Corporate Taxes

     

Some people like to complain that large corporations like General Electric, which currently has its corporate headquarters in my town of Fairfield, Connecticut do not pay taxes. In particular, the charge against GE seems to stem from Elizabeth Warren’s successful run for the Senate a couple of years ago. In her campaign Warren claimed that GE paid zero taxes.

Actually, Warren’s claim was shown to be sheer demagogic misinformation but the myth lingers on today. Sometimes, this kind of political hot air can have serious consequences. Apparently, many Democrat politicians believe that companies like GE are cash cows that can be milked forever.

Last June the Democrat Governor of Connecticut and the Democrat controlled Legislature sought to deal with the State’s huge budget deficit by adding new taxes to large corporations like GE with headquarters in Connecticut. It appears that the strategy has backfired since a number of other states have come courting GE with very attractive offers.

If GE paid no taxes, why would those states, like blue state New York, offer rich incentives to entice them to leave Connecticut? The truth is that GE and other large corporations pay tons of taxes although their corporate tax returns are not usually in the public domain. Here’s how it works.

Any business whether a large corporation or a small sole proprietor is allowed to subtract business expenses from its gross revenues before paying a business or corporate income tax. For most of my career I was a self-employed financial advisor and every year I had to file a Schedule C along with my personal income tax return. At the top of Schedule C I would have to list my total income or revenue for the year, but then I could subtract my business expenses from the gross income to come up with my net taxable income. These expenses included salaries paid to employees other than myself, office rent, phone costs, business travel expenses, and purchases of office supplies from computers to paper.

 A large corporation like GE has all these expenses and more. Salaries, from the CEO down to the minimum wage mail clerk, are deductible. So, when the CEO gets a bonus, that reduces the gross income for corporate tax purposes, but so too does an increase in the minimum wage for low salaried employees. When the CEO and the mail clerk get their salaries, they are subject to both Federal and State personal income taxes.

GE can also deduct the real estate taxes it pays to the town of Fairfield. It is the largest taxpayer on the town’s grand list. It must pay sales tax on all purchases of equipment and supplies to the State of Connecticut. It would be a catastrophe for Fairfield and Connecticut if GE and its 3000 corporate employees left the State for a more business friendly environment.

It is true that corporations can claim expenses against income that most individuals cannot. A corporation can deduct the cost of its benefits package, including the medical insurance that is often provided to employees at low cost. It can deduct the cost of major acquisitions or at least claim depreciation expenses over time.

After all deductions are totaled, they are subtracted from gross revenues and the balance or profit is subject to corporate income tax. The corporate tax must be paid before shareholders can receive any dividends. So, the profit is taxed, and then the part of it paid in dividends is taxed again to the shareholders as ordinary income. This is why some people think that the taxation of corporate dividends is unfair double taxation.

What is left of the annual profit after taxes and dividends is then retained in the corporation for various purposes although there are limits on the amount of retained earnings. For this reason Warren Buffet’s Berkshire Hathaway Company never pays dividends. Rather than generating taxable income for his shareholders, Buffet prefers to just make new acquisitions. If the shareholders need the money, they can just sell some shares.

Finally, if a corporation has a bad year or incurs unexpected huge expenses due to things like new taxes, or government mandates, there may be little profit to tax. Many companies saw this happen in 2008 with the onset of what is now called the Great Recession. Nevertheless, it is estimated that in 2010 GE paid about a Billion dollars in corporate taxes, and almost 3 Billion in 2011.

Governor Malloy of Connecticut seems to have seen the light and has since put together a package for GE but it may turn out to be too little and too late. Instead of milking the cow, the Democrats may have killed the goose that laid the golden egg.

If GE leaves Connecticut, there will be no profits to tax. If GE leaves the State, the results would be disastrous not so much for GE stockholders, executives and other fat cats, but mainly for the thousands of ordinary people whose incomes are dependent on GE.

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