What GE Teaches Us About Taxes

GE made the news recently when it came out that the corporation did not owe any corporate taxes for 2010 even though it made a tidy profit. What can we learn from this?

First, GE did nothing wrong. They took advantage of legal tax breaks. Google does something similar. By using accounting maneuvers known as the "Double Irish" and the "Dutch Sandwich" they reduced their taxes by more than $3 billion. This too is legal.

Right now the US has the second highest corporate tax rate in the world with a combined rate of 39.2%. Number one, Japan, has a combined rate of 39.5%. They were scheduled to cut this by 5% as of April 1 but this might be delayed because of the earthquake. But the tax rate is only part of the story. The US tax code is riddled with tax breaks. By taking advantage of different tax breaks and loopholes, domestic corporations pay an average of 20% and multinationals pay 30%. This is known as the effective rate.

The effective rate is an average. Some companies, like GE, manage to reduce their taxes to zero but that means that others are paying more than the effective rate and some are paying the full statutory rate. Larger companies are more likely to be able to take advantage of the breaks than smaller companies. Their size and resources allow them the flexibility to do things like set up a shell company in Holland (the Dutch Sandwich). Moreover, these tax breaks made their way into the tax code in the first place because large corporation lobbied for them.

We are overdue for tax simplification. We need to reduce our statutory rates to be competitive with the rest of the world while eliminating the loopholes that help large corporations at the expense of the smaller ones. This is part of the Republicans' budget proposal and should be seriously considered rather than dismissed as tax cuts for the rich.