The Tax Man Cometh -- Just Not for Everybody

The tax man and Santa Claus have two things in common. Every year they 'cometh' -- just not for everybody. Santa doesn't visit those who've been 'bad,' and the tax man doesn't visit those who have high-priced lobbyists working for them.

The current best example of the latter -- best in both 'pertinence' and 'dollars' -- is General Electric Company, the nation's largest industrial company. "Best in pertinence" because GE's chairman and chief executive officer, Jeffrey Immelt, is now also Mr. Obama's chairman of the President's Council of Jobs and Competitiveness and because, according to the New York Times, GE spent $4.1 million last year on outside lobbyists to preserve favorable tax treatment for its earnings. "Best in dollars" because despite worldwide profits of $14.2 billion in 2010, of which $5.1 billion came from its operations in the United States, the company announced on March 23 that its American tax bill was none, nada, zilch.

And of course this isn't the first time that GE has drunk from the 'zero-taxes trough.' The company's consolidated tax rate from 2005 through 2009 was only 11.6%, including state, local and foreign taxes, and a mere 6.6% in 2009, compared to the 30.5% average for all the companies in the Standard & Poor's 500-stock index, according to Bloomberg Businessweek.

David Kocieniewski of the New York Times thoughtfully wrote that GE's extraordinary success at driving its U.S. tax rate to near zero, from around 30% in the mid-1950s, is the result of "an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore." GE's more than $200 million spent on lobbying Congress over the last decade (per the Center for Responsive Politics) and the tax avoidance schemes it produces with its massive 975-person tax department are no different in intent than the tax avoidance schemes that President Franklin D. Roosevelt wrote to Congress about in 1937, which, he said, "shift the tax load to the shoulders of others less able to pay and mulct the Treasury of the Government's just due."

Of course what makes all of this especially galling is listening to Mr. Obama deride in his January 25th State of the Union Address the "parade of lobbyists" who have "rigged the tax code to benefit particular companies and industries." He uttered these words just four days after, on January 21st, appointing as his "liaison" to the American business community the CEO of the company that (per Bloomberg News) spent in 2010 more on tax lobbyists than any other company or trade association in the country.

Having this important government post apparently gave Mr. Immelt no pause even in the few weeks immediately after his appointment, first in lobbying against Mr. Obama's very own tax proposal that would have limited the ability of companies like GE to defer even more types of overseas income and then in disingenuously calling for reform of the corporate tax code while all the while defending his company's zero U.S. tax rate in 2010 and its ongoing overseas tax avoidance schemes.

Is it any wonder then, with the economy-related personnel choices that Mr. Obama makes, which so often contradict both his campaign promises and his speeches as president, that 60% of those surveyed in a CNN/Opinion Research poll disapprove of his handling of the economy?

The underlying issue that needs to be confronted by the administration and Congress is narrowing greatly the entire spectrum of "tax avoidance," since the greater culprit here is ultimately our own government, albeit increasingly under the influence of big-business lobbyists. The degree to which members of Congress from both parties enact tax loophole after tax loophole that benefit their favored companies continues unabated -- so much so that corporate taxes, which accounted for 35% of all federal revenues in 1945, accounted for less than 9% in 2010. And the unwillingness of President Obama to stand tough on his campaign pledge to level the tax playing field between American and foreign workers -- and between the U.S. Treasury and the treasuries of our major trading parties -- is a mind-boggling disconnect given this country's extreme revenue shortfall in our current federal-budget-challenged strait.

Tax evasion, we all know, is the willful illegal failure to pay taxes that are due. Tax avoidance, on the other hand, is, generally speaking, the legal and ethical practice of paying only those taxes that are due, and no more. However, tax avoidance becomes inappropriate at a minimum and in some instances even unethical when it is the nation's major domestic and multinational corporations -- rather than the people's Congress -- which, through the efforts of their lobbyists, become the architects of the very tax avoidance schemes that they then take advantage of.

In my book, It Takes a CEO: It's Time to Lead with Integrity (Free Press, 2005), I wrote at length about what I believe is the equal and concurrent responsibility of American corporations to their shareholders, employees, customers and communities and to the nation. And this isn't an isolated view. It was fairly commonly held in the post-WWII era, and as long ago as 1981, ironically largely at GE's urging, the Business Roundtable formally adopted this broad sense of responsibility for all of its member companies. While this view was modestly 'qualified' by the Roundtable in 1997, it wasn't until 2004, in this current post-Enron age of selfishness, that it was completely abandoned by the Roundtable to favor only insiders and shareholders. Against this long, sensitive history, it's particularly hard to condone today the myriad tax avoidance efforts by GE and others that now rob our Treasury of its due and the middle class of the tax fairness to which they're entitled.

I never thought I would hear myself saying this, but the single U.S. president who in recent administrations got it right when it came to closing unwarranted corporate tax loopholes, especially the massive overseas taxation loophole, was Ronald Reagan, who supported changes that closed those loopholes and immediately led to GE and companies with similar tax practices to pay far higher effective rates, up to 32.5%.

And what do we hear from Mr. Obama, in sharp contrast to Mr. Reagan? Well, that Mr. Immelt "understands what it takes for America to compete in the global economy." With respect, Mr. President, a lot of us would beg to differ -- and differ a lot.

Since the start of the Great Recession of 2007 we've read often about the more than $2 trillion that has accumulated in the treasuries of the nation's major companies awaiting investment. I've written, as have others, that the administration and Congress need to put in place the incentives, tax policies and overall environment that would incentivize these companies to use these reserves to help create the millions of jobs needed to dig our economy out of the near jobless malaise it's mired in. But as Jason Zweig rightly pointed out in the Wall Street Journal , "much of that cash isn't in the U.S.; it is abroad." In fact, of the companies in the Standard & Poor's 500-stock index, "north of $1 trillion in undistributed foreign earnings or profits has been parked overseas to avoid U.S. taxes," much of it by now in illiquid 'American jobs-stealing' foreign factories that can't easily be repatriated.

For example, as Mr. Kocieniewski identified, for years even GE's abysmally low reported U.S. tax burden has been overstated because it includes taxes that will be paid only if the company brings its overseas profits back to America. As GE has expanded abroad, the portion of its profits intentionally steered to low-tax countries such as -- give us a break! -- Ireland and Singapore simply to avoid taxes has grown far faster than any associated revenues. Thus, over the last three years, although 46% of the company's revenue was in the U.S., only 18% of its profits were because of its offshore tax schemes and its 'transfer pricing' between and among its foreign offices, which has no economic justification.

Despite its CEO now being chairman of Mr. Obama's Council on Jobs, GE, since 2002, has in fact eliminated fully 20% of its American workforce while increasing overseas employment -- in that relatively short time, GE's accumulated sheltered offshore profits have, no surprise, risen from $15 billion to an almost unbelievable $92 billion. So when Mr. Immelt says that "GE's tax breaks protect American jobs" while he continues to ship high-quality American jobs to China and elsewhere and that he wants "reform of the U.S. tax code" while defending his company's tax schemes, it just doesn't compute.

By far the best analysis of the biggest of the ongoing abuses of our corporate tax system has been done by Peter Coy and Jesse Drucker of Bloomberg Businessweek (March 21-27, 2011) in an amazing piece of journalism entitled "Apple, Google May Profit on a Tax Holiday."

Coy and Drucker started off by tracing the sad evolution of Mr. Obama's consistent campaign pledge to "end tax breaks for companies that ship jobs overseas" to its abandonment on February 11 in the direction instead of the U.S. Chamber of Commerce-sponsored 'corporate tax code overhaul' that would be silent on this issue while at once giving these same companies yet another temporary 'tax holiday.' This so-called holiday would repatriate profits attributed to foreign operations at a 5.25% tax rate instead of the usual 35% rate, despite the fact that, according to several independent economic studies, a nearly identical holiday passed by Congress in 2004 ultimately repatriated a staggering $312 billion at the reduced tax rate while doing little or nothing to boost jobs or investment.

What we need as alternatives from the president, from his Council of Jobs and Competitiveness, and from Congress are:

  1. Incentives for American multinationals to attribute less not more of their profits to their foreign operations.

  • Acknowledgment that the oft-proposed alternative pure "territorial system" of corporate taxation, which doesn't tax at all companies' foreign income, has its own significant disadvantages. A territorial system, as Coy and Drucker wrote, would further and perhaps even more "amp up the gains [to companies] from shifting income to low-tax jurisdictions."
  • As analyzed extensively by the economists Rosanne Altshuler, Benjamin Harris and Eric Toder, consider cutting the corporate income rate to, say, 26% while (i) increasing the capital gains rate to 28% (the rate adopted in the Reagan-advanced bipartisan Tax Reform Act of 1986), (ii) taxing dividends as ordinary income, and (iii) eliminating unwarranted business tax breaks.
  • Alternatively, consider a modest value-added-tax or VAT on the order of 5% that reduces both corporate income and payroll taxes and includes thoughtful exemptions. Perhaps more than any other single systemic initiative, this combination would spur investments, help America grow its way back to good economic health, and materially reduce the deficit. Replacing growth-choking taxes with a modest VAT while eliminating the incentives to move production out of the U.S. could also be the basis of a new grand bargain between progressives, who oppose slashing programs that millions of Americans depend on more than ever, and pro-business conservatives, who favor lower corporate and payroll taxes.
  • Make honest taxation of carried interest part of any tax reform initiative. Investment professionals who earn what is in essence fee income investing other people's money at no risk to their own capital should not be eligible for the lower capital gains rate aimed at stimulating investment. Properly taxing riskless carried interest as ordinary income rather than as capital gain would bring upwards of10 billion a year to the Treasury (not the much lower3 billion 'scored' by the Congressional Budget Office and others).
  • President Obama says we have to retool our economy to "win the future." A key pillar of this initiative must be a corporate tax policy that helps U.S. corporations grow and prosper, incentivizes job creation here at home, ensures that corporate America makes their fair contributions to the fiscal needs of our country, and will encourage the kind of responsible corporate leadership that will allow this country to responsibly lead the worlds' economies in the future.

    Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.