Speaker 1: This is Wall Street Week. I'm David Weston bringing you
Speaker 1: stories of capitalism this week. Why so many US pharmaceutical
Speaker 1: companies make their drugs in Ireland and whether President Trump
Speaker 1: can use tariffs to change that, Plus the irresistible force
Speaker 1: of government subsidies meets the immovable object of Harvard and
Speaker 1: using the irs for all sorts of things other than
Speaker 1: collecting money, how much it could cost us all But
Speaker 1: we start once again with the Federal Reserve.
Speaker 2: The risks of higher unemployment and higher inflation appear to
Speaker 2: have risen. If the large increases in tariff that have
Speaker 2: been announced or sustained, they're likely to generate a rise
Speaker 2: in inflation, a slow down in economic growth, and an
Speaker 2: increase in unemployment.
Speaker 1: And we turn to our special contributor, Larry Summers of
Speaker 1: Harvard for a reaction.
Speaker 3: I thought the Chairman handled a difficult situation correctly.
Speaker 4: Look, he has a real problem.
Speaker 3: Policy is pursuing a supply shock that we are inflicting
Speaker 3: on ourselves. We're pushing up prices with the tariffs, which
Speaker 3: is a path to inflation. In response to that, monetary
Speaker 3: policy normally hits the brakes. We're sucking purchasing power out
Speaker 3: of the economy and creating huge uncertainty that potentially is
Speaker 3: chilling spending in response to that, Monetary policy traditionally hits
Speaker 3: the accelerator. It's kind of a trick that we've pursued
Speaker 3: policies that have made expected unemployment and expected inflation go
Speaker 3: up at the same time. It's not a good thing
Speaker 3: to have done. But faced with both of them effects,
Speaker 3: not knowing which one is going to be larger, not
Speaker 3: knowing what the size of the shock is going to be,
Speaker 3: not knowing what the effects of the uncertainty is going
Speaker 3: to be. I don't see how the FED had any
Speaker 3: viable alternative.
Speaker 4: But watchful waiting.
Speaker 1: The FED said explicitly, just exactly what you did, which
Speaker 1: is the risks of inflation have gone up and the
Speaker 1: risks of an employment have gone up, which really goes
Speaker 1: to the dual mandates. And Chair Powell did his best
Speaker 1: to dance around that. But as a macroeconomist, if in
Speaker 1: fact you end up with inflation and higher unemployment at
Speaker 1: the same time and you have to choose between to
Speaker 1: two mandates, does history tell us which you should choose.
Speaker 3: So this is a rare situation that the FED finds
Speaker 3: itself in look, I don't think there's a hard and
Speaker 3: fast rule. I think the balance of opinion would be
Speaker 3: among economists that the fed first obligation is to the
Speaker 3: price stability mandate, because if you let inflation go, you're
Speaker 3: going to have higher inflation expectations, and that's going to
Speaker 3: risk higher unemployment down the road, almost for sure, as
Speaker 3: you try to achieve disinflation.
Speaker 1: The one constant it seems we have right now is uncertainty.
Speaker 1: We heard about it from the FED, We hear about
Speaker 1: on Wall Street, we hear about it from companies as
Speaker 1: they report their earnings. Uncertainty, and it pops up in
Speaker 1: all sorts of ways. What do you make about what
Speaker 1: happened with the Asian currencies in the last week. I mean, like,
Speaker 1: for example, the Taiwan dollar went up more than done
Speaker 1: in decades.
Speaker 3: My instinct is that the Taiwanese situation, because of the
Speaker 3: national security aspect, because of how much the currency had
Speaker 3: been pegged, is because of aspects of the hedging behavior,
Speaker 3: is somewhat unique. So I don't think it would be
Speaker 3: right to see it as a precedent for multiple other
Speaker 3: moves that are going to.
Speaker 4: Take place.
Speaker 3: But I'm not certain of that, and I'm very much
Speaker 3: aware that there are huge foreign holdings of treasuries at
Speaker 3: this point, that the other side of that flow into
Speaker 3: US treasuries, that what enables other countries to buy all
Speaker 3: those treasuries is the dollars they're accumulating, because in Toto,
Speaker 3: they're exporting more to us than we are exporting to them.
Speaker 3: But I don't think the contradiction between hating the trade
Speaker 3: deficit and loving the capitol in flows is entirely clear
Speaker 3: in the mind of the administration. I have not heard
Speaker 3: the Secretary of the Treasury thoughtfully address the question if
Speaker 3: we scale back trade deficits, which after all, is the
Speaker 3: repeated and constant emphasis of their policy, how are we
Speaker 3: going to have the capital inflows that are necessary to
Speaker 3: keep interest rates bounded, that are necessary to accumulate all of.
Speaker 4: The debt that we are mounting.
Speaker 3: So my guess is that this Taiwan situation is suey generous,
Speaker 3: but it is indicative of a much broader kind of
Speaker 3: challenge that we face with capital inflows and trade deficit.
Speaker 3: The one thing we know is that we can't fully
Speaker 3: resolve that very deficit just as a matter of arithmetic
Speaker 3: without also reducing the foreign capital inflow into the United States.
Speaker 1: President Trump has been pressuring the FED to cut rates,
Speaker 1: which the FED Chair Jay Powell has resisted. Larry's fellow
Speaker 1: Harvard economist Ken Rogoff, was the chief economist at the IMF,
Speaker 1: and his new book, Our Dollar, Your Problem looks at
Speaker 1: the link between FED independence and the strength of the dollar.
Speaker 1: We've heard from the Chair J Powell. One of the
Speaker 1: concerns going to this was the independence of the Fed.
Speaker 1: Given some of the remarks from the President United States
Speaker 1: Donald Trump and others. Did J. Powell help restore some
Speaker 1: of the confidence in the independence of the Fed.
Speaker 5: Well, he's definitely held the line, and Trump has retreated
Speaker 5: at the same time. But he's just been very professional,
Speaker 5: kind of ignoring Trump and saying the truth. Tariffs are
Speaker 5: going to cause higher prices and lower output.
Speaker 6: Trump might not want to hear it. I mean, to
Speaker 6: be fair to.
Speaker 5: Trump, every president tries to get the FED to lower
Speaker 5: interest rates. They're ninety nine percent of the time. But
Speaker 5: I think where he is crossing a line. It's saying, well,
Speaker 5: I'm going to fire him. That's just self destructive. He's
Speaker 5: shooting himself in the foot. I mean that said, FED
Speaker 5: independence is not as sacrosanct as people think.
Speaker 6: I'm amazed how many.
Speaker 5: Educated people I talk to who think the FEDS in
Speaker 5: the Constitution and you can't do it. It's not. It's a
Speaker 5: creature of Congress. There have been various acts of Congress,
Speaker 5: but you know, nineteen thirteen it's when it started. If
Speaker 5: Congress were in cahoots with Trump, they could literally make
Speaker 5: it disappear in a week, bring it back under the treasury.
Speaker 1: We have a tenion right now. I think everything is
Speaker 1: because of Donald Trump as president. As you point out
Speaker 1: in your book, you know, the Donisa dollar actually may
Speaker 1: have peaked like in twenty fifteen. Exactly, there are larger
Speaker 1: forces even than Donald Trump. Foot here, What are the
Speaker 1: consequences of a relative decline in the dollar as against
Speaker 1: other currencies.
Speaker 5: So first, the fact that a larger forces is significant
Speaker 5: is you know, if he backtracks and somehow convinces everybody
Speaker 5: to forget that it happened. The role of law is fine,
Speaker 5: We're not going to arbitrarily put tariffs and this and that.
Speaker 5: We're still in a period of dollar decline. So the
Speaker 5: consequences of it are first, will pay a higher interest rate?
Speaker 6: Now we probably.
Speaker 5: Pay between half a percent and a percent less than
Speaker 5: we would if we weren't so dominant. It's not just
Speaker 5: that the dollars the most used, it's way the most used.
Speaker 5: And to be clear, that doesn't mean we're paying less
Speaker 5: than Germany, because we borrow a lot more than Germany.
Speaker 5: So it's sort of controlling for what we're borrowing. And
Speaker 5: that applies to mortgages to car loans. It's a big deal.
Speaker 1: So if the United States were to come together as one,
Speaker 1: just bear with me. Now you're in a counterfactual. If
Speaker 1: we're to come together as one and came to Ken
Speaker 1: Rogan and said we our priority is making sure the
Speaker 1: dollar does not continuous decline, what would you advise us
Speaker 1: to do well.
Speaker 5: I mean, the simplest thing for short term is preserved
Speaker 5: fat independence, which I do think is under duress in
Speaker 5: a lot of ways. Don't do the tariff war, which
Speaker 5: is absolutely accelerates the process. When you restrict trade, you're
Speaker 5: putting sand in the wheels of the global financial system.
Speaker 5: When trade can't move freely, it affects finance. Since we're
Speaker 5: the kings of finance and we benefit from that, you
Speaker 5: know that's not a great idea either.
Speaker 1: Coming back to j Powell, Chairman of the FED, and
Speaker 1: what he had to say this week. Basically, the FED
Speaker 1: told us the risks have gone enough of both inflation
Speaker 1: and unemployment. Are we headed to stake fleation?
Speaker 3: Oh?
Speaker 6: I think it's very likely.
Speaker 5: I mean, that's the base case here, that the hard
Speaker 5: numbers are not so bad.
Speaker 6: They're mixed, but not so bad.
Speaker 5: I mean, the jobs report was amazing, but you know, nevertheless,
Speaker 5: if you look at business confidence, consumer confidence, global confidence,
Speaker 5: and some of the more forward looking measures, it certainly
Speaker 5: looks like we're if we don't quite go into recession,
Speaker 5: we're going into something that'll feel like it. And just
Speaker 5: you know, the arithmetic of the tariffs is it's going
Speaker 5: to raise prices so near term, yes, Now is that
Speaker 5: a one time thing or not? It's hard to know
Speaker 5: what behavior will be. I mean, I think the FEDS
Speaker 5: a little bit worried that this is coming on top
Speaker 5: of what just happened, where people were told, except by
Speaker 5: Larry told you, but people are told this is temporary,
Speaker 5: it's transitory, it's going away one time thing. Now the
Speaker 5: tariffs are coming. Oh, it's it's a temporary, one time thing. Well,
Speaker 5: you're not going to believe them and wage setters businesses.
Speaker 5: So it's a difficult period for sure for the FED
Speaker 5: and stagflations the most likely outcoming.
Speaker 6: Powell kind of set that without coming out and saying it.
Speaker 3: Up.
Speaker 1: Next, the politicization of the IRS. President Trump has a
Speaker 1: lot of plans for America's tax service, but they don't
Speaker 1: appear to have much to do with actually collecting money
Speaker 1: for the government. That's next on Wall Street Week.
Speaker 7: You're listening to Bloomberg Wall Street Week with David Weston
Speaker 7: from Bloomberg Radio. This is Bloomberg Wall Street Week with
Speaker 7: David Weston from Bloomberg Radio.
Speaker 1: This is a story about biting the hand that feeds
Speaker 1: all of us, and at a time when we're particularly hungry.
Speaker 1: The IRS is the federal agency charged with collecting taxes
Speaker 1: from all of us who all them, And though we
Speaker 1: might not enjoy paying our taxes, there's little doubt that
Speaker 1: the government needs the money right now. President Trump has
Speaker 1: made cutting the deficit a priority for his second term
Speaker 1: in office, and he proposes to do that in part
Speaker 1: by cutting back on government agencies.
Speaker 3: We have cut billions and billions and billions of dollars.
Speaker 1: One of the first agencies to be hit with some
Speaker 1: of the deepest cuts has been the Internal Revenue Service,
Speaker 1: an agency of the Treasury responsible for collecting taxes. Its
Speaker 1: predecessor was a federal office once called the Commissioner of
Speaker 1: Internal Revenue, created in eighteen sixty two to fund the
Speaker 1: Civil War with the country's first income tax.
Speaker 8: Most people think of the IRS in terms of an
Speaker 8: agency of taxes. When you say IRS, that's what they
Speaker 8: think about, right It is filing a tax return, paying
Speaker 8: taxes and getting a refund, and how much is my
Speaker 8: refund going to be? And how quickly am I going
Speaker 8: to get that refund.
Speaker 1: Chuck Reddick was IRS Commissioner in President Trump's first term.
Speaker 8: That dynamic, right there, literally touches one hundred percent of
Speaker 8: the American tax paying public, which is corporate, large corporations,
Speaker 8: small corporations, it's small businesses throughout the country.
Speaker 1: As important as it is for the IRS to make
Speaker 1: sure the government gets all the revenues it's entitled to,
Speaker 1: it has historically fallen short.
Speaker 9: The IRS is responsible for collecting about ninety seven percent
Speaker 9: of federal revenues. So the money that funds everything, that
Speaker 9: funds our defense, that funds our roads, that funds our schools.
Speaker 1: Natasha Saran is a professor at Yale Law School and
Speaker 1: president of the Budget Lab, which calculates the fiscal impact
Speaker 1: of federal policy proposals.
Speaker 9: Historically, the IRS has been able to collect about eighty
Speaker 9: five percent of taxes that are owed, so that means
Speaker 9: that every year it loses out on about seven hundred
Speaker 9: billion dollars in taxes that are owed to the government
Speaker 9: but not collected.
Speaker 4: That's a lot.
Speaker 9: That's about three percent of GDP on an annualized basis.
Speaker 1: Why has the government been going without revenue amounting to
Speaker 1: three percent of its GDP each year? Experts say, it's
Speaker 1: simply a lack of resources.
Speaker 8: It has never had the resources for decades and decades
Speaker 8: and decades. It has been an underfunded, underserved organization. It
Speaker 8: doesn't get a lot of talking support from anybody on
Speaker 8: the hill, not in terms of the nature of the
Speaker 8: IRS itself. So people will use the IRS for other
Speaker 8: game plans. So when the IRIS does get funding, Congress
Speaker 8: tells us exactly how to spend every one of those dollars.
Speaker 9: You had an IRS that, over the course of the
Speaker 9: decade between twenty ten and twenty twenty had lost in
Speaker 9: real terms about thirty percent of its budget.
Speaker 1: The Biden administration tried to remedy the problem working with
Speaker 1: Congress to give the IRS more resources to get the
Speaker 1: job done.
Speaker 9: Congress invested about eighty billion dollars in the IRS over
Speaker 9: a ten year period, and that over a ten year
Speaker 9: period is actually super important because when you think about
Speaker 9: things like, you know, hiring and training a bunch of
Speaker 9: revenue agents who are capable of doing complex partnership return work,
Speaker 9: or when you think about modernizing outdated technology, those are
Speaker 9: investments that don't pay off immediately.
Speaker 8: When I was on board August sixteen, twenty twenty two
Speaker 8: Inflation Reduction Act, we got seventy nine point six billion
Speaker 8: dollars of supplemental funding, and of that seventy nine point
Speaker 8: six billion dollars, they appropriated forty five point six billion
Speaker 8: dollars to what's called.
Speaker 4: Compliance or enforcement.
Speaker 8: And the significance of that forty five point six billion
Speaker 8: was Treasury ran the numbers and said, well, IRIS, if
Speaker 8: we give you forty five point six billion dollars for enforcement,
Speaker 8: you will be able to recover.
Speaker 4: Seven hundred billion dollars. That's their math.
Speaker 8: That was never my math, and IRIS never spoke and said,
Speaker 8: give us this and we'll recover that. I always said,
Speaker 8: with more funding, will be a better agency across the board.
Speaker 8: That gave Congress the ability to go spend seven hundred
Speaker 8: billion dollars, So, if you will, giving us forty five
Speaker 8: was a pay for for other things that Congress wanted
Speaker 8: to do.
Speaker 1: The hope was that by investing in the IRS, revenues
Speaker 1: would grow more than the expense of more agents and
Speaker 1: better technology. But as of now, it looks like that
Speaker 1: will never happen.
Speaker 9: You've seen a bunch of those investments rolled back. So
Speaker 9: already of that eighty billion dollars, the IRS lost twenty
Speaker 9: billion dollars of enforcement dollars that were really focused on
Speaker 9: improving tax compliance. They were rolled back as part of
Speaker 9: the debt sealing agreement last summer.
Speaker 8: So in twenty three they took away twenty billion dollars
Speaker 8: from enforcement, and then just in the last round took
Speaker 8: another twenty one point four billion dollars for enforcement.
Speaker 1: We have four years now. The Trump administration has moved
Speaker 1: not only to reverse giving the IRS more resources, but
Speaker 1: to cut them below what was there beforecluding cutting staff
Speaker 1: by as much as twenty five percent, with a fair
Speaker 1: number of staff already let go.
Speaker 8: In terms of workforce cuts right the high for the agency.
Speaker 8: There was about one hundred and two thousand employees last
Speaker 8: year with deferred resignations, with getting rid of probationary people
Speaker 8: as well as normal attrition.
Speaker 4: So let me touch the attrition issue.
Speaker 8: When I was on board, we averaged eighty three to
Speaker 8: eighty seven thousand employees, but about fifty five thousand of
Speaker 8: those employees were.
Speaker 4: Eligible to retire within three years.
Speaker 8: Thankfully, most IRS employees stay five years after they're eligible
Speaker 8: to retire. But it's an aging workforce, and there was
Speaker 8: a hiring freeze from twenty eleven to twenty eighteen, and
Speaker 8: so you lost an entire generation of experience, if you will,
Speaker 8: that you would bring in, and you have an aging workforce,
Speaker 8: and then in the current environment, they've been encouraged or
Speaker 8: told to leave the agency.
Speaker 9: The IRS has lost about seven thousand probationary employees at
Speaker 9: the agency.
Speaker 10: And I think.
Speaker 9: Probationary is like kind of a misnomer of a term
Speaker 9: because it implies like someone's on probation or some such
Speaker 9: that's really not the case at all. In fact, these
Speaker 9: are individuals who were either recently hired and recruited by
Speaker 9: the IRS to do some of this, like very difficult
Speaker 9: work that they historically haven't been able to invest in,
Speaker 9: like partnership audits, where today the IRS's audit rate is
Speaker 9: like literally zero percent. So they hired a bunch of
Speaker 9: people who have expertise in these areas. And what they
Speaker 9: also did is they promoted people. They move people into
Speaker 9: new roles, and because they're relatively new in these new roles,
Speaker 9: they're probationary employees. About seven thousand of these people have
Speaker 9: already been let go from the agency, and there have
Speaker 9: been plans for reductions in force that would total like
Speaker 9: fifty percent across the board, which would bring the IRS
Speaker 9: to levels it hasn't been at since the nineteen sixties
Speaker 9: when the population was sixty million people fewer. You've seen
Speaker 9: a very significant exodus from the IRS of your love leaderships,
Speaker 9: but really across the board, and about twenty two thousand
Speaker 9: employees have already taken the deferred resignation plan that's been offered,
Speaker 9: which means that by the end of this year, even
Speaker 9: without any additional reductions in force, you're going to have
Speaker 9: an IRS that's thirty percent smaller than it was at
Speaker 9: the beginning of this year.
Speaker 3: I think we will come to judge when we observe
Speaker 3: the consequences of tens of thousands of IRS enforcement personnel
Speaker 3: being let go, and it being done in a way
Speaker 3: where the because of the incentive scheme, the most competent people,
Speaker 3: the people who can get the best jobs elsewhere, are
Speaker 3: the ones who are most likely to lead. I think
Speaker 3: we are threatening the basis of our tax system, which
Speaker 3: is based on voluntary compliance.
Speaker 1: So is there any way of calculating how much this
Speaker 1: will cost us, at least in lost revenues that we
Speaker 1: otherwise would have.
Speaker 9: Had Legs and I at the Yell Budget Lab have
Speaker 9: concluded that just the workforce reductions that have been planned
Speaker 9: thus far are likely to cost the IRS somewhere between
Speaker 9: four hundred billion and two point four trillion dollars over
Speaker 9: the course of this next decade. That's like a very
Speaker 9: large range. And so what is driving that, Well, the
Speaker 9: dollars that are going to be lost aren't just direct
Speaker 9: dollars like you do fewer audits and as a result
Speaker 9: of that you collect less taxes. Certainly that's going to happen,
Speaker 9: and you know, we're great work by Nathan Hendron and
Speaker 9: Ben Spernkaiser and their co authors says, every one dollars
Speaker 9: spent on high end enforcement by the IRS generates twelve
Speaker 9: so incredibly high ROI work that we're not going to
Speaker 9: be able to do, but you're not just losing direct dollars.
Speaker 9: If there are traffic cameras on the road, people drive
Speaker 9: the speed limit more often than not. And the same
Speaker 9: is true with the tax system. If there is an
Speaker 9: infrastructure in place and people know that the IRS sits
Speaker 9: ready to pursue non compliance more likely to play by
Speaker 9: the rules, people are going to adjust their behavior and
Speaker 9: not play by the rules as often, and also take
Speaker 9: tax positions that are really quite questionable.
Speaker 1: If President Trump really wants to make progress on that deficit,
Speaker 1: it looks like cutting costs at the IRS may be
Speaker 1: the last place to look, not only for the taxes
Speaker 1: we won't collect, but also for the signal it sends
Speaker 1: to those who didn't want to pay the taxes they
Speaker 1: owed in the first place.
Speaker 8: I do believe you're going to see aggressive tax planning.
Speaker 8: I think you're going to see tax professionals who prepare
Speaker 8: returns are telling you people are coming in saying, well,
Speaker 8: why do I need to file the.
Speaker 4: Return or have been found.
Speaker 3: We have a president who's completely delegitimizing government and who's
Speaker 3: taking away the capacity of the IRS to process tax
Speaker 3: returns to want it when that's necessary, I think we'll
Speaker 3: see many more people take cash payments and not report them,
Speaker 3: many more people engage in dubious transactions with their cronies
Speaker 3: to misvalue assets and avoid paying taxes. Many more people
Speaker 3: engage in abusive tax shelters. That's an area of the
Speaker 3: president I think has some awareness of from his past
Speaker 3: business dealings. And when all of that happens, the people
Speaker 3: who are going to pay are honest taxpayers. I'm working
Speaker 3: on this pretty carefully right now with some colleagues. I'd
Speaker 3: be surprised if we're not on our path to sacrificing
Speaker 3: more than a trillion dollars of revenue over the next
Speaker 3: decade because of this misguided want and attack on the IRS,
Speaker 3: and that's going to make our fiscal problem worse, or
Speaker 3: it's going to force us into other kinds of damaging
Speaker 3: tax increases. It would be much better to do a
Speaker 3: better job of collecting the taxes that are levied under
Speaker 3: current law. It would be better not to be driving
Speaker 3: the economy from above ground to underground in terms of
Speaker 3: American competitiveness. So I don't think we've seen large consequences
Speaker 3: yet from all of these, but the.
Speaker 6: Risks are very big.
Speaker 1: Coming up next, President Trump complains about all those US
Speaker 1: pharmaceutical companies making drugs and money in Ireland. What took
Speaker 1: them there in the first place, and can Trump tariffs
Speaker 1: get them to come home.
Speaker 7: You're listening to Bloomberg Wall Street Week with David Weston
Speaker 7: from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
Speaker 7: with David Weston from Bloomberg Radio.
Speaker 1: This is a story about competing for the business. Every
Speaker 1: government cuts sweetheart deals to attract companies business, but can
Speaker 1: it go too far? President Trump says Ireland's done just that,
Speaker 1: especially when it comes to US companies manufacturing pharmaceuticals.
Speaker 5: The EU were set up in order to take advantage
Speaker 5: of the United States.
Speaker 4: Including Ireland. Is Ireland taking advantage of the US?
Speaker 3: Of course they are, but the United States shouldn't have
Speaker 3: let it happen.
Speaker 1: Whether it's taking advantage of the United States or not.
Speaker 1: The facts show that Ireland is winning more than it's
Speaker 1: losing in the competition for American business.
Speaker 11: So the Irish story with corporate tax and multinationals is
Speaker 11: probably a five decade long story at least at this stage,
Speaker 11: particularly since we joined the European Union, it's been a
Speaker 11: real differentiator having a low corporate tax rate.
Speaker 1: Ireland's investment promotion agency, the IDA, reports that more than
Speaker 1: ninety pharmaceutical companies operate in the country, and many of
Speaker 1: them are US based. All of this is no coincidence
Speaker 1: for the companies. Ireland offers a range of advantages and
Speaker 1: one of them is its sweet tax arrangement, part of
Speaker 1: a long term Irish plan to attract foreign direct investment.
Speaker 1: Danny McCoy is the CEO of the Irish Business and
Speaker 1: Employers Confederations.
Speaker 11: We're looking at an FDI model that's built on certainty
Speaker 11: and log evity, and I think that's been really significant
Speaker 11: the last decade in terms of the flight of capital
Speaker 11: towards Ireland as a result of the OECD corporate tax work.
Speaker 11: Big brands like Intel, Apple and Pfeiser have a history here.
Speaker 11: In the case of Intel, they're nearly newbies at over
Speaker 11: forty years. Apple has been here since nineteen eighty and
Speaker 11: Pfiser probably the best part of a century in one
Speaker 11: form of another. So longevity and the very big brands
Speaker 11: have been co located here in Ireland long before the corporate.
Speaker 6: Tax world that we've entered into in the last decade.
Speaker 12: I think there's many different reasons why, I mean both
Speaker 12: why they set up shop initially and then also why
Speaker 12: they've continued investment in Ireland and continued to expand in Ireland.
Speaker 1: Jennifer Duggan is Bloomberg's Ireland Bureau a chief.
Speaker 10: I think the rumber of tax incentives initially there to
Speaker 10: really entice international companies to come to Ireland, and I
Speaker 10: think that probably started a lot of that initial investment.
Speaker 12: But I think there's a number of things that has
Speaker 12: helped Ireland continue to attract investment.
Speaker 1: The Irish strategy to use taxes to compete for foreign
Speaker 1: investment went into overdrive during the Great Financial Crisis and the.
Speaker 13: Global Financial Crisis happened. We were part of an imf
Speaker 13: ECB bailout. When I first joined the government twenty eleven,
Speaker 13: we had fourteen percent unemployment, we had a massive budget
Speaker 13: deficit and we were able to turn that around and
Speaker 13: we mainly turned it around based on the trade and
Speaker 13: sector of our economy, and that was producing goods and
Speaker 13: services that we could sell for the world, and US
Speaker 13: firms were a big part of that.
Speaker 1: Leo Varadkar was Ireland's Prime Minister from twenty seventeen to
Speaker 1: twenty twenty and then again from twenty twenty two to
Speaker 1: twenty twenty four. Huw material to the fiscal situation in
Speaker 1: Ireland has been, if I can say, the extra money
Speaker 1: from corporate income.
Speaker 4: Tax, it's been a UTEHLP.
Speaker 13: It's a big part of our tax base, larger than
Speaker 13: will be the case for most of out countries.
Speaker 1: Corporate taxes make up close to twenty percent of total
Speaker 1: government revenues, most of which comes from US multinationals. But
Speaker 1: it wasn't just the Irish government's business friendly policies that
Speaker 1: got us to where we are. The US did its
Speaker 1: fair share to drive away business.
Speaker 14: I think really the role of Ireland as a major
Speaker 14: center of tax policy or of tax sort of goes
Speaker 14: back to the nineteen eighties in some form, but it
Speaker 14: really gets going in the late nineteen nineties and early
Speaker 14: two thousands.
Speaker 1: Alex Arnan is director of policy analysis at the pen
Speaker 1: Wharton Budget Model.
Speaker 14: One of the key changes there is on the US
Speaker 14: side is the introduction of what's called check the box regulations. Essentially,
Speaker 14: it made it easier for US multinationals to manage their
Speaker 14: overseas operations. And so this change in US regulations combines
Speaker 14: with some very specific attractive features of the Irish tax environment.
Speaker 14: Starting in the nineteen nineties, they dramatically reduce their corporate
Speaker 14: tax rate down to about twelve point five percent by
Speaker 14: two thousand and three. Ireland also has a lot of
Speaker 14: bilateral tax treaties with other countries, which makes it easy
Speaker 14: to manage the relationship between your subsidiaries across those countries.
Speaker 14: So the combination of those US policy changes the Irish
Speaker 14: tax environment, and then some features of Ireland as an
Speaker 14: economy that made it attractive.
Speaker 1: This isn't the first time and Trump has focused on
Speaker 1: Ireland's success in luring US businesses. His Tax Cuts and
Speaker 1: Jobs Act of twenty seventeen tried to address at least
Speaker 1: some of the problems.
Speaker 14: When we look at the Irish royalty payments to other
Speaker 14: countries before twenty nineteen twenty twenty, we see the vast
Speaker 14: majority of these payments are going to tax havens. That's Bermuda,
Speaker 14: the Cayman Islands, the Netherlands, Luxembourg, Singapore, and then starting
Speaker 14: in twenty twenty, we see a very sharp crossing of
Speaker 14: the pattern of the trends here, where royalty payments to
Speaker 14: these tax havens fall off a cliff, royalty payments directly
Speaker 14: to the US shoot up, and often this is interrelated
Speaker 14: with some of the changes in the Tax Cuts and
Speaker 14: Jobs Act, in particular the deduction for foreign derived intangible income.
Speaker 6: I think we are vulnerable.
Speaker 13: Ireland is a small country in a very big world,
Speaker 13: and we've done very well because of globalization. It's one
Speaker 13: of the things that has helped us to become a
Speaker 13: wealthy country and hastowed us to increase our stands from
Speaker 13: living considerably. So a less globalized world is going to
Speaker 13: be less favorable to Ireland economically. But I'm not as pessimistic,
Speaker 13: I think, as maybe others are. The United States is
Speaker 13: certainly now going in a direction which is protectionist, and
Speaker 13: that's definitely going to be a negative force. But at
Speaker 13: the same time, the European Union twenty seven countries four
Speaker 13: interred million people, is doubling down on free trade.
Speaker 1: Now President Trump is once again focused on Ireland's big
Speaker 1: attraction for US pharmaceutical companies. But this time the tool
Speaker 1: he wants to use isn't taxes, but one of his
Speaker 1: favorites tariffs. If your single goal was to get US
Speaker 1: pharmaceutical companies to make more on shore United States, would
Speaker 1: you use tax policy or tariff policy?
Speaker 5: No.
Speaker 14: Obviously tariffs are a form of tax, but really here
Speaker 14: the much more important component is the corporate income tax policy.
Speaker 14: If what we were talking about was a deeply considered,
Speaker 14: well planned out, long term strategy for predictable tariffs on pharmaceuticals,
Speaker 14: that might be a different story. That might start encouraging
Speaker 14: some major multinationals to rethink how they've arranged their activities
Speaker 14: around the globe. If it's what we have been seeing
Speaker 14: in practice from the Trump administration over the last few months.
Speaker 14: Very hard to imagine really any big corporation making major
Speaker 14: long term decisions on that basis. It is just too unpredictable,
Speaker 14: and that is really the biggest factor there.
Speaker 12: I don't see it being a doomsday situation where suddenly
Speaker 12: all US arm and tech companies move out of Ireland.
Speaker 12: I don't think that's something that's going to happen overnight,
Speaker 12: but it certainly has the potential to damage Ireland's economy
Speaker 12: and also its attractiveness to future investment as well. Ireland
Speaker 12: has the second largest exports to the US from the EU,
Speaker 12: only behind Germany, and most of that is from the
Speaker 12: pharmaceutical industry.
Speaker 4: If US companies.
Speaker 12: Start to invest less than Ireland or start to move
Speaker 12: even small parts of their production to back to the US, yeah,
Speaker 12: that would certainly have an impact. It's not something that's
Speaker 12: going to happen overnight, but you know, as we see
Speaker 12: going forward over the next five years that the rest
Speaker 12: of the lifetime of this administration, it is something that
Speaker 12: we could see gradual changes.
Speaker 14: It is hard to imagine what they will actually come
Speaker 14: out with would be enough to really prompt major shift
Speaker 14: in the long term planning and activities. There's a couple
Speaker 14: other wrinkles in there. You know, Ireland has an exit
Speaker 14: tax for intellectual property. So if a major US manufacturer
Speaker 14: of pharmaceuticals did want to move some of their valuable
Speaker 14: pens out of Ireland back to the US, they would
Speaker 14: have to not just get more benefit than they're losing
Speaker 14: from what they currently have in terms of their strategy,
Speaker 14: they would have to be enough to offset this exit
Speaker 14: tax that Ireland will levy and which they have specifically
Speaker 14: to prevent this sort of thing.
Speaker 1: Ireland has seen change coming and is provided for it
Speaker 1: by investing the revenues it has enjoyed until now.
Speaker 12: Ireland has one of only two trade surpluses within the EU.
Speaker 12: Being open to foreign direct investment to multinationals, I think
Speaker 12: has brought a lot of multilturalism to Ireland as well
Speaker 12: and really helped propel Ireland in its development in terms
Speaker 12: of just to be more diverse, more progressive. So there's
Speaker 12: a number of different ways that it's impacted. From education
Speaker 12: perspective as well.
Speaker 4: It's been a huge help.
Speaker 13: It's a big part of our tax space, larger than
Speaker 13: will be the case for most developed countries, and we've
Speaker 13: invested that, invested in infrastructure in particular, and that will continue.
Speaker 6: But we've also thought ahead.
Speaker 13: While it might have been tempting to ramp up public
Speaker 13: spending by much more than we did, we haven't done that.
Speaker 13: So the government for twenty twenty five anticipates running a
Speaker 13: budget surplus of just one hundred three percent of GDP.
Speaker 13: There might be a falloff in the amount of corporate
Speaker 13: tax revenues that come into the Art Exchequer and that's
Speaker 13: why we've paid down our debt, why we are running
Speaker 13: substantial government surpluses, notwithstanding a lot of political pressure back
Speaker 13: home to spend more on just about everything. And we've
Speaker 13: also established some future sovereign wealth funds, putting aside money
Speaker 13: for future pension and care liabilities and also things like
Speaker 13: the cost of climate action into the future as well.
Speaker 1: And in the competition for the US pharmaceutical business, Ireland
Speaker 1: has a lot going for it beyond favorable taxes.
Speaker 13: The investment pipeline still remains very strong, a lot of
Speaker 13: US companies investing in Ireland, a lot expanding their operations.
Speaker 13: I think because of the geopolitical changes that are happening
Speaker 13: and the changes and the rules of tax and trade,
Speaker 13: we might see the same level of new investment in
Speaker 13: the years ahead as we saw in the past. But
Speaker 13: I'd certainly be optimistic that those big pharma, big medical
Speaker 13: devices chip operations will continue to operate. There's going to
Speaker 13: be a market for these products, and are growing and
Speaker 13: expanding market for these products, not just in the US,
Speaker 13: but in other parts of the world as well. And
Speaker 13: bear in mind, were part of the European Single Market,
Speaker 13: a market of over four hundred billion people, and the
Speaker 13: European Union has a network of free trade agreements with
Speaker 13: lots of different parts of the world. I'm confident those
Speaker 13: operations will continue.
Speaker 11: International business of trust Ireland, and they've got a history
Speaker 11: and a record prove it.
Speaker 12: We've seen Ireland's economy binds back and really recover in
Speaker 12: international presence of major companies has certainly helped us.
Speaker 1: In the end, what the United States does to compete
Speaker 1: for pharmaceutical manufacturing will depend in large part on one man,
Speaker 1: President Trump.
Speaker 13: I think what we don't hear enough about is the
Speaker 13: by latter relationship. It used to be very one way,
Speaker 13: but now Ireland invests a lot in the US. Were
Speaker 13: the sixth biggest investor in the US, which isn't bad
Speaker 13: for a small country of just over five million people,
Speaker 13: and depending on how you counted the summer, between one
Speaker 13: hundred and two hundred thousand Americans across fifty states working
Speaker 13: in Irish owned companies. But certainly there is a focus
Speaker 13: on tax and one thing I was said to President Trump,
Speaker 13: and I met him many times, is that if there
Speaker 13: is an issue around tax laws, it's probably more of
Speaker 13: an issue with American laws than our laws. The anomalies
Speaker 13: that maybe exist in the law are probably more on
Speaker 13: the American side, and fairnesss he's acknowledged that. He's said
Speaker 13: that we've been very smart in our tax policies. We've
Speaker 13: always expected at some point that the US would change theirs.
Speaker 1: Is it for us? Here at Wall Street Week, I'm
Speaker 1: David Weston. Join us next week for more stories of capitalism.