May 9, 2025 • 36 mins
This week, former Treasury Secretary Lawrence H. Summers and Economist Kenneth Rogoff weigh the effects of President Trump's policies on monetary policy. And, how will the IRS carry out its mandate under the Trump administration’s recent staff and funding cuts? Plus, across the pond, how will tariffs affect Ireland’s corporate tax policies that have attracted American companies to its shores?
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Episode Transcript
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Speaker 1 (00:13):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism this week. Why so many US pharmaceutical
companies make their drugs in Ireland and whether President Trump
can use tariffs to change that, Plus the irresistible force
of government subsidies meets the immovable object of Harvard and
(00:34):
using the irs for all sorts of things other than
collecting money, how much it could cost us all But
we start once again with the Federal Reserve.
Speaker 2 (00:45):
The risks of higher unemployment and higher inflation appear to
have risen. If the large increases in tariff that have
been announced or sustained, they're likely to generate a rise
in inflation, a slow down in economic growth, and an
increase in unemployment.
Speaker 1 (01:01):
And we turn to our special contributor, Larry Summers of
Harvard for a reaction.
Speaker 3 (01:06):
I thought the Chairman handled a difficult situation correctly.
Speaker 4 (01:11):
Look, he has a real problem.
Speaker 3 (01:14):
Policy is pursuing a supply shock that we are inflicting
on ourselves. We're pushing up prices with the tariffs, which
is a path to inflation. In response to that, monetary
policy normally hits the brakes. We're sucking purchasing power out
of the economy and creating huge uncertainty that potentially is
(01:38):
chilling spending in response to that, Monetary policy traditionally hits
the accelerator. It's kind of a trick that we've pursued
policies that have made expected unemployment and expected inflation go
up at the same time. It's not a good thing
to have done. But faced with both of them effects,
(02:01):
not knowing which one is going to be larger, not
knowing what the size of the shock is going to be,
not knowing what the effects of the uncertainty is going
to be. I don't see how the FED had any
viable alternative.
Speaker 4 (02:16):
But watchful waiting.
Speaker 1 (02:18):
The FED said explicitly, just exactly what you did, which
is the risks of inflation have gone up and the
risks of an employment have gone up, which really goes
to the dual mandates. And Chair Powell did his best
to dance around that. But as a macroeconomist, if in
fact you end up with inflation and higher unemployment at
the same time and you have to choose between to
two mandates, does history tell us which you should choose.
Speaker 3 (02:41):
So this is a rare situation that the FED finds
itself in look, I don't think there's a hard and
fast rule. I think the balance of opinion would be
among economists that the fed first obligation is to the
(03:04):
price stability mandate, because if you let inflation go, you're
going to have higher inflation expectations, and that's going to
risk higher unemployment down the road, almost for sure, as
you try to achieve disinflation.
Speaker 1 (03:20):
The one constant it seems we have right now is uncertainty.
We heard about it from the FED, We hear about
on Wall Street, we hear about it from companies as
they report their earnings. Uncertainty, and it pops up in
all sorts of ways. What do you make about what
happened with the Asian currencies in the last week. I mean, like,
for example, the Taiwan dollar went up more than done
in decades.
Speaker 3 (03:37):
My instinct is that the Taiwanese situation, because of the
national security aspect, because of how much the currency had
been pegged, is because of aspects of the hedging behavior,
is somewhat unique. So I don't think it would be
(03:59):
right to see it as a precedent for multiple other
moves that are going to.
Speaker 4 (04:08):
Take place.
Speaker 3 (04:09):
But I'm not certain of that, and I'm very much
aware that there are huge foreign holdings of treasuries at
this point, that the other side of that flow into
US treasuries, that what enables other countries to buy all
(04:33):
those treasuries is the dollars they're accumulating, because in Toto,
they're exporting more to us than we are exporting to them.
But I don't think the contradiction between hating the trade
deficit and loving the capitol in flows is entirely clear
(04:59):
in the mind of the administration. I have not heard
the Secretary of the Treasury thoughtfully address the question if
we scale back trade deficits, which after all, is the
repeated and constant emphasis of their policy, how are we
(05:19):
going to have the capital inflows that are necessary to
keep interest rates bounded, that are necessary to accumulate all of.
Speaker 4 (05:31):
The debt that we are mounting.
Speaker 3 (05:35):
So my guess is that this Taiwan situation is suey generous,
but it is indicative of a much broader kind of
challenge that we face with capital inflows and trade deficit.
The one thing we know is that we can't fully
(05:58):
resolve that very deficit just as a matter of arithmetic
without also reducing the foreign capital inflow into the United States.
Speaker 1 (06:10):
President Trump has been pressuring the FED to cut rates,
which the FED Chair Jay Powell has resisted. Larry's fellow
Harvard economist Ken Rogoff, was the chief economist at the IMF,
and his new book, Our Dollar, Your Problem looks at
the link between FED independence and the strength of the dollar.
We've heard from the Chair J Powell. One of the
(06:31):
concerns going to this was the independence of the Fed.
Given some of the remarks from the President United States
Donald Trump and others. Did J. Powell help restore some
of the confidence in the independence of the Fed.
Speaker 5 (06:44):
Well, he's definitely held the line, and Trump has retreated
at the same time. But he's just been very professional,
kind of ignoring Trump and saying the truth. Tariffs are
going to cause higher prices and lower output.
Speaker 6 (07:00):
Trump might not want to hear it. I mean, to
be fair to.
Speaker 5 (07:02):
Trump, every president tries to get the FED to lower
interest rates. They're ninety nine percent of the time. But
I think where he is crossing a line. It's saying, well,
I'm going to fire him. That's just self destructive. He's
shooting himself in the foot. I mean that said, FED
independence is not as sacrosanct as people think.
Speaker 6 (07:25):
I'm amazed how many.
Speaker 5 (07:27):
Educated people I talk to who think the FEDS in
the Constitution and you can't do it. It's not. It's a
creature of Congress. There have been various acts of Congress,
but you know, nineteen thirteen it's when it started. If
Congress were in cahoots with Trump, they could literally make
it disappear in a week, bring it back under the treasury.
Speaker 1 (07:50):
We have a tenion right now. I think everything is
because of Donald Trump as president. As you point out
in your book, you know, the Donisa dollar actually may
have peaked like in twenty fifteen. Exactly, there are larger
forces even than Donald Trump. Foot here, What are the
consequences of a relative decline in the dollar as against
other currencies.
Speaker 5 (08:10):
So first, the fact that a larger forces is significant
is you know, if he backtracks and somehow convinces everybody
to forget that it happened. The role of law is fine,
We're not going to arbitrarily put tariffs and this and that.
We're still in a period of dollar decline. So the
consequences of it are first, will pay a higher interest rate?
Speaker 6 (08:33):
Now we probably.
Speaker 5 (08:35):
Pay between half a percent and a percent less than
we would if we weren't so dominant. It's not just
that the dollars the most used, it's way the most used.
And to be clear, that doesn't mean we're paying less
than Germany, because we borrow a lot more than Germany.
So it's sort of controlling for what we're borrowing. And
(08:56):
that applies to mortgages to car loans. It's a big deal.
Speaker 1 (09:00):
So if the United States were to come together as one,
just bear with me. Now you're in a counterfactual. If
we're to come together as one and came to Ken
Rogan and said we our priority is making sure the
dollar does not continuous decline, what would you advise us
to do well.
Speaker 5 (09:16):
I mean, the simplest thing for short term is preserved
fat independence, which I do think is under duress in
a lot of ways. Don't do the tariff war, which
is absolutely accelerates the process. When you restrict trade, you're
putting sand in the wheels of the global financial system.
(09:37):
When trade can't move freely, it affects finance. Since we're
the kings of finance and we benefit from that, you
know that's not a great idea either.
Speaker 1 (09:46):
Coming back to j Powell, Chairman of the FED, and
what he had to say this week. Basically, the FED
told us the risks have gone enough of both inflation
and unemployment. Are we headed to stake fleation?
Speaker 3 (09:59):
Oh?
Speaker 6 (09:59):
I think it's very likely.
Speaker 5 (10:00):
I mean, that's the base case here, that the hard
numbers are not so bad.
Speaker 6 (10:07):
They're mixed, but not so bad.
Speaker 5 (10:08):
I mean, the jobs report was amazing, but you know, nevertheless,
if you look at business confidence, consumer confidence, global confidence,
and some of the more forward looking measures, it certainly
looks like we're if we don't quite go into recession,
we're going into something that'll feel like it. And just
(10:29):
you know, the arithmetic of the tariffs is it's going
to raise prices so near term, yes, Now is that
a one time thing or not? It's hard to know
what behavior will be. I mean, I think the FEDS
a little bit worried that this is coming on top
of what just happened, where people were told, except by
(10:51):
Larry told you, but people are told this is temporary,
it's transitory, it's going away one time thing. Now the
tariffs are coming. Oh, it's it's a temporary, one time thing. Well,
you're not going to believe them and wage setters businesses.
So it's a difficult period for sure for the FED
and stagflations the most likely outcoming.
Speaker 6 (11:13):
Powell kind of set that without coming out and saying it.
Speaker 3 (11:19):
Up.
Speaker 1 (11:19):
Next, the politicization of the IRS. President Trump has a
lot of plans for America's tax service, but they don't
appear to have much to do with actually collecting money
for the government. That's next on Wall Street Week.
Speaker 7 (11:33):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. This is Bloomberg Wall Street Week with
David Weston from Bloomberg Radio.
Speaker 1 (11:49):
This is a story about biting the hand that feeds
all of us, and at a time when we're particularly hungry.
The IRS is the federal agency charged with collecting taxes
from all of us who all them, And though we
might not enjoy paying our taxes, there's little doubt that
the government needs the money right now. President Trump has
made cutting the deficit a priority for his second term
(12:11):
in office, and he proposes to do that in part
by cutting back on government agencies.
Speaker 3 (12:17):
We have cut billions and billions and billions of dollars.
Speaker 1 (12:23):
One of the first agencies to be hit with some
of the deepest cuts has been the Internal Revenue Service,
an agency of the Treasury responsible for collecting taxes. Its
predecessor was a federal office once called the Commissioner of
Internal Revenue, created in eighteen sixty two to fund the
Civil War with the country's first income tax.
Speaker 8 (12:44):
Most people think of the IRS in terms of an
agency of taxes. When you say IRS, that's what they
think about, right It is filing a tax return, paying
taxes and getting a refund, and how much is my
refund going to be? And how quickly am I going
to get that refund.
Speaker 1 (12:59):
Chuck Reddick was IRS Commissioner in President Trump's first term.
Speaker 8 (13:03):
That dynamic, right there, literally touches one hundred percent of
the American tax paying public, which is corporate, large corporations,
small corporations, it's small businesses throughout the country.
Speaker 1 (13:15):
As important as it is for the IRS to make
sure the government gets all the revenues it's entitled to,
it has historically fallen short.
Speaker 9 (13:23):
The IRS is responsible for collecting about ninety seven percent
of federal revenues. So the money that funds everything, that
funds our defense, that funds our roads, that funds our schools.
Speaker 1 (13:33):
Natasha Saran is a professor at Yale Law School and
president of the Budget Lab, which calculates the fiscal impact
of federal policy proposals.
Speaker 9 (13:43):
Historically, the IRS has been able to collect about eighty
five percent of taxes that are owed, so that means
that every year it loses out on about seven hundred
billion dollars in taxes that are owed to the government
but not collected.
Speaker 4 (13:57):
That's a lot.
Speaker 9 (13:58):
That's about three percent of GDP on an annualized basis.
Speaker 1 (14:02):
Why has the government been going without revenue amounting to
three percent of its GDP each year? Experts say, it's
simply a lack of resources.
Speaker 8 (14:12):
It has never had the resources for decades and decades
and decades. It has been an underfunded, underserved organization. It
doesn't get a lot of talking support from anybody on
the hill, not in terms of the nature of the
IRS itself. So people will use the IRS for other
game plans. So when the IRIS does get funding, Congress
(14:34):
tells us exactly how to spend every one of those dollars.
Speaker 9 (14:37):
You had an IRS that, over the course of the
decade between twenty ten and twenty twenty had lost in
real terms about thirty percent of its budget.
Speaker 1 (14:49):
The Biden administration tried to remedy the problem working with
Congress to give the IRS more resources to get the
job done.
Speaker 9 (14:57):
Congress invested about eighty billion dollars in the IRS over
a ten year period, and that over a ten year
period is actually super important because when you think about
things like, you know, hiring and training a bunch of
revenue agents who are capable of doing complex partnership return work,
or when you think about modernizing outdated technology, those are
(15:20):
investments that don't pay off immediately.
Speaker 8 (15:22):
When I was on board August sixteen, twenty twenty two
Inflation Reduction Act, we got seventy nine point six billion
dollars of supplemental funding, and of that seventy nine point
six billion dollars, they appropriated forty five point six billion
dollars to what's called.
Speaker 4 (15:38):
Compliance or enforcement.
Speaker 8 (15:40):
And the significance of that forty five point six billion
was Treasury ran the numbers and said, well, IRIS, if
we give you forty five point six billion dollars for enforcement,
you will be able to recover.
Speaker 4 (15:50):
Seven hundred billion dollars. That's their math.
Speaker 8 (15:53):
That was never my math, and IRIS never spoke and said,
give us this and we'll recover that. I always said,
with more funding, will be a better agency across the board.
That gave Congress the ability to go spend seven hundred
billion dollars, So, if you will, giving us forty five
was a pay for for other things that Congress wanted
to do.
Speaker 1 (16:14):
The hope was that by investing in the IRS, revenues
would grow more than the expense of more agents and
better technology. But as of now, it looks like that
will never happen.
Speaker 9 (16:25):
You've seen a bunch of those investments rolled back. So
already of that eighty billion dollars, the IRS lost twenty
billion dollars of enforcement dollars that were really focused on
improving tax compliance. They were rolled back as part of
the debt sealing agreement last summer.
Speaker 8 (16:42):
So in twenty three they took away twenty billion dollars
from enforcement, and then just in the last round took
another twenty one point four billion dollars for enforcement.
Speaker 1 (16:51):
We have four years now. The Trump administration has moved
not only to reverse giving the IRS more resources, but
to cut them below what was there beforecluding cutting staff
by as much as twenty five percent, with a fair
number of staff already let go.
Speaker 8 (17:07):
In terms of workforce cuts right the high for the agency.
There was about one hundred and two thousand employees last
year with deferred resignations, with getting rid of probationary people
as well as normal attrition.
Speaker 4 (17:19):
So let me touch the attrition issue.
Speaker 8 (17:22):
When I was on board, we averaged eighty three to
eighty seven thousand employees, but about fifty five thousand of
those employees were.
Speaker 4 (17:30):
Eligible to retire within three years.
Speaker 8 (17:32):
Thankfully, most IRS employees stay five years after they're eligible
to retire. But it's an aging workforce, and there was
a hiring freeze from twenty eleven to twenty eighteen, and
so you lost an entire generation of experience, if you will,
that you would bring in, and you have an aging workforce,
and then in the current environment, they've been encouraged or
(17:54):
told to leave the agency.
Speaker 9 (17:57):
The IRS has lost about seven thousand probationary employees at
the agency.
Speaker 10 (18:02):
And I think.
Speaker 9 (18:03):
Probationary is like kind of a misnomer of a term
because it implies like someone's on probation or some such
that's really not the case at all. In fact, these
are individuals who were either recently hired and recruited by
the IRS to do some of this, like very difficult
work that they historically haven't been able to invest in,
like partnership audits, where today the IRS's audit rate is
(18:24):
like literally zero percent. So they hired a bunch of
people who have expertise in these areas. And what they
also did is they promoted people. They move people into
new roles, and because they're relatively new in these new roles,
they're probationary employees. About seven thousand of these people have
already been let go from the agency, and there have
been plans for reductions in force that would total like
(18:46):
fifty percent across the board, which would bring the IRS
to levels it hasn't been at since the nineteen sixties
when the population was sixty million people fewer. You've seen
a very significant exodus from the IRS of your love leaderships,
but really across the board, and about twenty two thousand
employees have already taken the deferred resignation plan that's been offered,
(19:08):
which means that by the end of this year, even
without any additional reductions in force, you're going to have
an IRS that's thirty percent smaller than it was at
the beginning of this year.
Speaker 3 (19:17):
I think we will come to judge when we observe
the consequences of tens of thousands of IRS enforcement personnel
being let go, and it being done in a way
where the because of the incentive scheme, the most competent people,
the people who can get the best jobs elsewhere, are
(19:40):
the ones who are most likely to lead. I think
we are threatening the basis of our tax system, which
is based on voluntary compliance.
Speaker 1 (19:52):
So is there any way of calculating how much this
will cost us, at least in lost revenues that we
otherwise would have.
Speaker 9 (19:59):
Had Legs and I at the Yell Budget Lab have
concluded that just the workforce reductions that have been planned
thus far are likely to cost the IRS somewhere between
four hundred billion and two point four trillion dollars over
the course of this next decade. That's like a very
large range. And so what is driving that, Well, the
dollars that are going to be lost aren't just direct
(20:21):
dollars like you do fewer audits and as a result
of that you collect less taxes. Certainly that's going to happen,
and you know, we're great work by Nathan Hendron and
Ben Spernkaiser and their co authors says, every one dollars
spent on high end enforcement by the IRS generates twelve
so incredibly high ROI work that we're not going to
be able to do, but you're not just losing direct dollars.
(20:44):
If there are traffic cameras on the road, people drive
the speed limit more often than not. And the same
is true with the tax system. If there is an
infrastructure in place and people know that the IRS sits
ready to pursue non compliance more likely to play by
the rules, people are going to adjust their behavior and
(21:05):
not play by the rules as often, and also take
tax positions that are really quite questionable.
Speaker 1 (21:13):
If President Trump really wants to make progress on that deficit,
it looks like cutting costs at the IRS may be
the last place to look, not only for the taxes
we won't collect, but also for the signal it sends
to those who didn't want to pay the taxes they
owed in the first place.
Speaker 8 (21:29):
I do believe you're going to see aggressive tax planning.
I think you're going to see tax professionals who prepare
returns are telling you people are coming in saying, well,
why do I need to file the.
Speaker 4 (21:38):
Return or have been found.
Speaker 3 (21:39):
We have a president who's completely delegitimizing government and who's
taking away the capacity of the IRS to process tax
returns to want it when that's necessary, I think we'll
see many more people take cash payments and not report them,
(22:01):
many more people engage in dubious transactions with their cronies
to misvalue assets and avoid paying taxes. Many more people
engage in abusive tax shelters. That's an area of the
president I think has some awareness of from his past
(22:24):
business dealings. And when all of that happens, the people
who are going to pay are honest taxpayers. I'm working
on this pretty carefully right now with some colleagues. I'd
be surprised if we're not on our path to sacrificing
(22:49):
more than a trillion dollars of revenue over the next
decade because of this misguided want and attack on the IRS,
and that's going to make our fiscal problem worse, or
it's going to force us into other kinds of damaging
(23:09):
tax increases. It would be much better to do a
better job of collecting the taxes that are levied under
current law. It would be better not to be driving
the economy from above ground to underground in terms of
American competitiveness. So I don't think we've seen large consequences
(23:34):
yet from all of these, but the.
Speaker 6 (23:38):
Risks are very big.
Speaker 1 (23:40):
Coming up next, President Trump complains about all those US
pharmaceutical companies making drugs and money in Ireland. What took
them there in the first place, and can Trump tariffs
get them to come home.
Speaker 7 (23:53):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 1 (24:09):
This is a story about competing for the business. Every
government cuts sweetheart deals to attract companies business, but can
it go too far? President Trump says Ireland's done just that,
especially when it comes to US companies manufacturing pharmaceuticals.
Speaker 5 (24:27):
The EU were set up in order to take advantage
of the United States.
Speaker 4 (24:32):
Including Ireland. Is Ireland taking advantage of the US?
Speaker 3 (24:35):
Of course they are, but the United States shouldn't have
let it happen.
Speaker 1 (24:38):
Whether it's taking advantage of the United States or not.
The facts show that Ireland is winning more than it's
losing in the competition for American business.
Speaker 11 (24:47):
So the Irish story with corporate tax and multinationals is
probably a five decade long story at least at this stage,
particularly since we joined the European Union, it's been a
real differentiator having a low corporate tax rate.
Speaker 1 (25:00):
Ireland's investment promotion agency, the IDA, reports that more than
ninety pharmaceutical companies operate in the country, and many of
them are US based. All of this is no coincidence
for the companies. Ireland offers a range of advantages and
one of them is its sweet tax arrangement, part of
a long term Irish plan to attract foreign direct investment.
(25:23):
Danny McCoy is the CEO of the Irish Business and
Employers Confederations.
Speaker 11 (25:28):
We're looking at an FDI model that's built on certainty
and log evity, and I think that's been really significant
the last decade in terms of the flight of capital
towards Ireland as a result of the OECD corporate tax work.
Big brands like Intel, Apple and Pfeiser have a history here.
In the case of Intel, they're nearly newbies at over
(25:50):
forty years. Apple has been here since nineteen eighty and
Pfiser probably the best part of a century in one
form of another. So longevity and the very big brands
have been co located here in Ireland long before the corporate.
Speaker 6 (26:06):
Tax world that we've entered into in the last decade.
Speaker 12 (26:09):
I think there's many different reasons why, I mean both
why they set up shop initially and then also why
they've continued investment in Ireland and continued to expand in Ireland.
Speaker 1 (26:19):
Jennifer Duggan is Bloomberg's Ireland Bureau a chief.
Speaker 10 (26:22):
I think the rumber of tax incentives initially there to
really entice international companies to come to Ireland, and I
think that probably started a lot of that initial investment.
Speaker 12 (26:36):
But I think there's a number of things that has
helped Ireland continue to attract investment.
Speaker 1 (26:40):
The Irish strategy to use taxes to compete for foreign
investment went into overdrive during the Great Financial Crisis and the.
Speaker 13 (26:48):
Global Financial Crisis happened. We were part of an imf
ECB bailout. When I first joined the government twenty eleven,
we had fourteen percent unemployment, we had a massive budget
deficit and we were able to turn that around and
we mainly turned it around based on the trade and
sector of our economy, and that was producing goods and
services that we could sell for the world, and US
(27:12):
firms were a big part of that.
Speaker 1 (27:14):
Leo Varadkar was Ireland's Prime Minister from twenty seventeen to
twenty twenty and then again from twenty twenty two to
twenty twenty four. Huw material to the fiscal situation in
Ireland has been, if I can say, the extra money
from corporate income.
Speaker 4 (27:29):
Tax, it's been a UTEHLP.
Speaker 13 (27:31):
It's a big part of our tax base, larger than
will be the case for most of out countries.
Speaker 1 (27:37):
Corporate taxes make up close to twenty percent of total
government revenues, most of which comes from US multinationals. But
it wasn't just the Irish government's business friendly policies that
got us to where we are. The US did its
fair share to drive away business.
Speaker 14 (27:53):
I think really the role of Ireland as a major
center of tax policy or of tax sort of goes
back to the nineteen eighties in some form, but it
really gets going in the late nineteen nineties and early
two thousands.
Speaker 1 (28:05):
Alex Arnan is director of policy analysis at the pen
Wharton Budget Model.
Speaker 14 (28:11):
One of the key changes there is on the US
side is the introduction of what's called check the box regulations. Essentially,
it made it easier for US multinationals to manage their
overseas operations. And so this change in US regulations combines
with some very specific attractive features of the Irish tax environment.
(28:33):
Starting in the nineteen nineties, they dramatically reduce their corporate
tax rate down to about twelve point five percent by
two thousand and three. Ireland also has a lot of
bilateral tax treaties with other countries, which makes it easy
to manage the relationship between your subsidiaries across those countries.
So the combination of those US policy changes the Irish
(28:53):
tax environment, and then some features of Ireland as an
economy that made it attractive.
Speaker 1 (28:58):
This isn't the first time and Trump has focused on
Ireland's success in luring US businesses. His Tax Cuts and
Jobs Act of twenty seventeen tried to address at least
some of the problems.
Speaker 14 (29:10):
When we look at the Irish royalty payments to other
countries before twenty nineteen twenty twenty, we see the vast
majority of these payments are going to tax havens. That's Bermuda,
the Cayman Islands, the Netherlands, Luxembourg, Singapore, and then starting
in twenty twenty, we see a very sharp crossing of
(29:31):
the pattern of the trends here, where royalty payments to
these tax havens fall off a cliff, royalty payments directly
to the US shoot up, and often this is interrelated
with some of the changes in the Tax Cuts and
Jobs Act, in particular the deduction for foreign derived intangible income.
Speaker 6 (29:46):
I think we are vulnerable.
Speaker 13 (29:48):
Ireland is a small country in a very big world,
and we've done very well because of globalization. It's one
of the things that has helped us to become a
wealthy country and hastowed us to increase our stands from
living considerably. So a less globalized world is going to
be less favorable to Ireland economically. But I'm not as pessimistic,
I think, as maybe others are. The United States is
(30:09):
certainly now going in a direction which is protectionist, and
that's definitely going to be a negative force. But at
the same time, the European Union twenty seven countries four
interred million people, is doubling down on free trade.
Speaker 1 (30:23):
Now President Trump is once again focused on Ireland's big
attraction for US pharmaceutical companies. But this time the tool
he wants to use isn't taxes, but one of his
favorites tariffs. If your single goal was to get US
pharmaceutical companies to make more on shore United States, would
you use tax policy or tariff policy?
Speaker 5 (30:45):
No.
Speaker 14 (30:45):
Obviously tariffs are a form of tax, but really here
the much more important component is the corporate income tax policy.
If what we were talking about was a deeply considered,
well planned out, long term strategy for predictable tariffs on pharmaceuticals,
that might be a different story. That might start encouraging
some major multinationals to rethink how they've arranged their activities
(31:08):
around the globe. If it's what we have been seeing
in practice from the Trump administration over the last few months.
Very hard to imagine really any big corporation making major
long term decisions on that basis. It is just too unpredictable,
and that is really the biggest factor there.
Speaker 12 (31:26):
I don't see it being a doomsday situation where suddenly
all US arm and tech companies move out of Ireland.
I don't think that's something that's going to happen overnight,
but it certainly has the potential to damage Ireland's economy
and also its attractiveness to future investment as well. Ireland
has the second largest exports to the US from the EU,
(31:46):
only behind Germany, and most of that is from the
pharmaceutical industry.
Speaker 4 (31:50):
If US companies.
Speaker 12 (31:51):
Start to invest less than Ireland or start to move
even small parts of their production to back to the US, yeah,
that would certainly have an impact. It's not something that's
going to happen overnight, but you know, as we see
going forward over the next five years that the rest
of the lifetime of this administration, it is something that
we could see gradual changes.
Speaker 14 (32:09):
It is hard to imagine what they will actually come
out with would be enough to really prompt major shift
in the long term planning and activities. There's a couple
other wrinkles in there. You know, Ireland has an exit
tax for intellectual property. So if a major US manufacturer
of pharmaceuticals did want to move some of their valuable
(32:29):
pens out of Ireland back to the US, they would
have to not just get more benefit than they're losing
from what they currently have in terms of their strategy,
they would have to be enough to offset this exit
tax that Ireland will levy and which they have specifically
to prevent this sort of thing.
Speaker 1 (32:45):
Ireland has seen change coming and is provided for it
by investing the revenues it has enjoyed until now.
Speaker 12 (32:52):
Ireland has one of only two trade surpluses within the EU.
Being open to foreign direct investment to multinationals, I think
has brought a lot of multilturalism to Ireland as well
and really helped propel Ireland in its development in terms
of just to be more diverse, more progressive. So there's
a number of different ways that it's impacted. From education
perspective as well.
Speaker 4 (33:12):
It's been a huge help.
Speaker 13 (33:13):
It's a big part of our tax space, larger than
will be the case for most developed countries, and we've
invested that, invested in infrastructure in particular, and that will continue.
Speaker 6 (33:23):
But we've also thought ahead.
Speaker 13 (33:25):
While it might have been tempting to ramp up public
spending by much more than we did, we haven't done that.
So the government for twenty twenty five anticipates running a
budget surplus of just one hundred three percent of GDP.
There might be a falloff in the amount of corporate
tax revenues that come into the Art Exchequer and that's
why we've paid down our debt, why we are running
(33:46):
substantial government surpluses, notwithstanding a lot of political pressure back
home to spend more on just about everything. And we've
also established some future sovereign wealth funds, putting aside money
for future pension and care liabilities and also things like
the cost of climate action into the future as well.
Speaker 1 (34:03):
And in the competition for the US pharmaceutical business, Ireland
has a lot going for it beyond favorable taxes.
Speaker 13 (34:10):
The investment pipeline still remains very strong, a lot of
US companies investing in Ireland, a lot expanding their operations.
I think because of the geopolitical changes that are happening
and the changes and the rules of tax and trade,
we might see the same level of new investment in
the years ahead as we saw in the past. But
I'd certainly be optimistic that those big pharma, big medical
(34:30):
devices chip operations will continue to operate. There's going to
be a market for these products, and are growing and
expanding market for these products, not just in the US,
but in other parts of the world as well. And
bear in mind, were part of the European Single Market,
a market of over four hundred billion people, and the
European Union has a network of free trade agreements with
lots of different parts of the world. I'm confident those
(34:52):
operations will continue.
Speaker 11 (34:53):
International business of trust Ireland, and they've got a history
and a record prove it.
Speaker 12 (34:58):
We've seen Ireland's economy binds back and really recover in
international presence of major companies has certainly helped us.
Speaker 1 (35:04):
In the end, what the United States does to compete
for pharmaceutical manufacturing will depend in large part on one man,
President Trump.
Speaker 13 (35:12):
I think what we don't hear enough about is the
by latter relationship. It used to be very one way,
but now Ireland invests a lot in the US. Were
the sixth biggest investor in the US, which isn't bad
for a small country of just over five million people,
and depending on how you counted the summer, between one
hundred and two hundred thousand Americans across fifty states working
in Irish owned companies. But certainly there is a focus
(35:35):
on tax and one thing I was said to President Trump,
and I met him many times, is that if there
is an issue around tax laws, it's probably more of
an issue with American laws than our laws. The anomalies
that maybe exist in the law are probably more on
the American side, and fairnesss he's acknowledged that. He's said
that we've been very smart in our tax policies. We've
always expected at some point that the US would change theirs.
Speaker 1 (36:00):
Is it for us? Here at Wall Street Week, I'm
David Weston. Join us next week for more stories of capitalism.
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism this week. Why so many US pharmaceutical
companies make their drugs in Ireland and whether President Trump
can use tariffs to change that, Plus the irresistible force
of government subsidies meets the immovable object of Harvard and
(00:34):
using the irs for all sorts of things other than
collecting money, how much it could cost us all But
we start once again with the Federal Reserve.
Speaker 2 (00:45):
The risks of higher unemployment and higher inflation appear to
have risen. If the large increases in tariff that have
been announced or sustained, they're likely to generate a rise
in inflation, a slow down in economic growth, and an
increase in unemployment.
Speaker 1 (01:01):
And we turn to our special contributor, Larry Summers of
Harvard for a reaction.
Speaker 3 (01:06):
I thought the Chairman handled a difficult situation correctly.
Speaker 4 (01:11):
Look, he has a real problem.
Speaker 3 (01:14):
Policy is pursuing a supply shock that we are inflicting
on ourselves. We're pushing up prices with the tariffs, which
is a path to inflation. In response to that, monetary
policy normally hits the brakes. We're sucking purchasing power out
of the economy and creating huge uncertainty that potentially is
(01:38):
chilling spending in response to that, Monetary policy traditionally hits
the accelerator. It's kind of a trick that we've pursued
policies that have made expected unemployment and expected inflation go
up at the same time. It's not a good thing
to have done. But faced with both of them effects,
(02:01):
not knowing which one is going to be larger, not
knowing what the size of the shock is going to be,
not knowing what the effects of the uncertainty is going
to be. I don't see how the FED had any
viable alternative.
Speaker 4 (02:16):
But watchful waiting.
Speaker 1 (02:18):
The FED said explicitly, just exactly what you did, which
is the risks of inflation have gone up and the
risks of an employment have gone up, which really goes
to the dual mandates. And Chair Powell did his best
to dance around that. But as a macroeconomist, if in
fact you end up with inflation and higher unemployment at
the same time and you have to choose between to
two mandates, does history tell us which you should choose.
Speaker 3 (02:41):
So this is a rare situation that the FED finds
itself in look, I don't think there's a hard and
fast rule. I think the balance of opinion would be
among economists that the fed first obligation is to the
(03:04):
price stability mandate, because if you let inflation go, you're
going to have higher inflation expectations, and that's going to
risk higher unemployment down the road, almost for sure, as
you try to achieve disinflation.
Speaker 1 (03:20):
The one constant it seems we have right now is uncertainty.
We heard about it from the FED, We hear about
on Wall Street, we hear about it from companies as
they report their earnings. Uncertainty, and it pops up in
all sorts of ways. What do you make about what
happened with the Asian currencies in the last week. I mean, like,
for example, the Taiwan dollar went up more than done
in decades.
Speaker 3 (03:37):
My instinct is that the Taiwanese situation, because of the
national security aspect, because of how much the currency had
been pegged, is because of aspects of the hedging behavior,
is somewhat unique. So I don't think it would be
(03:59):
right to see it as a precedent for multiple other
moves that are going to.
Speaker 4 (04:08):
Take place.
Speaker 3 (04:09):
But I'm not certain of that, and I'm very much
aware that there are huge foreign holdings of treasuries at
this point, that the other side of that flow into
US treasuries, that what enables other countries to buy all
(04:33):
those treasuries is the dollars they're accumulating, because in Toto,
they're exporting more to us than we are exporting to them.
But I don't think the contradiction between hating the trade
deficit and loving the capitol in flows is entirely clear
(04:59):
in the mind of the administration. I have not heard
the Secretary of the Treasury thoughtfully address the question if
we scale back trade deficits, which after all, is the
repeated and constant emphasis of their policy, how are we
(05:19):
going to have the capital inflows that are necessary to
keep interest rates bounded, that are necessary to accumulate all of.
Speaker 4 (05:31):
The debt that we are mounting.
Speaker 3 (05:35):
So my guess is that this Taiwan situation is suey generous,
but it is indicative of a much broader kind of
challenge that we face with capital inflows and trade deficit.
The one thing we know is that we can't fully
(05:58):
resolve that very deficit just as a matter of arithmetic
without also reducing the foreign capital inflow into the United States.
Speaker 1 (06:10):
President Trump has been pressuring the FED to cut rates,
which the FED Chair Jay Powell has resisted. Larry's fellow
Harvard economist Ken Rogoff, was the chief economist at the IMF,
and his new book, Our Dollar, Your Problem looks at
the link between FED independence and the strength of the dollar.
We've heard from the Chair J Powell. One of the
(06:31):
concerns going to this was the independence of the Fed.
Given some of the remarks from the President United States
Donald Trump and others. Did J. Powell help restore some
of the confidence in the independence of the Fed.
Speaker 5 (06:44):
Well, he's definitely held the line, and Trump has retreated
at the same time. But he's just been very professional,
kind of ignoring Trump and saying the truth. Tariffs are
going to cause higher prices and lower output.
Speaker 6 (07:00):
Trump might not want to hear it. I mean, to
be fair to.
Speaker 5 (07:02):
Trump, every president tries to get the FED to lower
interest rates. They're ninety nine percent of the time. But
I think where he is crossing a line. It's saying, well,
I'm going to fire him. That's just self destructive. He's
shooting himself in the foot. I mean that said, FED
independence is not as sacrosanct as people think.
Speaker 6 (07:25):
I'm amazed how many.
Speaker 5 (07:27):
Educated people I talk to who think the FEDS in
the Constitution and you can't do it. It's not. It's a
creature of Congress. There have been various acts of Congress,
but you know, nineteen thirteen it's when it started. If
Congress were in cahoots with Trump, they could literally make
it disappear in a week, bring it back under the treasury.
Speaker 1 (07:50):
We have a tenion right now. I think everything is
because of Donald Trump as president. As you point out
in your book, you know, the Donisa dollar actually may
have peaked like in twenty fifteen. Exactly, there are larger
forces even than Donald Trump. Foot here, What are the
consequences of a relative decline in the dollar as against
other currencies.
Speaker 5 (08:10):
So first, the fact that a larger forces is significant
is you know, if he backtracks and somehow convinces everybody
to forget that it happened. The role of law is fine,
We're not going to arbitrarily put tariffs and this and that.
We're still in a period of dollar decline. So the
consequences of it are first, will pay a higher interest rate?
Speaker 6 (08:33):
Now we probably.
Speaker 5 (08:35):
Pay between half a percent and a percent less than
we would if we weren't so dominant. It's not just
that the dollars the most used, it's way the most used.
And to be clear, that doesn't mean we're paying less
than Germany, because we borrow a lot more than Germany.
So it's sort of controlling for what we're borrowing. And
(08:56):
that applies to mortgages to car loans. It's a big deal.
Speaker 1 (09:00):
So if the United States were to come together as one,
just bear with me. Now you're in a counterfactual. If
we're to come together as one and came to Ken
Rogan and said we our priority is making sure the
dollar does not continuous decline, what would you advise us
to do well.
Speaker 5 (09:16):
I mean, the simplest thing for short term is preserved
fat independence, which I do think is under duress in
a lot of ways. Don't do the tariff war, which
is absolutely accelerates the process. When you restrict trade, you're
putting sand in the wheels of the global financial system.
(09:37):
When trade can't move freely, it affects finance. Since we're
the kings of finance and we benefit from that, you
know that's not a great idea either.
Speaker 1 (09:46):
Coming back to j Powell, Chairman of the FED, and
what he had to say this week. Basically, the FED
told us the risks have gone enough of both inflation
and unemployment. Are we headed to stake fleation?
Speaker 3 (09:59):
Oh?
Speaker 6 (09:59):
I think it's very likely.
Speaker 5 (10:00):
I mean, that's the base case here, that the hard
numbers are not so bad.
Speaker 6 (10:07):
They're mixed, but not so bad.
Speaker 5 (10:08):
I mean, the jobs report was amazing, but you know, nevertheless,
if you look at business confidence, consumer confidence, global confidence,
and some of the more forward looking measures, it certainly
looks like we're if we don't quite go into recession,
we're going into something that'll feel like it. And just
(10:29):
you know, the arithmetic of the tariffs is it's going
to raise prices so near term, yes, Now is that
a one time thing or not? It's hard to know
what behavior will be. I mean, I think the FEDS
a little bit worried that this is coming on top
of what just happened, where people were told, except by
(10:51):
Larry told you, but people are told this is temporary,
it's transitory, it's going away one time thing. Now the
tariffs are coming. Oh, it's it's a temporary, one time thing. Well,
you're not going to believe them and wage setters businesses.
So it's a difficult period for sure for the FED
and stagflations the most likely outcoming.
Speaker 6 (11:13):
Powell kind of set that without coming out and saying it.
Speaker 3 (11:19):
Up.
Speaker 1 (11:19):
Next, the politicization of the IRS. President Trump has a
lot of plans for America's tax service, but they don't
appear to have much to do with actually collecting money
for the government. That's next on Wall Street Week.
Speaker 7 (11:33):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. This is Bloomberg Wall Street Week with
David Weston from Bloomberg Radio.
Speaker 1 (11:49):
This is a story about biting the hand that feeds
all of us, and at a time when we're particularly hungry.
The IRS is the federal agency charged with collecting taxes
from all of us who all them, And though we
might not enjoy paying our taxes, there's little doubt that
the government needs the money right now. President Trump has
made cutting the deficit a priority for his second term
(12:11):
in office, and he proposes to do that in part
by cutting back on government agencies.
Speaker 3 (12:17):
We have cut billions and billions and billions of dollars.
Speaker 1 (12:23):
One of the first agencies to be hit with some
of the deepest cuts has been the Internal Revenue Service,
an agency of the Treasury responsible for collecting taxes. Its
predecessor was a federal office once called the Commissioner of
Internal Revenue, created in eighteen sixty two to fund the
Civil War with the country's first income tax.
Speaker 8 (12:44):
Most people think of the IRS in terms of an
agency of taxes. When you say IRS, that's what they
think about, right It is filing a tax return, paying
taxes and getting a refund, and how much is my
refund going to be? And how quickly am I going
to get that refund.
Speaker 1 (12:59):
Chuck Reddick was IRS Commissioner in President Trump's first term.
Speaker 8 (13:03):
That dynamic, right there, literally touches one hundred percent of
the American tax paying public, which is corporate, large corporations,
small corporations, it's small businesses throughout the country.
Speaker 1 (13:15):
As important as it is for the IRS to make
sure the government gets all the revenues it's entitled to,
it has historically fallen short.
Speaker 9 (13:23):
The IRS is responsible for collecting about ninety seven percent
of federal revenues. So the money that funds everything, that
funds our defense, that funds our roads, that funds our schools.
Speaker 1 (13:33):
Natasha Saran is a professor at Yale Law School and
president of the Budget Lab, which calculates the fiscal impact
of federal policy proposals.
Speaker 9 (13:43):
Historically, the IRS has been able to collect about eighty
five percent of taxes that are owed, so that means
that every year it loses out on about seven hundred
billion dollars in taxes that are owed to the government
but not collected.
Speaker 4 (13:57):
That's a lot.
Speaker 9 (13:58):
That's about three percent of GDP on an annualized basis.
Speaker 1 (14:02):
Why has the government been going without revenue amounting to
three percent of its GDP each year? Experts say, it's
simply a lack of resources.
Speaker 8 (14:12):
It has never had the resources for decades and decades
and decades. It has been an underfunded, underserved organization. It
doesn't get a lot of talking support from anybody on
the hill, not in terms of the nature of the
IRS itself. So people will use the IRS for other
game plans. So when the IRIS does get funding, Congress
(14:34):
tells us exactly how to spend every one of those dollars.
Speaker 9 (14:37):
You had an IRS that, over the course of the
decade between twenty ten and twenty twenty had lost in
real terms about thirty percent of its budget.
Speaker 1 (14:49):
The Biden administration tried to remedy the problem working with
Congress to give the IRS more resources to get the
job done.
Speaker 9 (14:57):
Congress invested about eighty billion dollars in the IRS over
a ten year period, and that over a ten year
period is actually super important because when you think about
things like, you know, hiring and training a bunch of
revenue agents who are capable of doing complex partnership return work,
or when you think about modernizing outdated technology, those are
(15:20):
investments that don't pay off immediately.
Speaker 8 (15:22):
When I was on board August sixteen, twenty twenty two
Inflation Reduction Act, we got seventy nine point six billion
dollars of supplemental funding, and of that seventy nine point
six billion dollars, they appropriated forty five point six billion
dollars to what's called.
Speaker 4 (15:38):
Compliance or enforcement.
Speaker 8 (15:40):
And the significance of that forty five point six billion
was Treasury ran the numbers and said, well, IRIS, if
we give you forty five point six billion dollars for enforcement,
you will be able to recover.
Speaker 4 (15:50):
Seven hundred billion dollars. That's their math.
Speaker 8 (15:53):
That was never my math, and IRIS never spoke and said,
give us this and we'll recover that. I always said,
with more funding, will be a better agency across the board.
That gave Congress the ability to go spend seven hundred
billion dollars, So, if you will, giving us forty five
was a pay for for other things that Congress wanted
to do.
Speaker 1 (16:14):
The hope was that by investing in the IRS, revenues
would grow more than the expense of more agents and
better technology. But as of now, it looks like that
will never happen.
Speaker 9 (16:25):
You've seen a bunch of those investments rolled back. So
already of that eighty billion dollars, the IRS lost twenty
billion dollars of enforcement dollars that were really focused on
improving tax compliance. They were rolled back as part of
the debt sealing agreement last summer.
Speaker 8 (16:42):
So in twenty three they took away twenty billion dollars
from enforcement, and then just in the last round took
another twenty one point four billion dollars for enforcement.
Speaker 1 (16:51):
We have four years now. The Trump administration has moved
not only to reverse giving the IRS more resources, but
to cut them below what was there beforecluding cutting staff
by as much as twenty five percent, with a fair
number of staff already let go.
Speaker 8 (17:07):
In terms of workforce cuts right the high for the agency.
There was about one hundred and two thousand employees last
year with deferred resignations, with getting rid of probationary people
as well as normal attrition.
Speaker 4 (17:19):
So let me touch the attrition issue.
Speaker 8 (17:22):
When I was on board, we averaged eighty three to
eighty seven thousand employees, but about fifty five thousand of
those employees were.
Speaker 4 (17:30):
Eligible to retire within three years.
Speaker 8 (17:32):
Thankfully, most IRS employees stay five years after they're eligible
to retire. But it's an aging workforce, and there was
a hiring freeze from twenty eleven to twenty eighteen, and
so you lost an entire generation of experience, if you will,
that you would bring in, and you have an aging workforce,
and then in the current environment, they've been encouraged or
(17:54):
told to leave the agency.
Speaker 9 (17:57):
The IRS has lost about seven thousand probationary employees at
the agency.
Speaker 10 (18:02):
And I think.
Speaker 9 (18:03):
Probationary is like kind of a misnomer of a term
because it implies like someone's on probation or some such
that's really not the case at all. In fact, these
are individuals who were either recently hired and recruited by
the IRS to do some of this, like very difficult
work that they historically haven't been able to invest in,
like partnership audits, where today the IRS's audit rate is
(18:24):
like literally zero percent. So they hired a bunch of
people who have expertise in these areas. And what they
also did is they promoted people. They move people into
new roles, and because they're relatively new in these new roles,
they're probationary employees. About seven thousand of these people have
already been let go from the agency, and there have
been plans for reductions in force that would total like
(18:46):
fifty percent across the board, which would bring the IRS
to levels it hasn't been at since the nineteen sixties
when the population was sixty million people fewer. You've seen
a very significant exodus from the IRS of your love leaderships,
but really across the board, and about twenty two thousand
employees have already taken the deferred resignation plan that's been offered,
(19:08):
which means that by the end of this year, even
without any additional reductions in force, you're going to have
an IRS that's thirty percent smaller than it was at
the beginning of this year.
Speaker 3 (19:17):
I think we will come to judge when we observe
the consequences of tens of thousands of IRS enforcement personnel
being let go, and it being done in a way
where the because of the incentive scheme, the most competent people,
the people who can get the best jobs elsewhere, are
(19:40):
the ones who are most likely to lead. I think
we are threatening the basis of our tax system, which
is based on voluntary compliance.
Speaker 1 (19:52):
So is there any way of calculating how much this
will cost us, at least in lost revenues that we
otherwise would have.
Speaker 9 (19:59):
Had Legs and I at the Yell Budget Lab have
concluded that just the workforce reductions that have been planned
thus far are likely to cost the IRS somewhere between
four hundred billion and two point four trillion dollars over
the course of this next decade. That's like a very
large range. And so what is driving that, Well, the
dollars that are going to be lost aren't just direct
(20:21):
dollars like you do fewer audits and as a result
of that you collect less taxes. Certainly that's going to happen,
and you know, we're great work by Nathan Hendron and
Ben Spernkaiser and their co authors says, every one dollars
spent on high end enforcement by the IRS generates twelve
so incredibly high ROI work that we're not going to
be able to do, but you're not just losing direct dollars.
(20:44):
If there are traffic cameras on the road, people drive
the speed limit more often than not. And the same
is true with the tax system. If there is an
infrastructure in place and people know that the IRS sits
ready to pursue non compliance more likely to play by
the rules, people are going to adjust their behavior and
(21:05):
not play by the rules as often, and also take
tax positions that are really quite questionable.
Speaker 1 (21:13):
If President Trump really wants to make progress on that deficit,
it looks like cutting costs at the IRS may be
the last place to look, not only for the taxes
we won't collect, but also for the signal it sends
to those who didn't want to pay the taxes they
owed in the first place.
Speaker 8 (21:29):
I do believe you're going to see aggressive tax planning.
I think you're going to see tax professionals who prepare
returns are telling you people are coming in saying, well,
why do I need to file the.
Speaker 4 (21:38):
Return or have been found.
Speaker 3 (21:39):
We have a president who's completely delegitimizing government and who's
taking away the capacity of the IRS to process tax
returns to want it when that's necessary, I think we'll
see many more people take cash payments and not report them,
(22:01):
many more people engage in dubious transactions with their cronies
to misvalue assets and avoid paying taxes. Many more people
engage in abusive tax shelters. That's an area of the
president I think has some awareness of from his past
(22:24):
business dealings. And when all of that happens, the people
who are going to pay are honest taxpayers. I'm working
on this pretty carefully right now with some colleagues. I'd
be surprised if we're not on our path to sacrificing
(22:49):
more than a trillion dollars of revenue over the next
decade because of this misguided want and attack on the IRS,
and that's going to make our fiscal problem worse, or
it's going to force us into other kinds of damaging
(23:09):
tax increases. It would be much better to do a
better job of collecting the taxes that are levied under
current law. It would be better not to be driving
the economy from above ground to underground in terms of
American competitiveness. So I don't think we've seen large consequences
(23:34):
yet from all of these, but the.
Speaker 6 (23:38):
Risks are very big.
Speaker 1 (23:40):
Coming up next, President Trump complains about all those US
pharmaceutical companies making drugs and money in Ireland. What took
them there in the first place, and can Trump tariffs
get them to come home.
Speaker 7 (23:53):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 1 (24:09):
This is a story about competing for the business. Every
government cuts sweetheart deals to attract companies business, but can
it go too far? President Trump says Ireland's done just that,
especially when it comes to US companies manufacturing pharmaceuticals.
Speaker 5 (24:27):
The EU were set up in order to take advantage
of the United States.
Speaker 4 (24:32):
Including Ireland. Is Ireland taking advantage of the US?
Speaker 3 (24:35):
Of course they are, but the United States shouldn't have
let it happen.
Speaker 1 (24:38):
Whether it's taking advantage of the United States or not.
The facts show that Ireland is winning more than it's
losing in the competition for American business.
Speaker 11 (24:47):
So the Irish story with corporate tax and multinationals is
probably a five decade long story at least at this stage,
particularly since we joined the European Union, it's been a
real differentiator having a low corporate tax rate.
Speaker 1 (25:00):
Ireland's investment promotion agency, the IDA, reports that more than
ninety pharmaceutical companies operate in the country, and many of
them are US based. All of this is no coincidence
for the companies. Ireland offers a range of advantages and
one of them is its sweet tax arrangement, part of
a long term Irish plan to attract foreign direct investment.
(25:23):
Danny McCoy is the CEO of the Irish Business and
Employers Confederations.
Speaker 11 (25:28):
We're looking at an FDI model that's built on certainty
and log evity, and I think that's been really significant
the last decade in terms of the flight of capital
towards Ireland as a result of the OECD corporate tax work.
Big brands like Intel, Apple and Pfeiser have a history here.
In the case of Intel, they're nearly newbies at over
(25:50):
forty years. Apple has been here since nineteen eighty and
Pfiser probably the best part of a century in one
form of another. So longevity and the very big brands
have been co located here in Ireland long before the corporate.
Speaker 6 (26:06):
Tax world that we've entered into in the last decade.
Speaker 12 (26:09):
I think there's many different reasons why, I mean both
why they set up shop initially and then also why
they've continued investment in Ireland and continued to expand in Ireland.
Speaker 1 (26:19):
Jennifer Duggan is Bloomberg's Ireland Bureau a chief.
Speaker 10 (26:22):
I think the rumber of tax incentives initially there to
really entice international companies to come to Ireland, and I
think that probably started a lot of that initial investment.
Speaker 12 (26:36):
But I think there's a number of things that has
helped Ireland continue to attract investment.
Speaker 1 (26:40):
The Irish strategy to use taxes to compete for foreign
investment went into overdrive during the Great Financial Crisis and the.
Speaker 13 (26:48):
Global Financial Crisis happened. We were part of an imf
ECB bailout. When I first joined the government twenty eleven,
we had fourteen percent unemployment, we had a massive budget
deficit and we were able to turn that around and
we mainly turned it around based on the trade and
sector of our economy, and that was producing goods and
services that we could sell for the world, and US
(27:12):
firms were a big part of that.
Speaker 1 (27:14):
Leo Varadkar was Ireland's Prime Minister from twenty seventeen to
twenty twenty and then again from twenty twenty two to
twenty twenty four. Huw material to the fiscal situation in
Ireland has been, if I can say, the extra money
from corporate income.
Speaker 4 (27:29):
Tax, it's been a UTEHLP.
Speaker 13 (27:31):
It's a big part of our tax base, larger than
will be the case for most of out countries.
Speaker 1 (27:37):
Corporate taxes make up close to twenty percent of total
government revenues, most of which comes from US multinationals. But
it wasn't just the Irish government's business friendly policies that
got us to where we are. The US did its
fair share to drive away business.
Speaker 14 (27:53):
I think really the role of Ireland as a major
center of tax policy or of tax sort of goes
back to the nineteen eighties in some form, but it
really gets going in the late nineteen nineties and early
two thousands.
Speaker 1 (28:05):
Alex Arnan is director of policy analysis at the pen
Wharton Budget Model.
Speaker 14 (28:11):
One of the key changes there is on the US
side is the introduction of what's called check the box regulations. Essentially,
it made it easier for US multinationals to manage their
overseas operations. And so this change in US regulations combines
with some very specific attractive features of the Irish tax environment.
(28:33):
Starting in the nineteen nineties, they dramatically reduce their corporate
tax rate down to about twelve point five percent by
two thousand and three. Ireland also has a lot of
bilateral tax treaties with other countries, which makes it easy
to manage the relationship between your subsidiaries across those countries.
So the combination of those US policy changes the Irish
(28:53):
tax environment, and then some features of Ireland as an
economy that made it attractive.
Speaker 1 (28:58):
This isn't the first time and Trump has focused on
Ireland's success in luring US businesses. His Tax Cuts and
Jobs Act of twenty seventeen tried to address at least
some of the problems.
Speaker 14 (29:10):
When we look at the Irish royalty payments to other
countries before twenty nineteen twenty twenty, we see the vast
majority of these payments are going to tax havens. That's Bermuda,
the Cayman Islands, the Netherlands, Luxembourg, Singapore, and then starting
in twenty twenty, we see a very sharp crossing of
(29:31):
the pattern of the trends here, where royalty payments to
these tax havens fall off a cliff, royalty payments directly
to the US shoot up, and often this is interrelated
with some of the changes in the Tax Cuts and
Jobs Act, in particular the deduction for foreign derived intangible income.
Speaker 6 (29:46):
I think we are vulnerable.
Speaker 13 (29:48):
Ireland is a small country in a very big world,
and we've done very well because of globalization. It's one
of the things that has helped us to become a
wealthy country and hastowed us to increase our stands from
living considerably. So a less globalized world is going to
be less favorable to Ireland economically. But I'm not as pessimistic,
I think, as maybe others are. The United States is
(30:09):
certainly now going in a direction which is protectionist, and
that's definitely going to be a negative force. But at
the same time, the European Union twenty seven countries four
interred million people, is doubling down on free trade.
Speaker 1 (30:23):
Now President Trump is once again focused on Ireland's big
attraction for US pharmaceutical companies. But this time the tool
he wants to use isn't taxes, but one of his
favorites tariffs. If your single goal was to get US
pharmaceutical companies to make more on shore United States, would
you use tax policy or tariff policy?
Speaker 5 (30:45):
No.
Speaker 14 (30:45):
Obviously tariffs are a form of tax, but really here
the much more important component is the corporate income tax policy.
If what we were talking about was a deeply considered,
well planned out, long term strategy for predictable tariffs on pharmaceuticals,
that might be a different story. That might start encouraging
some major multinationals to rethink how they've arranged their activities
(31:08):
around the globe. If it's what we have been seeing
in practice from the Trump administration over the last few months.
Very hard to imagine really any big corporation making major
long term decisions on that basis. It is just too unpredictable,
and that is really the biggest factor there.
Speaker 12 (31:26):
I don't see it being a doomsday situation where suddenly
all US arm and tech companies move out of Ireland.
I don't think that's something that's going to happen overnight,
but it certainly has the potential to damage Ireland's economy
and also its attractiveness to future investment as well. Ireland
has the second largest exports to the US from the EU,
(31:46):
only behind Germany, and most of that is from the
pharmaceutical industry.
Speaker 4 (31:50):
If US companies.
Speaker 12 (31:51):
Start to invest less than Ireland or start to move
even small parts of their production to back to the US, yeah,
that would certainly have an impact. It's not something that's
going to happen overnight, but you know, as we see
going forward over the next five years that the rest
of the lifetime of this administration, it is something that
we could see gradual changes.
Speaker 14 (32:09):
It is hard to imagine what they will actually come
out with would be enough to really prompt major shift
in the long term planning and activities. There's a couple
other wrinkles in there. You know, Ireland has an exit
tax for intellectual property. So if a major US manufacturer
of pharmaceuticals did want to move some of their valuable
(32:29):
pens out of Ireland back to the US, they would
have to not just get more benefit than they're losing
from what they currently have in terms of their strategy,
they would have to be enough to offset this exit
tax that Ireland will levy and which they have specifically
to prevent this sort of thing.
Speaker 1 (32:45):
Ireland has seen change coming and is provided for it
by investing the revenues it has enjoyed until now.
Speaker 12 (32:52):
Ireland has one of only two trade surpluses within the EU.
Being open to foreign direct investment to multinationals, I think
has brought a lot of multilturalism to Ireland as well
and really helped propel Ireland in its development in terms
of just to be more diverse, more progressive. So there's
a number of different ways that it's impacted. From education
perspective as well.
Speaker 4 (33:12):
It's been a huge help.
Speaker 13 (33:13):
It's a big part of our tax space, larger than
will be the case for most developed countries, and we've
invested that, invested in infrastructure in particular, and that will continue.
Speaker 6 (33:23):
But we've also thought ahead.
Speaker 13 (33:25):
While it might have been tempting to ramp up public
spending by much more than we did, we haven't done that.
So the government for twenty twenty five anticipates running a
budget surplus of just one hundred three percent of GDP.
There might be a falloff in the amount of corporate
tax revenues that come into the Art Exchequer and that's
why we've paid down our debt, why we are running
(33:46):
substantial government surpluses, notwithstanding a lot of political pressure back
home to spend more on just about everything. And we've
also established some future sovereign wealth funds, putting aside money
for future pension and care liabilities and also things like
the cost of climate action into the future as well.
Speaker 1 (34:03):
And in the competition for the US pharmaceutical business, Ireland
has a lot going for it beyond favorable taxes.
Speaker 13 (34:10):
The investment pipeline still remains very strong, a lot of
US companies investing in Ireland, a lot expanding their operations.
I think because of the geopolitical changes that are happening
and the changes and the rules of tax and trade,
we might see the same level of new investment in
the years ahead as we saw in the past. But
I'd certainly be optimistic that those big pharma, big medical
(34:30):
devices chip operations will continue to operate. There's going to
be a market for these products, and are growing and
expanding market for these products, not just in the US,
but in other parts of the world as well. And
bear in mind, were part of the European Single Market,
a market of over four hundred billion people, and the
European Union has a network of free trade agreements with
lots of different parts of the world. I'm confident those
(34:52):
operations will continue.
Speaker 11 (34:53):
International business of trust Ireland, and they've got a history
and a record prove it.
Speaker 12 (34:58):
We've seen Ireland's economy binds back and really recover in
international presence of major companies has certainly helped us.
Speaker 1 (35:04):
In the end, what the United States does to compete
for pharmaceutical manufacturing will depend in large part on one man,
President Trump.
Speaker 13 (35:12):
I think what we don't hear enough about is the
by latter relationship. It used to be very one way,
but now Ireland invests a lot in the US. Were
the sixth biggest investor in the US, which isn't bad
for a small country of just over five million people,
and depending on how you counted the summer, between one
hundred and two hundred thousand Americans across fifty states working
in Irish owned companies. But certainly there is a focus
(35:35):
on tax and one thing I was said to President Trump,
and I met him many times, is that if there
is an issue around tax laws, it's probably more of
an issue with American laws than our laws. The anomalies
that maybe exist in the law are probably more on
the American side, and fairnesss he's acknowledged that. He's said
that we've been very smart in our tax policies. We've
always expected at some point that the US would change theirs.
Speaker 1 (36:00):
Is it for us? Here at Wall Street Week, I'm
David Weston. Join us next week for more stories of capitalism.
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