57,000 Questions

Something is wrong.

Something is wrong when GE employs an army of accountants to file a 57,000 page tax return in order to pay no taxes. Something is wrong when our 35% marginal corporate tax rate nets a 20% effective tax rate. Something is wrong when a country like Finland–with a 26% marginal rate–collects corporate taxes equal to 4% of its economy, while the US, with a 35% marginal rate, only collect taxes equal to 1.8% of its economy.

And this isn’t just a result of the downturn. Sure, GE’s zero tax-burden from last year is. When it hit the news earlier that they paid no taxes in 2010 my reaction to the story was, “Duh.” They lost tons of money in ’08 and ’09. So because they could carry the losses forward, that wiped out their profits for the next couple years: no profits, no tax. Seems fair to me.

But corporations in the US are subject to taxes on money they earn anywhere in the world. If IBM’s Japanese subsidiary provides consulting to Toyota in Japan, the US Treasury wants some of it. So IBM just keeps the money safe over there, where our tax authorities can’t get at it. And large companies employ thousands of accountants and tax attorneys to minimize payments to Uncle Sam—thousands of intelligent, skilled individuals whose gifts and training surely could be put to a more productive use.

High rates, worldwide taxation, and a complex tax code are a poisonous combination. It would be great if we could simplify things.

Douglas R. Tengdin, CFA
Chief Investment Officer
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