Chances are you have used a GE appliance, turned on a GE light bulb, flown on a plane powered by a GE aircraft engine, seen a GE locomotive or wind turbine, taken out a loan from GE Capital (its lending division), or watched a program on NBC (partly owned by GE).
General Electric Company (GE) is a multinational conglomerate corporation with 287,000 employees. It is one of America’s oldest and largest companies. GE was one of the original twelve companies listed on the Dow Jones Industrial Average and is consistently ranked near the top on the Forbes Global 2000 and Fortune 500 lists. GE is also one of the best-known global brands. The company has been ranked first in Fortune magazine’s “Global Most Admired Companies” and “America’s Most Admired Companies” lists.
But GE has a major public-relations problem. It has been widely reported, including in the New York Times, that GE earned $14.2 billion in worldwide profits last year, including $5.1 billion in the United States, and paid nothing in federal corporate income tax.
Conservatives charge that the leadership of GE is in the pocket of the Democrat Party and stands to benefit from its green agenda. After all, is not GE CEO Jeffrey Immelt the head of President Obama’s Council on Jobs and Competitiveness? Although liberals many times deserve it, conservatives have a bad habit of blaming liberals for everything bad about government without checking the facts. For example: “As soon as Democrats took over Congress that’s exactly what they did: they criminalized incandescent light bulbs and made GE’s mercury-laden CFL bulbs the ‘Big Brother’ alternative.” But the legislation that criminalized incandescent bulbs is the Energy Independence and Security Act of 2007 that was signed into law by a Republican president, passed with the votes of ninety-five Republicans in the House, and only opposed by seven Republicans in the Senate.
Liberals are predictably up in arms that GE is shirking its responsibilities and not paying its fair share of taxes. They complain that GE lobbies Congress for special tax treatment and moves its profits to offshore tax havens. But, of course, the same liberals that condemn GE for seeking corporate welfare are aghast that anyone would think of cutting federal funds for the Corporation for Public Broadcasting, which receives all of its yearly $430 million budget from the federal government.
Libertarians oppose the taxing of corporations for the same reason they oppose the taxing of individuals: taxation is theft. And even worse, as the nineteenth-century classical-liberal political philosopher Lysander Spooner it: “If the government can take a man’s money without his consent, there is no limit to the additional tyranny it may practise upon him; for, with his money, it can hire soldiers to stand over him, keep him in subjection, plunder him at discretion, and kill him if he resists.”
But aside from the onerous nature of taxes in general, there are other problems with the corporate income tax as well.
First, corporations are more properly tax collectors rather than tax payers. Taxes paid by corporations merely add to their cost of doing business. It is consumers and employees that ultimately pay corporate taxes as they are embedded in the prices paid for products and reduce wages paid. The corporate tax is just another of the government’s vehicles by which it masks Americans’ true tax burden.
The state masks taxation in many different ways. Other than businesses and self-employed individuals that submit quarterly income tax payments, few Americans pay taxes directly to the government thanks to the withholding tax. The curse of the withholding tax is that it allows the U.S. government to confiscate the wealth of its citizens systematically, effortlessly, painlessly, and benevolently. This latter point is especially insidious because interest-free loans to the government known as tax refunds are generally viewed as gifts from the government instead of the return of stolen property. Other forms of government tax masking include the Social Security and Medicare taxes taken out of paychecks, the employer portion of these taxes, unemployment taxes paid by employers, excise taxes on things like alcohol and gasoline, corporate taxes, and, of course, the estate tax, since you don’t pay it until after you’re dead.
Second, after corporations pay taxes on their income, individuals pay taxes on this same income when it is distributed in the form of dividends. This “double taxation” is nothing new, for the federal government does the same thing when it taxes individuals on their income in the form of income tax, Social Security tax, and Medicare tax and then on top of that taxes the taxpayer’s employer on the same income.
From an economic perspective, the double taxation of corporate income, as explained by economist Murray Rothbard, “penalizes corporate income as opposed to income from other market forms (single ownership, partnerships, etc.), thereby penalizing efficient forms of enterprise and encouraging the inefficient,” “encourages a further distortion of market investment and organization” by leaving “a greater proportion of earnings undistributed” than would occur in a free market, and “hampers the adjustment of the economy to dynamic changes in conditions.”
Third, U.S. corporate tax rates are among the highest in the world. They are also among the most convoluted, with marginal tax rates of 15, 25, 34, 39, 34, 35, 38, and 35 percent. In a recent edition of the Heritage Foundation’s Index of Economic Freedom, 124 countries had a lower corporate tax rate than the United States. And we wonder why some corporations prefer to operate in a lower-tax environment overseas?
And then there is corporate tax on the state level. Only the states of Nevada, South Dakota, and Wyoming have no state corporate tax. Michigan, Ohio, Texas, and Washington have no corporate tax, but assess a gross receipts tax. The rest of the states have a corporate tax and some of them have in addition a gross receipts tax, a franchise tax, and/or an alternative minimum tax.
And fourth, corporate income taxes account for a relatively small portion of the federal budget. According to the IRS, in fiscal year 2010 the corporate income tax brought in about $180 billion. This was dwarfed by the $814 billion from the individual income tax and the $820 from Social Security and Medicare taxes. By anyone’s estimate, the U.S. government is spending over $10 billion a month on the wars in Iraq and Afghanistan. That is $120 billion a year – two thirds of the yearly corporate tax revenue. And once you add in the billions that the United States will spend this year warring in Pakistan, Yemen, Somalia, and Libya, it is clear that the corporate income tax could easily be eliminated just by ending our senseless military adventures. The result would be unprecedented economic growth, innovation, capital investment, foreign direct investment, and a much more favorable business climate.
But since we do have a corporate income tax, and since it is not likely to be eliminated anytime soon, we need to take a brief look at whether GE is paying its fair share.
First of all, what is GE’s fair share? And furthermore, what is any company’s fair share? And on the individual level, what is your fair share and my fair share? Obviously, whether GE or any corporation or individual is paying their fair share is highly subjective. Even a supporter of the corporate income tax might be willing to give GE and other large corporations a free pass since they employ so many Americans.
Second, GE did pay taxes in the United States last year, even if the company paid no corporate income tax. GE paid state and local taxes. GE paid the employer’s share of its employees Social Security and Medicare taxes. GE paid unemployment taxes on behalf of all its workers. And look at all the income and social insurance taxes that were paid by employees of GE. The more GE is able to prosper and hire more employees the more individuals there will be that are paying federal income taxes.
Third, according to GE’s Director of Financial Communications, Anne Eisele, GE “paid almost $23 billion in taxes to governments around the world from 2000 to 2009.” And last year GE filed over 7,000 tax returns in more than 250 jurisdictions around the world. And according to GE’s Vice President for Communications and Public Affairs, Gary Sheffer, “It was significant losses at GE Capital in the financial crisis, not ‘tax avoidance’ strategies, that reduced General Electric’s 2010 overall tax rate below historic levels.”
And fourth, even if one does not view taxation as theft, there is nothing wrong with “tax avoidance” strategies – for an individual or a corporation. Any and all deductions, loopholes, shelters, exemptions, and credits that can be used the better. And the more that Congress can be lobbied to come up with the merrier.
The libertarian approach differs markedly from the approach of the statists on the left and the right who want to simplify the tax code by eliminating these things to ensure that every individual and corporation pays some arbitrary fair share. Since the federal government is unlikely to eliminate the income tax in one fell swoop, instead of complaining about the unfairness of deductions, loopholes, shelters, exemptions, and credits, proponents of a free society should work toward expanding them and applying them to as many individuals and corporations as possible. As Murray Rothbard pointed out in “The Myth of Tax ‘Reform’”: “Every economic activity that escapes taxes and controls is not only a blow for freedom and property rights; it is also one more instance of a free flow of productive energy getting out from under parasitic repression.”
Reprinted from The Future of Freedom Foundation.