It is hard to think of a less coherent pair of policies: President Trump’s tax policy encourages the very offshoring that his tariffs are intended to stop.
Take the more than $600 billion pharmaceutical industry. Over the past few months, Mr. Trump and his associates have repeatedly criticized companies’ moves to offshore much drug making, particularly to Ireland. “We can’t be beholden and rely upon foreign countries for fundamental things that we need,” Commerce Secretary Howard Lutnick said on April 13.
But the tax incentives in Mr. Trump’s 2017 tax and spending package helped generate this problem in the first place — a problem that would continue under the Republican bill under consideration. Mr. Trump’s Tax Cuts and Jobs Act created a loophole that made it far more profitable for the pharmaceutical giants, including Eli Lilly, Pfizer, Johnson and Johnson and Merck, to manufacture some of their most profitable drugs in Ireland. Unsurprisingly, that is what happened, with America’s imports of pharmaceuticals soaring to $250 billion in 2024, way up from $110 billion back in 2016.
American firms now report earning about $350 billion in profits annually in the world’s major centers of corporate tax avoidance, which include Ireland, Luxembourg, Singapore and a handful of others. And while the major drug companies have mastered the art of taking advantage of the loopholes created by the 2017 law, semiconductor equipment producers and other Big Tech companies use the same special tax break.
Fortunately, it isn’t too late to make sensible changes that would raise revenue and get rid of this strange incentive.
Republicans tend to blame Ireland’s lower corporate tax rate for the proliferation of corporate tax avoidance, but the real incentive comes from this obscure corner of our tax code. It offers a far-lower 10.5 percent tax rate for global profits if a global firm moves the profits from its intellectual property offshore. The tax rate for domestic profits, in contrast, is 21 percent. The tax break was created by Republicans who were searching for a compromise that would stop companies from moving their headquarters overseas without fully ending tax competition and the associated pressure on U.S. corporate tax rates.
That provision did stop the trend of companies moving their headquarters overseas. But it also didn’t take long for pharmaceutical companies to realize that they could cut their total tax bill in half by transferring their intellectual property (like, say, a patent for a new drug) to a subsidiary overseas. And to satisfy a different and equally obscure provision of the tax code, they also needed to move their manufacturing as well. Soon, Big Pharma began reporting to the I.R.S. that it earned almost all of its income abroad. They have all but stopped paying domestic corporate taxes.
Apple uses the same 2017 provision in a different way, and thanks to the lower tax rate on its foreign sales, its overall tax rate has been around 15 percent in a typical year. And it is likely that Apple is now paying the largest share of its corporate tax in Ireland — a country where it doesn’t make nor sell very much.
President Trump wants to solve these problems — and indeed almost every problem — with tariffs. But tariffs are an indiscriminate tool. They risk raising the price of all medicines and certainly will increase the prices of many generic medicines that are far more affordable than their patent-protected cousins. Generic medicines are sold at razor-thin margins, so their makers cannot “eat” the tariff out of their profits. A far better policy would be to just get rid of these strange tax quirks in the “big beautiful bill” to begin with. Passing the “Close the Round-Tripping Loophole Act” that the Senate Finance Committee members Ron Wyden, Mark Warner, Raphael Warnock and Peter Welch just introduced would be a very welcome step in the right direction.
Fixing the tax code is about putting the interest of the United States ahead of the interest of large global firms. It doesn’t make sense for an America-first president to push with one lever and pull with another. Better to get the tax policy right at the start.
Brad Setser is a senior fellow at the Council on Foreign Relations and the author of the follow the money blog. He served as an official in the Treasury Department in the Obama Administration.
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