How Much Corporate Tax is Enough? NYTimes says GE pays too Little!

The New York Times recently ran an article (http://finance.yahoo.com/news/Here-How-General-Electric-GE-wscheats-2926862183.html?x=0), recently referred to on Yahoo Finance.  Some call it an expose on the lack of taxes General Electric (GE) paid.  In this article they claim GE is a “welfare recipient”.  However, what is lacking in these details is a fair and honest interpretation of the facts.  When you approach the business of corporate taxation from the prospective that corporations exist for the welfare of the state, and that any profits they make should somehow be available to the societies they live in, well then you may as well have the government take ownership and nationalize all public corporations.  This experiment has been done already and we called it communism.  When the New York Times comes down hard on the percentages of tax our S&P 500 companies should be paying, it’s almost communism they are espousing.  They conclude that somehow, whatever the tax, it’s just too low when these corporations are making billions and that the U.S. government has a right by fiat to confiscate a higher percentage of corporate profit.  As if they “owe” the government something, or like you and I owe the government something.  We don’t owe them anything, taxation isn’t covered in the constitution.  

Well, forgetting about the obvious “Chavez-Castro” behaviors these ideologies foster, it’s important to realize a couple of specifics.  First, major U.S. corporations employee hundreds and thousands of Americans.  What is the amount of taxes these employees pay on their hard earned income, before they leave earnings and profits to the company?  What if you add these amounts to the corporate contribution to our tax-roll, then how much are these companies paying to society as a whole?

Secondly, much of the complaint in the article from the NYTimes about GE, has much to do with re-patriating foreign earned income.  When GE or Exxon or Walmart or Google earns money overseas, do you think those governments do not tax these monies?  So, then the New York Times and its ilk, would bring those dollars back to the U.S. and re-tax them on the full amount of earnings, not on the amount leftover after foreign tax.  I for one, believe double taxation is evil and morally wrong.  It’s confiscation, not taxation. 

Let’s put this concept into perspective.  If you have a good business idea and form your own corporation exporting Arizona wines (a recent terroir found well for grape growing) to China, you might elect to have Chinese consumers pay you in dollars or perhaps maybe if it’s a small amount they’d pay you in Chinese Yuan.  Then, maybe you’d open a bank account in Hong Kong and keep a percentage of profits there, to cover some costs your business might incur in Yuan denominations, costs to distributors for instance.  You are thinking about expanding your business to Vietnam and maybe Singapore and are working on some deals with other distributors who you’re planning on paying in Yuan.  So, you leave that money there and each and every month add to it a bit with overseas profits while you’re making deals, and take some profits home to the U.S. also.  Eventually after some time, that small amount in the HK bank becomes equal to your year’s income back in the U.S. from the profits you did re-patriat.  Now, a NY liberal sees this money in your account, or hears about it from a cocktail party and reports you to the IRS and says, “ that’s unfair, they need to bring that money back to the U.S. and pay taxes on it”.  Meanwhile, you’ve had to file a Hong Kong tax report and pay taxes on those earnings as you’ve earned them all along.

This in simplicity is what we’re talking about in regard to foreign earned income.  Besides the fact, that corporate profits are not the U.S. government’s money, nor U.S. citizens money not counting the fact that major corporations are “citizens” of the world anyway, that money is destined for investment, somewhere, eventually and of course is taxed by those authorities in each country wherever it’s used.  To my knowledge, any person nor a corporation can escape taxation entirely, eventually it catch up with you, somewhere and for the S&P 500, they can’t hide, they’re just too big. 

So, using FactSet software and Standard & Poors data, I downloaded the S&P 500 taxes, income, pre-tax and EBIT numbers and formed the ratio of taxes paid to these other parameters.  Here’s how the top 25 largest corporations in the U.S. fair.

As you can see from this data, GE is number 6 on the list, it paid 7.4% of pre-tax income in taxes.  But look at the other companies.  Are their taxes to low?  Would you like to see all these numbers closer to 60% or higher?  If so, then you can expect the U.S. economy to run much slower than it is now and unemployment to run much higher.   You cannot expect to have growth, to have corporations create jobs when a significant percentage of profits go to tax.  These numbers are pretty disparate, but indeed some are fairly large.  Are Exxon and Chevron’s contributions of over 40% of pre-tax income high enough?  The numbers below are the averages across the S&P 500 over 2010.

This tells me that 24.3% of pre-tax income is paid by the S&P500 on average per corporation.  That’s a good number.   Yes GE is low on the list, but this has much to do with claiming tax credits due to many technologies that the government is incenting due to their “green” nature along with the foreign profit impact.  Now, if you’re “green” and have been crying for corporations to “go green”, since green is generally more costly than not, you need to provide incentives for them to do so.  For instance, years ago I owned a small “farmette” that included 13.6 acres.  Given this room, I looked into building a windmill and battery bank to provide my own electricity.  The out-of-pocket costs were $20,000, while my monthly electric bill at the time was $54.  Do the math.  My return on investment would have been taken 20 years.  Why would I do this?  This was in “cloudy” upstate New York and though on my mountain top there was plenty of wind, there were no tax credits for windmills, only solar so again, why would I or anyone make this investment?  Now you’d ask then, why is it different for a major corporation?  Why should they switch to green technologies that are more costly without incentives (i.e. tax credits)?  So goes it with GE.  Whirlpool for instance also hasn’t’ paid much tax (its number 395 on the list, not shown) and has paid -10% as ratio of tax to pre-tax income.  Why?  Because of the tax credits they get for making “Energy Star” appliances.  So when environmentalists all go out and buy “low wattage, energy efficient” refrigerators, furnaces and dishwashers, they can thank their U.S. government for subsidizing their manufacture and of course, these incentives for corporations to go “green” both in terms of what they manufacture and use. 

In general, there are many people in this country who generally, are more socialist in their thinking, and more “European” like in their policies, and would have the U.S. move toward the European model in the relationship between the corporations and government.  If you are one of those people, understand there is no “free tax”.  The more you take from corporations (and individuals) the stronger the ramifications to growth in the economy will be.  There is no way around this.  Company’s need money to invest and when the government confiscates it in higher taxes, there will be net less investment, less job growth and it will create an incentive for these very large companies to do business elsewhere.  The result will just be to allow the emerged market countries to close ranks with us sooner and we’ll lose business and wealth to them just faster.