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The 2017 Tax Cuts and Irish Jobs Act

The 2017 Tax Cuts and Irish Jobs Act

Brad Setser has more to say about how the lack of enforcement with respect to transfer pricing in the Big Pharma sector has not only cost us Federal tax revenues but perhaps in American jobs in his “The Irish Shock to U.S. Manufacturing?” (May 25, 2020):

America’s production of pharmaceuticals and medicines peaked in 2006, back before the global financial crisis. Output now is about 20 percent below its 2006 level. Pharmaceuticals tend to be capital not labor intensive. High quality pharmaceuticals aren’t made in sweat shops. Pharmaceuticals certainly weren’t the kind of industry that most economists expected to be on the losing end of trade liberalization twenty years ago. Yet America’s consumption of pharmaceuticals didn’t peak in 2006. Only U.S. output. Imports have increased substantially since 2006. Imports of pharmaceuticals have increased from $65 billion in 2006 to $151 billion in 2019. As a result, the trade deficit in pharmaceuticals has increased from $32 billion at the end of 2006 to $93 billion in March of this year. That is about 0.4 percent of US GDP, or just under 10 percent of the total trade deficit in manufactures. The bulk of these imports are from countries that pay high wages. The two biggest sources of imports are Ireland and Switzerland. Many of the usual arguments around the gains to consumers from trade don’t really apply here. The imports are of patent protected goods, so they don’t expand consumer choice. And U.S. pharmaceutical prices are notoriously high—imports from Ireland and Switzerland haven’t brought U.S. pharmaceutical prices down to European levels. The bulk of the gains from trade here almost certainly go to the owners of the pharmaceutical companies who benefit from lower taxes. And the main loser is the U.S. Treasury. Right now, the United States pays the highest prices in the world for its medicines (many of which derive from NIH research) while U.S. pharmaceutical companies are often taxed at quite low effective rates.

I want to do two things here starting with an explanation of the Irish transfer pricing game and later a small complaint about his Swiss tale. He cites a story about an Irish affiliate of Pfizer by Tom Bergin and Kevin Drawbaugh:

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Brad Setser on Offshoring Life Science Production and Transfer Pricing

Brad Setser on Offshoring Life Science Production and Transfer Pricing

I just posted a discussion of an interesting proposal from Biden written by Alex Parker who mentioned some February 5, 2020 testimony from Brad Setser. The gist of this testimony was noted back in a March 26, 2019 blog post entitled When Tax Drives the Trade Data:

I often hear that pharmaceuticals are one of America’s biggest exports. But that isn’t what is in the actual trade data (see exhibits 7 & 8). American firms (or formerly American firms, if there has been an inversion) may own the intellectual property behind many successful drugs, but the active ingredients themselves are often manufactured abroad. In fact, the (goods) trade deficit in pharmaceuticals now exceeds the surplus in civil aircraft. This trade isn’t obviously driven by differences in labor costs. The biggest sources of pharmaceutical imports, Ireland and Switzerland, aren’t exactly low wage countries. Trade here seems motivated in large part by the ability to use transfer pricing to shift profits to low tax jurisdictions. And the new Tax Cuts and Jobs Act if anything looks to have made those games more not less attractive. The incentive to offshore intellectual property generally remains—the “GILTI” rate on profits shifted to no tax jurisdictions is the lowest rate in the tax code. And the lower tax on intangibles than on tangibles has created an incentive to offshore actual production and jobs as well—the more tangible assets abroad, the higher your deemed tangible income and the lower your tax on your intangible income (the same is true for firms that retain their intellectual property in the United States, as there is a lower tax rate on the export of intangibles than the export of tangibles). To be concrete, a firm with its intellectual property in the Caribbean believes it can reduce its effective tax rate to under 10 percent (a rate somewhat below the global “minimum”). It is too early to say definitively that these incentives drove the increase in the pharmaceutical deficit in 2018. But it doesn’t seem too early to say that there is no evidence that these kind of tax games have gone away after the tax reform.

Brad’s thesis is certainly going to be controversial. As I read what he is saying is that it is not just the GILTI provisions of the 2017 tax cut that led to the increase in the life science trade deficit over the years. Rather it was the weak enforcement of basic transfer pricing rules that allowed Big Pharma to massively evade U.S. corporate taxes and created these perverse incentives. While we were told that the 2017 Republican tax cut for the rich would close the transfer pricing loopholes and perverse incentives they clearly did not. I’m all for scrapping GILTI and FDII for a lot of reasons but these steps alone will not fundamentally change what Brad is suggesting unless we start actually enforcing good old fashion transfer pricing rules. Let’s hope Biden has this in mind.

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Selection

Selection

by

Ken Melvin

The times they are a changing.

And they are changing at pandemic speed. Five months ago is ancient history. Now is a but a fleeting interval. From now, the future. What will our world look like six months from now? What will it look like in three years?

So much for being the ‘Greatest Nation Ever Known’. We just got rolled by a virus whilst beset with incompetent leadership, inadequate healthcare, a global warming crisis, and a failed economic model. We weren’t prepared. Could’ve been, should’ve been, but we weren’t. For now, we must learn how to live with the virus while charting a new course. Can we rise to the challenge of dealing with the pandemic and its aftermath, and of correcting those existing, pre-pandemic, problems? We really need to do both.

There will be changes. Chances are that we will see a diminishment of globalization. The offshoring of medical supplies, such as protective equipment, and critical medicines has hurt. Those will probably return onshore. Such dependence was always a risk. The production of other ‘self-sufficient’ goods should be brought back. Some of the jobs will return; return to a much-diminished economy. Education, at all levels, will probably be changed forever. We are going to hear, “We can’t afford to do —-, a lot, when, in truth, we can’t afford to not do something about the pre-existing problems of healthcare, economic disparity, global warming, and a few other small things. In these short few months, the world was changed, changed forever, before our very eyes. If we are very wise and really lucky, we will get this mostly right.

Somethings stay the same.

During the Great Depression, jobs were scarce. Asked; the old men who came of age during the era would say, “there just weren’t any jobs.” When there are no jobs; education, gender, ethnicity, and race didn’t matter much. Many of those with good jobs got them because of who they knew or were related to. Whence the expression often heard from those of a certain age at the time, “It’s not what you know but who you know.”

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Biden Proposes Ending the GILTI Loophole

Biden Proposes Ending the GILTI Loophole

Alex Parker covers an interesting and important tax policy issue:

Former Vice President Joe Biden’s recent proposal to secure medical supply chains in the wake of the COVID-19 pandemic includes tweaks to the 2017 federal tax overhaul, reigniting the debate about whether its international provisions are pushing manufacturing facilities offshore   .   .   .   the TCJA exempted most foreign income from taxation as part of a shift toward a more territorial tax system, similar to those used in Europe and much of the world. But it also enacted new provisions, including the GILTI tax and the base erosion and anti-abuse tax, which lawmakers said would block companies from shifting U.S. income abroad.

Many of the structures for tax avoidance that have drawn public scrutiny and outrage over the past decade have involved intangibles, which are relatively easy to move from jurisdiction to jurisdiction to chase the lowest tax rate. But the very attribute that makes them difficult to tax also makes them difficult to define. Rather than attempt to pinpoint the intangibles themselves, the TCJA instead targets unusually high returns on tangible assets.

Under the GILTI provision, the total foreign income of a U.S. company, beyond a 10% return on its offshore depreciable tangible assets, is taxed at 10.5%. That rate is half of the overall corporate rate of 21%.

As the bill was passed by Congress in 2017, Democrats and outside critics quickly noted that the GILTI tax could encourage companies to shift investments in tangible assets abroad. Because the GILTI tax kicks in only at a 10% return on foreign tangible property, the more valuable that property is, the smaller the ultimate GILTI tax bill will be.

Even further, because GILTI is calculated at the global level, in most cases it would not matter where new tangible assets were located; as long as they were offshore, they would decrease the GILTI tax. A reduced rate on foreign-derived intangible income, or domestic income defined through a formula similar to GILTI, also creates a similar incentive, critics contend. If a company has tangible assets at home, it will have less income defined as FDII, and less of the tax benefit.

The 2017 tax cut for rich people was written in secret by Republicans who had told us that it would somehow stop transfer pricing manipulation and would encourage onshoring. But when the details were released, a lot of economists including conservative economics were taken back by the complexity of the international provisions.

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Opening schools

Important questions from my friend

Paula W……..

! Listen up world!

Betsy DeVos, we have a few questions for you:
• If a teacher tests positive for COVID-19 are they required to quarantine for 2-3 weeks? Is their sick leave covered, paid?
• If that teacher has 5 classes a day with 30 students each, do all 150 of those students need to then stay home and quarantine for 14 days?
• Do all 150 of those students now have to get tested? Who pays for those tests? Are they happening at school? How are the parents being notified? Does everyone in each of those kids’ families need to get tested? Who pays for that?
• What if someone who lives in the same house as a teacher tests positive? Does that teacher now need to take 14 days off of work to quarantine? Is that time off covered? Paid?
• Where is the district going to find a substitute teacher who will work in a classroom full of exposed, possibly infected students for substitute pay?

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Economists and Inequality

by Joseph Joyce

Economists and Inequality

Binyamin Applebaum of the New York Times has written a book, The Economists’ Hour: False Prophets, Free Markets and the Fracture of Society, in which he claims that economists are responsible for the increase in income inequality in the U.S. I thought this charge was off the mark and wrote a reply. My piece, “Are Economists Responsible for Income Inequality?“, has been published in the June issue of Society. Here is the abstract:

Economists are held responsible by some for the increase in income inequality that has taken place in recent decades. Milton Friedman in particular has been singled out for advocating the removal of the government from almost all sectors of the economy, which led to an increase in inequality. But this charge is flawed for two reasons. First, Friedman’s views were always contested by other equally well-known and respected economists who advocate government policies to deal with markets where there are distortions, such as health care. Second, policy decisions are undertaken by public officials in response to many factors, including the advancement of personal and ideological agendas as well as the influence of donors and interest groups. The study of the causes and effects of inequality has become a central topic of economic research, and economists have a role to play in developing policies to address it.

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Initial and continuing claims, JOLTS show labor market “less awful” improvement continues – for now

Initial and continuing claims, JOLTS show labor market “less awful” improvement continues – for now

Weekly initial and continuing jobless claims have been giving the most up-to-date snapshot of the continuing economic impacts of the coronavirus on employment. This week continues the trend of slight improvement (or, more truly, slightly less awful).

Below are initial jobless claims both seasonally adjusted (blue) and non- seasonally adjusted (red). The non-seasonally adjusted number is of added importance since seasonal adjustments should not have more than a trivial effect on the huge real numbers:

There were 1.400 million new claims, 31,000 less than one week ago. After seasonal adjustment, this became 1.314 million, 99,000 less than last week’s number. The good news is, this is the smallest weekly decline since the worst reading in April. The bad news is, it is only 250,000 (or 17%) less than five weeks ago. In other words, the improvement is slight and huge second-order impacts in terms of new layoffs continue to spread.

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Favoring Hi-Tech Tax Cheats Over Consumers of French Wine

Favoring Hi-Tech Tax Cheats Over Consumers of French Wine

Hoping to buy a nice bottle of French wine? Doug Palmer of Poltico has some bad news for you:

The Trump administration announced Friday a 25 percent tariff on $1.3 billion worth of French handbags, cosmetics and soaps in retaliation for a digital services tax on U.S. internet giants, but said it would suspend imposing them for up to six months. The United States believes the way the French tax is structured unfairly targets large U.S. internet companies like Facebook, Google and Amazon. However, other countries are increasingly determined to find a way to collect revenue from firms that earn billions of dollars in their markets.

Let’s note that Amazon, Facebook, and Google made yuuuuge profits and evade U.S. corporate profits taxes. So paying a modest excise tax on European sales is not exactly going to bankrupt these tax cheats. But back to the story:

U.S. Trade Representative Robert Lighthizer’s office concluded last year that France’s digital service tax was unreasonable, discriminatory and a burden on U.S. commerce. It also laid out a list of $2.4 billion worth of French goods — including Champagne, cheeses, handbags, soaps and fine dinnerware — that could be hit with retaliatory duties as high as 100 percent. U.S. trade officials said the final retaliation figure announced Friday reflects the value of U.S. digital transactions covered by France’s 3 percent digital services tax, which is estimated to be in the range of $15 billion per year, and the amount of taxes that France is expected to collect from U.S. companies.

If collecting tax revenues were the goal, the U.S. could make much more from Amazon, Facebook, and Google by simply enforcing the transfer pricing rules. Oh but that would be taxing rich people which is not the Republican way. Back to the story:

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It’s the Economy

It’s the Economy

by

Ken Melvin

Ask any group of people who have successfully started a small business and to a person, they will tell you that there had been at least once when it could have gone either way. Eight out of ten fail in those perilous first two years. No doubt some of the 80% made fatal mistakes, but how many of them did everything right and still failed? Some of the 20% made what could have been fatal mistakes yet came out smelling like a rose. One struggles for five years to get a business going while another one makes $200,000 their first, the other’s fifth, year.

In America today, the outstanding student loan debt is more than $1.6 Trillion; some $200 Billion of which is in arrears. Maybe the student loan was taken out for a career change after losing their job due to globalization, automation, the 2008 crash, … or for a college degree to better their prospects of getting a better paying job, or for Law School and the prospect of a $300k/yr. salary, or for Medical School, … Turns out that after graduation there weren’t enough jobs, or positions; at least enough of any that paid enough.

Maybe they took out a student loan in order to become a research chemist. They make it to grad school only to find out that most chemical research is now being farmed out to Uzbekistan for $40,000/yr.

Graduated college a couple years back, now works as a barista and Uber driver until the job market opens up. Shares in SF.

Turns out that one’s chances for success depend on what year it was that one graduated from college. In a year when the job market is good, the chances of achieving success are quite good. Graduate in a year when there are few jobs and your career may never take off.

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Initial jobless claims improve slightly; continuing claims resume decline

Initial jobless claims improve slightly; continuing claims resume decline

Weekly initial and continuing jobless claims give us the most up-to-date snapshot of the continuing economic impacts of the coronavirus on employment. More than three full months after the initial shock, the overall damage remains huge, with large spreading new secondary impacts. The positive news is that the total number of claims, including continuing claims, has resumed being “less awful,” likely meaning more people have been recalled to their jobs than have newly lost them.

First, here are initial jobless claims both seasonally adjusted (blue) and non- seasonally adjusted (red). The non-seasonally adjusted number is of added importance since seasonal adjustments should not have more than a trivial effect on the huge real numbers:

Figure 1

There were 1.457 million new claims, only 6,000 less than one week ago. After seasonal adjustment, this became 1.480 million, “only” 60,000 less than last week’s number. While the trend of the past 45 days of slight declines in new claims continues, this is the smallest weekly decline since the worst reading in April. Further, this objectively continues to show huge second-order impacts continuing to spread.

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