Thanks for Nothing, Ben!

Rodney Johnson | Monday, April 15, 2013 >>


Ben Franklin is famous for many things.

He invented the Franklin stove, he was instrumental in harnessing electricity, and apparently he was quite the party animal in Paris when he served as the American Ambassador to France.

Among all the positives, Ben Franklin is also famous for this quote: “The only certain things in life are death and taxes.”

I know we all “buy the farm” eventually, but on taxes, the old man was wrong.

For proof of it, just look at General Electric (GE) and General Motors (GM). They took different roads, but ended up at the same destination – tax-free land.


GE represents one of the best companies in the United States. Formerly headed by Jack Welch, the brash and outspoken CEO that continually challenged business units to perform better, this company has continued to reinvent itself as the business landscape changed around it.

It has also done something else…

In recent years, GE has spent an estimated $200 million in its tax compliance department just to figure out how to pay no taxes.

Now, $200 million might sound like a lot, but when your tax bill reaches into the billions, you’ll spend a lot to look for loopholes.

And GE found loopholes in 2010, allowing the company to pay less than 10% in taxes worldwide on income of more than $19 billion.

Hmmm.

The top personal tax rate in the U.S. was 36.9% at the time. Back then the corporate tax rate in the U.S. was 35%. So how did GE pay less than 10%?

Well, that’s what $200 million can buy – an army of lawyers and accountants to sort out the “details.” While this is not a zero tax rate, it’s a lot closer than what the company would have been expected to pay based simply on its income and the tax rate for corporations.

GM took a different path to tax-free land, and it is a path that earned my unending wrath.

GM went bankrupt, as everyone knows, in 2009. The company had racked up tens of billions of dollars in losses in the years leading up to bankruptcy and simply could not borrow or beg any more funds.

The U.S. government eventually loaned the company around $50 billion and then shepherded the firm through bankruptcy. Shareholders were wiped out. Senior bondholders were slashed. The only people who came out whole were the unions, who kept their gold-plated benefits 100% intact.

All of this was contradictory to existing bankruptcy law, but who cares?

Then the U.S. government added on a final piece worthy of indignation. It allowed the new GM to keep the losses incurred by the old GM.

Keep in mind that the new GM emerged from bankruptcy with different ownership (unions, the U.S. government, the Canadian government, and a small part for bondholders), no debt (it was wiped away in bankruptcy), and new union contracts.

This was a totally different company, financially speaking, and yet it was able to carry forward its previous losses. It uses these losses against profits going forward, which means that GM won’t pay taxes for many years.

At the end of 2011, GM had $16 billion (billion, with a “b”) in tax credits, which would allow the company to earn almost $48 billion in profits before it pays a dime of federal income tax.

Now, that’s quite a deal, if you can get it.

So as you toil away on your own taxes, contemplating exactly what it is you get in return for shipping the government a large percentage of your income and accumulated wealth, rest easy in the knowledge that there is a way to lower your tax bill dramatically.

You either need enough money to buy your way out, like GE, or have enough political clout so that the U.S. government will shield you from any harm and break all the rules to ensure a good outcome.

Unfortunately, if you’re like me, neither of these options is possible. Instead, we’ll calculate our taxes, shake our fists in frustration over the insanity of it all, and wonder in exasperation when it will ever change.

Probably long after we’ve expired, that’s when… making us the ones Ben was cursing when he uttered those words.

“Happy” tax day!

Rodney

 

 

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Categories: Life Cycle

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.