The Business Ethics Blog

A few months back, the NY Times shocked a lot of people by reporting that General Electric — an enormous, multi-billion-dollar company — had paid zero taxes to the US government in 2010, despite the fact that more than a third of the $14.1 billion that company earned that year had come from its US operations. The reason? GE has a truly enormous tax department that works non-stop to look for deductions and loopholes.

Scandalous, right?

Not so quick. As I’ve argued before, what we commonly call “loopholes” are in most cases the result of some decision by government to encourage or discourage a particular behaviour. That is, most of the things GE (or any other company) does in order to avoid taxes are thing the government is trying, however ham-fistedly, to encourage companies to do. Still, we might reasonably look askance at a company that works so assiduously to squeeze every last dollar out of the tax system. The millions spent to save millions in taxes could in principle be spent to develop products that would boost the overal value proposition of the company.

But the situation with regard to GE is even more complex than that. To get a taste, check out the comments section under the discussion of this story on the always-useful economics blog, Marginal Revolution. There, it is pointed out that the $14.1 billion in profits attributed to GE by the NYT was calculated according to GAAP, which is entirely different from how the IRS calculates taxable income. In other words, we’re looking at apples and oranges here. The entire discussion thread at MR is worth reading. But if you’re not well-versed in the niceties of tax rules, or corporate finance more generally, you’ll quickly find yourself in over your head.

But that in itself raises an important issue. As the sophistication of the debate in the MR comments section demonstrates, the fairness of GE’s tax burden (or lack thereof!) is something that most of us simply are not qualified to comment upon. And that’s a worry. It’s hard for companies to be held accountable if the general public doesn’t understand the factual basis for evaluating them. It seems to me that this is an additional reason for tax reform: the subtlety of the various policy objectives being sought through taxation of corporations needs to be balanced against the need for the concerned public to be able understand it.