Immelt’s General Electric Highlights The Broken, Ineffective Corporate Tax System

Today, President Obama will name General Electric CEO Jeffrey Immelt head of the newly renamed President’s Council on Jobs and Competitiveness. The old iteration of the council — the President’s Economic Recovery Advisory Board — was led by former Federal Reserve Chairman Paul Volcker.

As Alex Seitz-Wald noted, Immelt has had some harsh words for Obama in the not-too-distant past — “Business did not like the US president, and the president did not like business,” Immelt reportedly said — but if he has had a change of heart, he could be a good messenger on economic issues.

In one regard, Immelt’s company already highlights a need for change: due to a corporate tax system that is loophole-ridden and full of giveaways, General Electric pays a pittance in corporate income tax. Though the statutory corporate income tax rate is 35 percent, GE last year paid a paltry 3.6 percent. In 2009, despite making $10.3 billion in pretax income, GE paid nothing in corporate income tax (and, in fact, received $1.1 billion in tax benefits).

Immelt isn’t to blame for this; it makes sense that a company would take advantage of a tax code that enables it to dramatically lower its tax rate. The problem is that it is far too easy for companies to take advantage of the corporate tax code by shifting and sheltering income. Martin Sullivan of Tax Analysts explained this to the House Ways and Means Committee yesterday:

While many corporations have effective tax rates approximately equal to the 35 percent statutory rate, other corporations have effective rates in the low twenties, the teens, and even the single digits. The major reason for these low effective tax rates is the ability of some corporations to shift a significant portion of their profits into low-tax jurisdictions. As the table shows, low effective tax rates are common in industries like pharmaceuticals and computer equipment where it is easy to shift technology and manufacturing to low-tax jurisdictions.

GE is far from alone in exploiting the ability to shift profits to dramatically lower its tax rate. Pfizer, Hewlett-Packard, Coca-Cola, and many other do the exact same thing. At the moment, corporate tax receipts account for just 7.2 percent of federal revenues, while fifty years ago, they made up 23 percent of the total.

Congress and the administration are toying with the idea of reforming the corporate tax code, and if they do, this is one of the big problems that has to be addressed. It’s all well and good to talk about lowering the corporate tax rate, but knocking the rate down to 25 percent from 35 percent doesn’t do much if companies can exploit the system to bring their rate all the way down to zero.