04/11/2011 06:49 pm ET | Updated Jun 11, 2011

Corporate Citizenship Should Include Paying Taxes

General Electric paid no taxes in 2010. Or at least that was the major takeaway from a recent bomb-dropping exposé in the New York Times. At a time of obsessions with federal fiscal austerity, this was a big story, and everyone was talking about it last week.

I'll admit to having a visceral negative reaction, in part because GE is an important company that most people have high expectations for. So I wanted a bit of distance before composing some thoughts. I thought it would also be interesting to see GE's reaction and response before jumping to conclusions. But even after mulling it, I feel like the whole affair is not good for anyone -- the country, the business world, or even GE itself.

OK, so the facts are these. GE made $14 billion in profits in 2010, $5 billion in the U.S. Its tax bill in the U.S. will be negative $3.5 billion (as in getting money back). Is this legal? Of course it is. But the question on everyone's lips is whether a company can be a solid, contributing member of society and pay no taxes.

That's much less clear. After all, as I've long argued, responsible corporation, particularly one that is responsible with environmental resources, can create real value. GE has been a green leader for a number of years now with its ecomagination products and growth strategy through clean technology. And we always have to include the obligatory, but not insignificant, mention of providing jobs and livelihoods. We should also remember that this story is about income tax, not all taxes -- I assume the company is still paying Social Security taxes on all employees (please tell me they are).

So what did GE have to say? The company's response to the clear implication of wrongdoing was not overwhelming. The perfunctory letter to the editor mainly says that GE Capital lost a bunch of money in previous years, so the losses carried forward. Verifying that point is really not easy, and the company didn't offer details.

I looked at GE's SEC filings and didn't see losses (please, someone educate us on this). The 10-K's show a run of profits -- and positive return on equity -- ranging from $11.0 to $22.2 billion over the last five fiscal years. On income taxes, the latest 10-K has this to say: "Income taxes (benefit) on consolidated earnings from continuing operations were 7.4% in 2010 compared with (11.5)% in 2009 and 5.6% in 2008." More numbers follow, but all are far lower than the statutory tax rate of 35%.

The morass of numbers and complicated logic involving foreign earnings is really the point here. GE, according to the Times, has dedicated some significant resources to legally gaming the system. The company employs 975 full-time tax attorneys who have been told to spend half their time focusing on ways to reduce the company's tax bill (it was at this point that I wondered what 500 focused FTEs could accomplish on some more productive task, like inventing more ecomagination products). On top of this extensive internal tax law firm, GE spends $200 million on lobbying, much of which is dedicated to changing tax laws.

So let's look at the business logic here. GE has clearly seen the value in its socially-conscious programs, and the company has seen massive growth in its ecomagination portfolio to $18 billion in 2009 alone. Corporate social responsibility, the larger umbrella of environmental and social initiatives, also creates value, even if it's harder to put a number on. How your company is perceived on CSR issues affects sales, employee recruitment and retention, and brand value (I doubt that the coverage this tax story has driven is what GE is looking for).

But on a more tactical point, GE has a number of major business units that serve industries supported heavily by government spending: energy systems and the grid, transportation networks, and water systems to name a few. It's not silly to suggest that companies that need consistent and aggressive societal spending to thrive should consider it a good investment to pay into that system. I'm reminded of Henry Ford greatly increasing wages so that people could buy cars.

So there's a distinct possibility that tax strategies like GE's could destroy real brand and tangible business value and, given the fact that GE is not alone in this, impoverish the country.

But, to be blunt, it's also unfair.

As individuals, we all face taxes that we can't avoid in the form of the Alternative Minimum Tax. The landmark Citizens' United Supreme Court Case of 2010 continued a long tradition of giving companies the rights of citizens, in this case a form of free speech related to political donations. I could be convinced that "corporate personhood" is deserved, as long as it comes with accountability. A person with all rights and no responsibilities is basically a sociopath or, as one colleague joked, a teenager. It should be no different for a company.

GE is not a bad guy for doing what's in its charter and maximizing profits. Their actions are not illegal, or even immoral probably. But they are unfortunate at the least, and at the most, reduce the value of a great American company.

This post first appeared at Harvard Business Online.