Zinger Key Points
- Through complex accounting maneuvers, pharma companies shift profits earned in the U.S. to low-tax jurisdictions overseas, Krugman wrote.
- The 2017 tax cut incentivized corporations to further move profits and production abroad, he added.
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As the wrangling over the debt ceiling continues, economist and Nobel laureate Paul Krugman highlighted one avenue where the government is losing a lot of revenue.
What Happened: The Council on Foreign Relations’ Brad Setser testified before a Senate committee on Thursday about global tax avoidance by pharmaceutical companies, wrote Paul Krugman in a New York Times op-ed on Friday.
Krugman noted that these multinational companies employ accounting tricks to avoid tax payments on profits earned in the U.S. This deprives the government of revenue, he wrote.
Krugman also referred to the 2017 tax cut passed during the presidency of Donald Trump. Instead of bringing in corporate investment back to America, the legislation encouraged corporations to move even more of their reported profits and, to some extent, their production overseas, he wrote.
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Pharma's Big Tax Avoidance: Drug companies, which benefit due to higher prescription drug costs in the U.S., do not show much profit on U.S. sales, Krugman wrote.
The economist shared a chart presented by Setser, which showed big pharma companies earning abysmally low profits in the U.S. despite the fact that they reported significantly more revenue in the U.S. market than in the international market.
The Modus Operandi: Pharma companies assign patents and other forms of intellectual property to overseas subsidiaries located in low-tax jurisdictions, Krugman wrote. The U.S. operations at these companies pay fat fees to these overseas subsidiaries to use the IP, causing profits to disappear in the U.S. and reappear in other regions, where they go largely untaxed, he added.
Trump's Role: Krugman noted that the 2017 tax law gave companies incentives to shift actual production as well as reported profits overseas.
"[The tax cut] is probably a major factor in a recent surge in U.S. imports of pharmaceuticals," the economist wrote.
"Cracking down on tax avoidance could significantly reduce budget deficits," Krugman argued.
Read Next: Paul Krugman’s Debt Ceiling Fix: Trillion-Dollar Coin Or Premium Bond Strategy
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