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General Electric Wants to Pay Higher Taxes

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General Electric (NYSE:GE) says it wants to pay higher taxes and close loopholes. Since I was afraid you might not believe me, I got an email from a company spokesman to prove it.

"Like most Americans, GE would prefer a simpler tax code and we support a lower statutory corporate tax rate, closing loopholes, and adoption of territorial tax system even if it means higher taxes for companies like GE," reads the message in my inbox from GE spokesman Seth Martin.

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Despite striking a deal over the budget Tuesday night, Congress is still expected to battle over corporate tax reform ahead of the confrontation over the federal borrowing limit, better known as the debt ceiling. A showdown is expected to occur in two months' time, when Congress will have to increase the limit or risk a US default.

As a champion of loophole exploitation and tax evasion, General Electric will take a keen interest in shaping the debate over corporate tax reform. So when GE says it wants to simplify things and maybe even pay higher taxes, it behooves us to ask -- uh -- what's the catch there, GE?

The catch is that GE is willing to risk paying just a bit more so it can stop asking Congress for a favor every couple of years and risk being turned down.

GE Chairman and CEO Jeff Immelt told Charlie Rose last month he believes the plan known as Simpson-Bowles is "a great starting point" for tax reform.

That plan would reduce the maximum corporate tax rate, known as the "statutory" rate, to 29% from its current 35% level. It would also adopt a "territorial" tax system, meaning companies would not pay US taxes on profits earned abroad.

One problem with this plan, argues Robert McIntyre, Director of Citizens for Tax Justice, is that GE is especially adept at moving US profits overseas.

"It's money they make in the United States but they claim it's foreign" by using "arcane provisions in the tax code," McIntyre says.

GE saved $8.8 billion on "lower-taxed global operations" from 2009-2011, according to its latest 10-K. The company also made a decision in 2009 "to indefinitely reinvest prior-year earnings outside the US," according to the 10-K.

Further explaining why it likes doing business abroad, GE explains "[T]here is a benefit from global operations as non-US income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-US earnings have been indefinitely reinvested outside the US and are not subject to current US income tax," according to the 10-K.

One important reason for GE's low tax bill is an "active financing exception," which allows GE and other financial services companies to avoid paying taxes on "certain active financial services income," as the 10-K puts it, such as interest payments on loans made outside the US.

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Referring to the active financing exception, GE warns in the "risk factors" section of the 10-K that "this provision, which expired at the end of 2011, had been scheduled to expire and had been extended by Congress on six previous occasions, including in December of 2010, but there can be no assurance that it will be extended."

In fact, it was extended as part of the budget deal struck by Congress Tuesday night. However, the "territorial" tax system proposed by Simpson-Bowles would mean GE could remove those sentences from the "risk factors."

Just as a company is willing to pay up to settle a lawsuit and give shareholders a degree of certainty, GE would be happy to risk paying a little extra in taxes so it could stop asking Congress to repeatedly extend this active financing exception.

This is the loophole GE wants to close. It's true: If we stop threatening to tax GE's foreign earnings, GE won't need a loophole to be sure we don't do it. Meanwhile, GE's US tax rate goes lower. Sure, as GE says, that's simple. It also sounds like a great deal for GE, but maybe not so great for the rest of us.

Simple sounds great -- especially when we're talking about something as complex as taxes. GE is smart to appeal to our desire for simplicity in the tax code. But we must be careful not to be seduced by simplicity: Simple and fair aren't the same thing.

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