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Tue, Feb 25, 2003 - Page 12 News List

Americans end up paying higher tax rates than GE

BLOOMBERG , NEW YORK

As Americans prepare to file their tax returns this April, they may be surprised to learn that they're paying higher rates than some of the largest companies in the land.

On Feb. 3, President George W. Bush proposed a US$2.23 trillion budget that would leave the US with a record US$307 billion deficit. Given that gap, Federal Reserve Chairman Alan Greenspan has urged Congress to restrain spending and has questioned the president's proposal for US$690 million in new tax cuts.

"There should be little disagreement about the need to reestablish budget discipline," Greenspan told the House Financial Services Committee on Feb. 10.

Some lawmakers say the US needs to reestablish corporate tax discipline too. Enron Corp has avoided taxes in recent years with "incredibly complicated transactions," according to a report made public by the Senate Finance Committee on Feb. 13. The company set up 692 units in the Cayman Islands as part of a strategy to avoid taxes. The study called for new penalties to limit tax shelters.

"We are going to have the veil torn off the world of tax shelters and the world of manipulation of accounting," said Senator Charles Grassley, chairman of the Senate Finance Committee, as congressional investigators released the report this month.

Many US companies regularly -- and legally -- minimize their income taxes. In 2001, eight of the 30 companies in the Dow Jones Industrial Average, among them General Electric Co and Microsoft Corp, paid taxes amounting to less than 20 percent of their operating profit, according to Bloomberg data. The top 2001 tax rate for individuals was 39.1 percent.

Companies use a variety of methods to reduce taxes, ranging from credits for research to breaks on employee stock options.

When employees exercise their options, companies can take a tax deduction for the difference between what the employees pay for the stock and its market price. Such deductions cut Microsoft's tax bill by US$9.2 billion from 2000 to last year, says spokeswoman Caroline Boren.

``This is a standard deduction,'' Boren says.

General Electric has reduced its bill through tax-advantaged transactions done by its leasing unit, General Electric Capital Services, according to a 2000 study by the Washington-based Institute of Taxation and Economic Policy. From 1996 to 1998, GE received US$6.9 billion in tax breaks -- more than any other US company, according to the study.

In its 10-K filing with the US Securities and Exchange Commission, GE said its effective tax rate in 2001 was 27.8 percent. That's the rate at which GE was taxed on earnings after the company covered its costs and excluded one-time profits or losses from such variables as exchange rates. GE paid US$1.49 billion in taxes that year, the equivalent of 7.4 percent of its operating profit.

GE does business in more than 100 countries and has benefited from low tax rates outside the US, says spokesman David Frail.

The US has the fourth-highest corporate income tax rate in the 30-nation OECD, according to a January 2002 study by accounting firm KPMG International.

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