A few weeks ago, the New York Times reported that General Electric, despite earning $14.2 billion in profits worldwide in 2010, would not pay any US taxes – and that GE even claimed a tax benefit of $3.2 billion. Not surprisingly, the article generated unfavorable public opinion as many citizens are currently preparing their taxes for the April 18th deadline. The fact that the United States, at 35%, has the highest corporate tax rate in the world does not help GE win over sympathizers either. Besides the issues of fairness surrounding General Electric’s tax bill and the complexities of the US tax code, the story subtly suggests that we may need to be concerned with the future of America’s role in the increasingly globalized marketplace.
The high corporate tax rate is often cited as a deterrent from doing business in the United States and lowering the corporate tax rate was among the many changes proposed by the House GOP budget for 2012. The budget, presented on Wednesday, would lower the highest individual and corporate tax rates to 25% and eliminate many of the tax breaks that are largely responsible for the diversion between the stated rate and the effective rates for corporations. The proposed changes to the tax code are expected to have a neutral effect on tax revenues since the effective tax rate for large corporations is often much lower than the stated rate of 35%. In fact, many other large corporations besides GE regularly manage to pay little or no income taxes.
Although few large corporations actually pay US income taxes at a rate of 35%, GE garnered extraordinary attention for a couple reasons. First, the company’s 1,000 person tax department seems excessive despite having nearly 300,000 total employees and generating $150 billion in revenue across several different industries. Secondly, President Obama named GE Chairman and CEO, Jeff Imlet, as the Chairman of the President’s Council on Jobs and Competitiveness in January 2011. Imlet’s appointment now seems contradictory since GE has reportedly relocated one-fifth of its workforce overseas since 2002. During that same time frame, the company has increased the amount of earnings designated as permanently reinvested to $92 billion from $15 billion.
The concept of permanently reinvested earnings is essentially nothing more than an accounting creation that allows firms to avoid paying US income taxes on money that is put to use overseas. It seems reasonable that growth abroad, particularly the BRIC nations and other emerging markets, will outpace growth in the United States in the near future. If that is the case, then it makes sense for large multinationals such as GE to invest more of their profits, and to locate more employees, in those high-growth areas.
GE, an iconic brand of American business, is paying little to no income taxes in the US – and is growing its presence abroad. If the actual cash taxes paid by GE and other companies are already near zero, then what can be done to provide incentives for these companies to stay in the United States? Metrics on scholastic achievement show that US students are lagging many of their international counterparts. The US is also burdened by consistent budget deficits and trillions of dollars in national debt, which is decreasing confidence in the dollar’s strength. These trends suggest that we are quickly moving towards a much less US-centric international economy.
[The NY Times article referenced above can be found here](http://www.nytimes.com/2011/03/25/business/economy/25tax.html?pagewanted=1&_r=2)
[For more on the House GOP’s budget, check out the following link](http://online.wsj.com/article/SB10001424052748703806304576244522761581288.html)
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