A New York Times article came out this week about General Electric’s impressive tax saving strategies. So impressive, in fact, that they paid zero taxes for fiscal 2010 despite worldwide revenues of $150.2B and a declared operating income of $14.2B. That made me think. The bottom marginal tax rate for individuals is about 28% on taxable income. This is hypothetical, but if GE were an individual, they would have paid approximately $3.97B in taxes. Because corporate income are subject to very complex tax rules and formulas, I made a simple calculation just so I could use a figure for argument’s sake. Having done that, I posed the following questions:
- What is the best use of that cash?
- Who would best allocate that cash, the politicians or GE Execs?
- What can an individual taxpayer do to pay zero taxes?
A corporation the size of GE has a finance department that is certainly among the most competent in the world. I would not be surprised if somewhere in their corporate vaults there exists a piece of scholarly work - perhaps, encyclopedic in scale - produced by a team of highly talented accountants and lawyers that provide every tax loophole, tax-saving tactics, strategies and modeling every conceivable scenario unique to their businesses in the many industries they operate in around the world.
The temptation to criticize GE runs very strong considering the state of the economy and the astronomical national debt. But that kind of reaction is misplaced, if not irresponsible. Finding a way to retain their earnings is part of their corporate mission and one of the very reasons they exist. Retaining revenues and deploying their cash through smart investments is a responsibility that they have to their shareholders and all the partners they do business with.
I have always thought that the best social program is “job creation”. But I’m skeptical when I hear a government official promising to create jobs at the public sector. They all end up being an expense rather than a thriving and self-funding organization that offers value to the marketplace. The last call for another infusion of money recently came from the US Postal Service. Officials there warned that they will be running out of money by October of this year. An Associated Press (AP) article reported that “Postmaster General Patrick R. Donahoe told the House Oversight subcommittee on the postal service that his agency will owe the federal government a payment of $5.5 billion to fund medical costs, in advance, for future retirees, and in November it will need to make a $1.3 billion payment for worker's compensation”. He continued by saying:
"The Postal Service will not have the cash available to make both of these payments. We need legislation this year to address that fact."It is plain as it could be. It’s gonna be another “bail-out”. Surely, all those hard-working employees of the US Postal Service deserve to be paid their pensions, medical insurance and worker’s compensation benefits. But by asking for more taxpayer’s money to fund their operation, they are actually punishing taxpayers for not buying more stamps or patronizing their services. Now might be the right time to take a look at their business model. At the extreme, perhaps it's time that the federal government consider selling the postal service and leave the task of waging competition in the open market to individuals and companies with the proper orientation - those who measure results based on market performance and relevant market needs. The business of mail delivery has changed over the many years. We are now in an era where communication and financial transactions are done more efficiently via the Internet. It’s time that they scale their operations to meet those hard realities. I suspect that if the USPS were in the hands of GE executives, they would be introducing new delivery solutions such as scanning certain types of correspondences and letters for customers so mail can be viewed on the web.
As for paying zero taxes, you’ll need to have a business to be able to do that. An employee has very little chance of reducing much of their tax liabilities outside a restrictive list of deductions such as car leases, mortgage interest payments etc. On the other hand, the IRS code allows individuals who are in business for themselves to deduct much of their expenses if spent during the normal course of conducting their business. A percentage of a person’s meal can be deducted if engaged in a business meeting over breakfast or lunch. Much of what is spent on a trip, for instance, can also be deducted if done so for the purpose of company business. That also means that most of the newest technologies available can be deducted if used for business - Mac Air, IPad2, IPhone and other tools that enhances productivity. None of which, under current tax laws, a regular employee is able to do.
So, if you want to be like GE and pay no taxes, find a way to get in business, even if only part-time.
READ NYT ARTICLE ABOUT GE
READ MSN ARTICLE ABOUT THE USPS
