“How FedEx Cut Its Tax Bill to $0.” So blared a November 17 headline in The New York Times. And headlines are what make impressions, especially when the liberal media echo-chamber reverberates the sound bite. The story below that headline wasn’t much better; spinning some facts and ignoring others to fit its anti-business, progressive narrative and slamming the 2017 Republican tax reform bill signed into law by President Trump. This is how the Times typically inflames rather than informs public opinion.
A few days later, Frederick W. Smith, chairman and CEO of FedEx Corp., set the record straight in the opinion pages of The Wall Street Journal. Needless to say, few progressives read those pages and even fewer are able or willing to comprehend their meaning.
Although FedEx has paid more than $10 billion in US taxes over the past five years, its 2018 corporate income tax bill was zero. Why? Because its expenses exceeded its revenues in 2018. Hence, no net income. Why? For several reasons. With its positive cash flow from operations, FedEx increased wages, expanded and modernized facilities and spent $6.6 billion on two dozen Boeing freight jets. It also boosted funding for its employee pension plan (unlike many government employee pension plans that are spiraling into insolvency, leaving taxpayers to bail them out in the future).
Thanks to the 2017 tax law, FedEx was able to treat all of its 2018 capital expenditures as a current-year bookkeeping cost, rather than being forced to “depreciate” that expense and spread it out over a period of years. Since those expenses have now been recorded in 2018, they won’t be applied in future years which means FedEx’s tax bills will be relatively higher in those years. This kind of government fiscal policy like investment tax credits have been used in the past with success to incentivize capital spending and expand the economy.
The reduction in corporate income tax rates in the 2017 law from 35% to 21% didn’t help FedEx in 2018 since its net income was negative. But that law helped every other profitable business in the US increase its cash flow (by giving less to government) and realize a higher return on investment, which has contributed to record stock prices. You see, investors are interested in their after-tax return on investment.
Trump’s import tariffs have, lately, slowed economic growth and tempered stock prices. China has been waging a purposeful long-term economic war on the US, restricting our exports, violating intellectual property rights and stealing trade secrets. Hence, Trump’s retaliation is defendable. But in the short run, there will be disruptions for our economy. How China responds and whether we have the will to stay the course remains to be seen.
To disabuse the unenlightened, corporations don’t really pay income taxes anyway; they only seem to. To survive, a business must recover all of its costs from its customers. That includes payroll, raw materials, inventory, utilities, advertising, interest and taxes that it pays governments at all levels. All these costs are built into the prices they charge that are ultimately passed on to people. When politicians posture that “corporations should pay more taxes, not people” they’re either demagogues or fools.
The Times speculated that the 2017 tax reforms may not have been instrumental in stimulating the economy. Without a parallel universe to the contrary the degree of that is unknowable. But our economic surge in their wake clearly put the anemic growth of Obama’s economic policies and “shovel ready” stimulus to shame. In the absence of the corporate tax rate cuts, many more US companies might well have shifted their headquarters and jobs abroad.
The Times also complained about FedEx’s spending on lobbying Congress for tax reform, as if that’s inappropriate. FedEx and other businesses represent the producer interest in society. Given the scope of government power and control, corporations would be stupid not to attempt to influence government policy. Is lobbying only appropriate for labor unions, government workers, lawyers, enviros, LGBTQs, the ACLU, activists for illegal immigrants, abortion rights, and countless progressive causes?
FedEx is a profitable, efficient company. The US Postal Service is neither of these, operating at a perpetual loss. Who do you prefer for overnight delivery?
P.S. One more thing. There’s a popular myth that if a corporation spends money foolishly, it doesn’t matter because it can “write it off.” Wrong. When it reduces its reported profit by any expenditure, good or bad, it only saves the 21% tax on that amount. It’s still out of pocket for the other 79%.
Longtime KOA radio talk host and columnist for the Denver Post and Rocky Mountain News Mike Rosen now writes for CompleteColorado.com.