02/02/2011 12:20 pm ET Updated Dec 06, 2017

Corporate Tax Policies 'The Worst Of All Worlds' As Big Companies Often Pay Little

New York Times columnist David Leonhardt has an excellent piece out diving into the paradox of the American corporate tax code -- "the worst of all worlds" -- and the supreme difficulty of achieving the kind of reform Obama called for in his State of the Union address last week.

"I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes," Obama said in his address. "A parade of lobbyists has rigged the tax code to benefit particular companies and industries."

The top corporate tax rate in the United States is 35 percent, one of the highest in the world -- but, Leonhardt notes, the code is filled with so many loopholes and credits that few companies pay the top rate. And for this those companies that are paying only 4 or 5 percent, there is little incentive to overhaul the system.

As Leonhardt puts it, "any system that creates as many winners as this one won't be changed easily":

Or, as Jonathan Chait approximates it at The New Republic, "reforming the corporate income tax means transferring money away from companies with lots of political clout toward those with less political clout."

One of the major winners of the current loophole-ridden tax code system is General Electric -- and GE's CEO Jeffrey Immelt was recently appointed to head President Obama's Council on Jobs and Competitiveness, which is expected to suggest changes to the corporate tax code.

How does GE play the game so well? There are a number of routes that companies who pay low corporate tax rates can go, such as spending large sums of money on new equipment, or a company losing money can subtract their losses from initial profits thus avoiding tax payments until they are consistently earning money again. GE, as Leonhardt put it, is simply "expert at avoiding taxes":

When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.

G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm's. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.

At the Atlantic, Derek Thompson displays some nice graphs (h/t Tax Notes) which track the drastic drop in GE's effective tax rate from approximately 30 percent in the 1990s to extremely low levels today. Thompson notes: "What's good for GE isn't necessarily good for the U.S. Treasury."

However, Thompson also adds that Immelt "should be an expert" at suggesting changes to the tax code. Given Immelt's history of blasting the high corporate tax rate, and his company's adept navigation of tax arcana, it may be doubtful that he will be a reform-from-within leader. But Thompson's point still raises the question: is Immelt President Obama's Joseph Kennedy?

Kennedy was appointed by Roosevelt to be the first chairman of the SEC -- despite years of risky behavior on Wall Street. A BusinessWeek article on "Joseph Kennedy's Enduring Example" lays out the relevant historical details:

After becoming the youngest bank president in the country at age 25, Kennedy gained notoriety as a Wall Street speculator throughout the 1920s and early 1930s. In the 1930s, for example, he participated in the Libby-Owens-Ford stock pool, a scheme in which Kennedy and his partners created an artificial scarcity of Libby-Owens-Ford stock to drive up the value of their own portfolios. The pool, and others like it, was investigated by Senate Banking and Currency Committee counsel Ferdinand Pecora, who just a few years later would report to Kennedy as one of the SEC's commissioners. Clearly, Kennedy wasn't an obvious choice for the role of reformer. Indeed, Roosevelt is said to have responded to criticism of his appointment of Kennedy by saying, "It takes a thief to catch one."

Yet Kennedy succeeded beyond anyone's imagination in his efforts to create a watchdog for the securities business -- to the surprise of both his Wall Street associates and those who distrusted him. In retrospect, it seems as though Kennedy understood that the SEC represented such a radical idea that it was doomed to fail unless he persuaded a defiant business community to offer a measure of cooperation.