There are three essential follow up posts to the New York Times article that dropped like a bombshell on General Electric (NYSE: GE) when it claimed GE did not pay any income tax on its $5.1 billion in profits last year.
First up, Allan Sloan and Jeff Gerth from ProPublica present the five strategies GE uses to play the tax game. Here’s just one, the tax department as profit center:
GE’s tax department is well known for its size, skill and hiring of former government officials. About 20 years ago, GE’s tax employees totaled a few hundred and were decentralized. Today, there are almost 1,000. The department’s strong suit? Reducing the taxes GE reports for earnings purposes.
GE, like other publicly traded companies, publicly reports one set of tax numbers to calculate its earnings but uses a different set, which remain confidential, to calculate what it owes the tax collector. The lower the taxes GE reports, the higher its publicly reported profits. And the higher its profits, presumably, the higher its stock price goes.
Joe Nocera in the New York Times today with an OpEd that points the blame not at GE, but rather at Washington:
the company is going to pay little or nothing in federal income taxes for 2010. And the unambiguous reason for this is that G.E. took full advantage of the various tax loopholes in the U.S. tax code that are available to it. Wouldn’t you? The real villain here isn’t G.E. for gaming the corporate tax system. Rather, the villain is a political system that makes the corporate tax system so easy to game.
Finally, Megan McArdle at The Atlantic extends the debate by taking another approach:
Given how much time and energy we spend arguing about these loopholes, I’d like to suggest that we stop, and instead focus on somewhere it’s less taxing to capture the money: at the taxpayer. The richest leech of a trust-fund baby in the world does not have enough money to hire GE’s tax department. Why not just eliminate the corporate income tax, along with the special treatment of capital gains and dividends, and the basis-step up in the estate tax, and collect the taxes when the money hits a person? It wouldn’t cost us that much money (it couldn’t–the corporate income tax only collects a few hundred billion a year) and it needn’t cost any, if we readjust the tax code appropriately.
Here are the Covestor models that are long GE as of 4/5/11:
– Core and Hedged from Robert Foo
– Market Neutral Growth from Patrick Clark
– S&P 500 Best of Breed from Conrad Leifur
– Equity Opportunity from 401 Advisor
And these are short GE as of 4/5/11:
– Bottom Up Analysis and Bottom Up Analysis Aggressive from Epic Advisors
Sources:
“5 Ways GE Plays the Tax Game” Jeff Gerth and Allan Sloan, ProPublica 4/4/11
http://www.propublica.org/article/5-ways-ge-plays-the-tax-game
“Who Could Blame GE?” Joe Nocera, New York Times, 4/4/11
https://www.nytimes.com/2011/04/05/opinion/05nocera.html
“Yes, GE Paid Taxes in 2010 (We’re Pretty Sure)” Megan McArdle, The Atlantic, 4/4/11
http://www.theatlantic.com/business/archive/2011/04/yes-ge-paid-taxes-in-2010-were-pretty-sure/236802/
