax now by choosing to keep the money offshore isn't really that different from a homeowner deciding not to sell his house now because he doesn't want to pay the capital gains tax this year. Up to a point, the decision on when to realize income is up to the taxpayer, not up to the New York Times reporter. And whatever you might think about how influential GE or its tax department is, it's not GE that sets the tax rate in Singapore or Ireland.