By Kyla Ayers
In April, President Donald Trump finally released his long-awaited tax plan. While the brief four-page document leaves many details to be desired, it introduces several groundbreaking changes for individuals, small businesses, and corporations alike.
Firstly, this new tax code promises that any and every income-earning entity will be able to file its taxes on a piece of paper as small as a postcard. The simplicity does not stop there; instead of employing the traditional seven individual income tax brackets, Trump’s plan proposes just three, making room for tax cuts for the upper class, the upper middle class, and the working poor.
Businesses are up for a tax break, too. Corporations that currently pay up to 35 percent of their revenue in taxes will be taxed no more than 15 percent. This proposed 20 percent tax cut is designed to discourage outsourcing and, in turn, create new jobs on home turf and grow the American economy by a predicted two percent each year.
Because tax cuts across the board could mean less tax revenue for the government and an increasingly burgeoning federal deficit, the President’s new tax code proposes a few approaches to counteracting this ominous revenue loss. Aside from reducing the deductions and closing the loopholes that are available to huge corporations and the uber-rich, this new tax plan calls for the repatriation of corporate cash that is held overseas at a one-time 10 percent tax rate. Going forward, any unrepatriated profits will be taxed as earned.
However, even with Trump’s idealistic troubleshooting strategies, the Tax Policy Center still predicts that the government will suffer a revenue loss of about $7.5 trillion over a single decade, a deficit that will get off to a speedy start in just the first few years of the new plan’s implementation. If this loss is not offset by reductions in government spending, not only will the national debt increase, but national saving will quickly contract.
But how will all of this affect the pharmaceutical industry? Today, the median tax rate for the biggest pharma companies in the U.S. is 22 percent, with the lowest rate being 19 percent and the highest being a whopping 35 percent. These corporations will receive massive tax cuts averaging more than eight percent and, as mentioned above, repatriated profits held overseas will be taxed at an all-time low rate.
President Trump hopes that this major tax cut will dissuade corporate inversion. Currently, many U.S.-domiciled drugmakers that acquire a foreign firm can move their tax domicile outside the U.S. to the acquired company’s often lower-tax homeland. For example, Mylan pays its taxes in the Netherlands, which is the location of the manufacturer it acquired, and Allergan pays its taxes in Ireland, which is the location of its headquarters; both of these countries offer lower tax rates for corporations than the U.S. does at this time. Trump predicts that with the implementation of this proposed tax plan will come a decline in offshore intellectual property holdings and globally-distributed manufacturing bases.
While it seems that this tax plan offers many benefits to pharma companies, special interest loopholes that are disproportionately available to pharma companies and currently enable them to lower their effective tax rates will likely be eliminated.
If Trump’s tax plan is implemented in its presently-existing form, many companies may use repatriated profits to pay company debt, fuel business development, and reinvest in U.S. based projects. More cash at home could prompt increased deal activity for mid- to late-stage drug candidates, which is likely to bolster higher valuation and product deal amounts. More investment in research and development and the catalyzation of intra-national mergers and acquisitions may also be outcomes of the liquidation of cash held abroad.
On the other hand, widespread manufacturing relocation, which is one of the main goals of this new tax plan, seems highly unlikely. Many companies may decide to suffer their losses to avoid the “paperwork nightmare” that replacing workforces would create. Fortunately for the Trump administration (and possibly for the labor market as well), newer companies may be deterred from outsourcing manufacturing jobs.
Although Trump’s forgiving tax plan will generally be a win for large pharmaceutical corporations, companies that currently pay less than 15 percent of their profits in taxes may bear the brunt of these cuts, as their own tax rates may increase. Nonetheless, will lower tax rates for big businesses be worth the dangerous dent it is predicted to put in the national deficit?