What The Top U.S. Companies Pay In Taxes
Christopher Helman, 04.13.11, 07:10 PM EDT
For all the outcry over GE, a number of corporate titans are paying much higher rates than the average citizen.
As many Americans finish up their personal tax returns over the next few days, they'll marvel with horror at how much hard-earned cash gets siphoned up by the government. At times like this, it's satisfying to have a corporate bogeyman to hate--like General Electric, which has faced a withering hail of criticism since The New York Times proclaimed last month that the conglomerate paid no federal taxes in 2010, despite $5 billion in U.S. profits. There goes corporate America again, always sticking it to the little guy.
But is there any real reason to believe that? Sure, GE has an army of accountants and lobbyists trying to reduce its tax burden, but wouldn't you if you had $150 billion in worldwide revenue and $14.2 billion in pretax income last year?
To see if GE was an aberration, we took a look at the 2010 annual reports of the 20 most profitable U.S. companies. Some of the results may surprise you. The average income tax rate within the group was 25.4%. America's three biggest oil companies, ExxonMobil ( XOM - news - people ), Chevron ( CVX - news - people ) and ConocoPhillips ( COP - news - people ), all endure income tax burdens of more than 40%--higher than the statutory U.S. rate of 35%. Exxon, with a 45% rate, tallied $21.6 billion in worldwide income taxes for 2010. Wal-Mart Stores ( WMT - news - people ) paid $7.1 billion (at a rate of 32.4%) in income taxes.
All these tax burdens are higher than the average citizen pays. So where does General Electric ( GE - news - people ) stand? Contrary to what many in the public seem to think, the conglomerate did pay taxes in 2010. It reported $2.7 billion in cash tax payments during the year, and on its income statement lists a provision for income taxes of $1.05 billion. Considering GE's pretax income of $14.2 billion, that makes for a tax rate of just 7.4%. The only one of the 20 corporate giants with a lower rate was AT&T ( T - news - people ), at -6.4%--but that was only because MaBell won a tax settlement with the IRS that reduced its tax liability by $8.3 billion.
So how to make sense of GE's taxes? The outcry seems to focus on the $5 billion in profits GE made in the U.S. Now if GE were to pay the 35% statutory federal corporate tax rate on that, it would come to $1.75 billion. Yet, as the Times trumpeted, GE has recorded a $3.25 billion tax benefit for the year on its U.S. operations. It's important to understand that this "benefit" is not a refund (which is why the Associated Press should be doubly embarrassed for being fooled Wednesday by a bogus GE press release concocted by the Yes Men that said the conglomerate intended to return its $3.2 billion tax "refund" to the U.S. Treasury). It just represents an amount GE will balance out against other tax obligations.
But why does GE get this benefit? Simple: its finance arm, GE Capital, lost a lot of money during the financial meltdown (roughly $30 billion) and it's still carrying those losses forward and deducting them from current income. As GE spokesman Gary Sheffer wrote in his response to the Times story: "Without these financial crisis losses at GE Capital, GE's tax rate would have been near the average of other multinational corporations." He added, "In short, when you lose money, you don't pay taxes."
If GE's industrial side (maker of jet engines, light bulbs, turbines and such) were a standalone entity, its global tax rate would be 16.8%. It's only after consolidating its results with the GE Capital side that its rate drops down to 7.4%.
A lot of other mega-corporations suffered losses during the financial meltdown as well, but their tax rates aren't as low as GE's. So what's GE doing that they aren't? Yes, GE's lobbyists have helped get laws passed like those that grant federal tax credits for green energy investments like wind turbines. GE both builds such turbines and invests in wind farms and gets millions in such credits.
But the real tax benefits are gleaned overseas. The U.S. has higher corporate tax rates than nearly all the world's biggest economies, so it's only natural that GE would seek to generate as much of its profits overseas as possible. As long as those profits aren't repatriated to the U.S., GE doesn't owe U.S. tax rates on them.
GE reports that its overseas profit pile has grown to $94 billion. That cash is put to work, often lent to customers of GE's big ticket items. GE explains in its annual report some of these "intercompany transactions." GE makes aircraft engines for the likes of Boeing ( BA - news - people ), then GE Capital buys the planes and leases them out. Likewise, GE Capital will buy buildings and cars and lease them to GE And GE will sell GE Capital its receivables. Last year GE Capital acquired $7.7 billion of property and equipment, primarily commercial aircraft. All told, the division holds 1,800 aircraft worth $35 billion in 75 countries.
Overseas profits stay overseas, beyond the arm of Uncle Sam. But when losses happen, like in the credit crunch, they can be netted against U.S. profits. Just another balancing act in the global marketplace.
If you want to blame someone for shipping jobs and capital overseas, blame Congress. There would be no reason for GE or any company to engage in accounting contortions if Congress just reduced corporate taxes to be competitive with the rest of the world--say 25%.
And if you're still determined to hate GE for its tax "avoision" consider this: None of its executives are jumping for joy over the value of their stock-based compensation. An investment of $100 in GE five years ago would be worth just $58 today. The same money in the S&P 500 would be worth $101.
With that kind of sad-sack performance, maybe it's time for Jeff Immelt to start emulating the head of an even more diverse conglomerate: Berkshire Hathaway ( BRK - news - people ) Chairman Warren Buffett. The Oracle of Omaha has for years pushed for higher taxes for the rich, lamenting that his tax rate is lower than his secretary's. Berkshire paid some $5.6 billion in income taxes last year, at a 29% rate. That same $100 in Berkshire would now be up to $140.
