The United States’ fiscal outlook is bleak. Higher federal deficits, difficult-to-reverse tax giveaways, and after-tax-after-transfer regressivity caused by the 2025 reconciliation law have weakened our ability to effectively tax. Calamity is also coming on the revenue side, as demographic changes drive the increased Social Security and healthcare spending needs of an aging population. While tariff revenues may not return to pre-Trump lows, they likely will dip as we recognize the self-harm that broad tariffs engender (not to mention the possibility of an adverse Supreme Court decision). Further, Trump’s horrific anti-immigrant policies will likely wipe out the fiscal bonus from immigration, and other sources of declining federal revenue will feed into growing income and wealth inequality trends.
In order to meet the moment, policymakers (at the very least) will need to raise more money from corporations, increasing the ratio of U.S. corporate-tax-receipts-to-GDP from its current historic (non-recession, non-pandemic) doldrums of about 1%.
In the search for causes and solutions, single-digit U.S. cash tax rates for many U.S.-headquartered multinational corporations suggest there’s no shortage of industry groups that could win the top trophy for U.S. tax nonparticipation. The fossil fuels industry is always a U.S. tax-shirking contender. Financial services and commercial real estate also are right up there, especially given their facilitation (via lending and leasing) of tax avoidance across all industries. With cross-border base erosion and profit shifting driving U.S. tax avoidance, the tech industry too is in the running for top U.S. tax scrooge, notwithstanding Tim Cook’s assertion that “Apple pays all its required taxes, both in this country and abroad,” implying that Apple is just an innocent bystander in the policymaking process. Yet these other industries should feel relieved that Big Pharma is ahead of the pack for U.S. tax stinginess.
Pharma’s dearth of actual U.S. taxes paid compared to the industry’s domestic economic footprint is the stuff of congressional hearings, and shows no sign of abating. The means of Pharma tax avoidance include the offshore location of intangibles (like intellectual property), discriminatory pricing that makes the cost of drugs in the U.S. relatively higher, and the overly generous tax treatment of research expenses as well as overhead and interest costs. All the while, Pharma drafts off of basic government funded research and exploits regulatory revolving doors. If back in the mid-20th century we had been drawing up the ideal U.S. industry for tax avoidance (that’s the Mad Men episode we’re all waiting for), Pharma – with its reliance on government and private tax-advantaged research and intangibles coupled with U.S. and worldwide demographic trends – would’ve been the prototype.
Reworking Albert O. Hirschman’s concepts of exit, voice, and loyalty, I argue that Pharma’s loud voice over the decades has cultivated legislators’ loyalty to the industry’s tax benefits, as recently demonstrated by the 2025 law’s retroactive research deductions and reduced U.S. taxes on exports. Most critically, however, Pharma has used the threat of exit to keep legislators in line, and what few defenses we previously had are beginning to fall short. To prevent Pharma from supercharging their tax avoidance, U.S. policymakers must squelch their ability to relocate their headquarters – whether through buttressing an international, multilateral minimum tax or, at the very least, not allowing one of our few anti-exit tax provisions to expire. The U.S. fisc depends on it.
Pharma’s Herd Immunity to Taxation
After the passage of Trump’s 2025 tax law, the U.S. corporate marginal effective tax rate on investment in research and development became -47% overall and -146% if debt-financed. Yes, those are negative tax rates for critical investments – every additional dollar Pharma spends on debt-financed research returns $1.46 in tax benefits to the companies – and don’t even reflect the wasteful retroactive expensing of research costs permitted by the new law.
Further, Pharma piggybacks on a lot of basic research already performed or paid for by the federal government. I’m still waiting for DOGE types to suggest that the government could actually save a lot of money by doing more of Pharma’s research for them and making the results open-source, rather than giving tax benefits for Pharma’s research costs.
After reducing what domestic taxes the U.S. can collect by allowing Pharma companies to deduct research and other costs against their U.S.-source earnings and profits (even though many of those costs generate foreign earnings), Pharma profits on U.S.-source income were close to zero in 2022 (and actually negative in 2024). In reality, U.S. prescription drug retail purchases in 2022 totaled a whopping $400 billion.
In addition, the U.S. only taxes foreign-source earnings at a maximum 14% rate compared to the 21% tax rate on U.S.-source corporate income. Further, these are pre-credit tax rates. Once we account for U.S. research tax credits, roundtripping (which has the effect of laundering U.S.-source income through foreign affiliates in Ireland and elsewhere), and foreign tax deductions, Pharma pays only a dribble of U.S. corporate income tax.
Despite this menu of U.S. tax tricks, Pharma executives may feel they cannot rest on their laurels. Potential threats to after-tax Pharma profits include up to three more years of tariffs (though the Trump Administration is trying to finagle favored trade status for Pharma), the OECD’s Pillar 2 (a global corporate minimum tax with a new U.S. set-aside that protects Pharma for now but maybe not beyond 2028), the U.S. government’s increased role in drug price negotiations, and the 2017 and 2025 Medicaid cuts that reduced Pharma revenues. These threats combined with Bernie Sanders, Elizabeth Warren, and Ron Wyden still in the Senate and public dissatisfaction with healthcare may cause the already-nomadic Pharma to threaten headquartering in another nation.
In the past, when U.S. Pharma felt its tax avoidance strategies were at risk or needed expansion, the companies were quick to abandon loyalty to the U.S. and threaten exit: moving their headquarters abroad via inversion (generally becoming a U.S. subsidiary of a foreign parent), corporate expatriation, or merger. Two decades ago, Pharma’s threat to invert helped cause enactment of the 2004 foreign repatriation holiday giveaway that allowed companies to voluntarily repatriate deferred foreign profits at a maximum fire-sale U.S. tax rate of 5.25%. Within the next 10 years, Pfizer, Inc., one of the Pharma alphas, announced and then backed out of three different proposed inversions, including in 2015 when they threatened a $160 billion merger with Allergan, PLC (the now-Irish maker of Botox that has speed-dated with many companies that want to move headquarters around to avoid taxes).
The U.S. government has offered some pushback to Pharma’s exit strategy. The Obama Administration temporarily parried the inversion gambit via regulation, including designating Allergan a pick pocketer-esque “serial inverter” and thwarting Pfizer’s deal. The 2017 Tax Cuts and Jobs Act doubled down by, among other things, imposing a punitive retroactive tax (a part of the same provision central to the Supreme Court’s Moore decision) on the deferred earnings and profits of inverters. Yet the clock is ticking on that barrier to inversion – the punitive retroactive tax will not apply to inversions that occur after December 21, 2027 – and coupled with the 2025 tax bill, Pharma’s ability to successfully threaten exit to get out of U.S. taxes is on the rise once again.
An Anti-Tax-Avoidance Prescription for Pharma
In the future, when policymakers raise corporate income taxes as needed to improve our dire fiscal situation, it will be necessary for them to also curb Pharma’s three tax avoidance options: loyalty (that is, policymakers’ loyalty to Pharma’s persuasions), voice (lobbying), and exit. No doubt Pharma, being Pharma, will survive the Trump administration’s set of extortions and inducements. But in a post-Trump world, it may be possible to deal with policymaker loyalty to Pharma and Pharma’s lobbying voice with a twofer policy, such as a dollar cap or excise tax on the combined sum of Pharma lobbying and, say, drug advertising expenses (with the exception of true public health stuff like Tommy John surgeries for Mets pitchers and vaccinations), in addition to other campaign finance reforms.
Constraining Pharma’s ability to exit, however, is where there should and could be some real bipartisan action (again, after Trump). Though the Trump Administration is seeking more direct investment domestically from the industry, the administration simultaneously has aided and abetted Pharma’s exit by attempting to further defang Pillar 2’s already-diluted corporate global minimum tax in a way that preserves potential tax haven landing spots for Pharma headquarters’ operations. The strategy of bullying other countries into granting the U.S. special treatment under Pillar 2 in the end may only serve to cut Pharma and other industries’ taxes without serving broader U.S. interests.
While some tax policymakers complain that Pillar 2’s global minimum tax helps just Ireland, Singapore, and other favored intermediaries receive tax payments from U.S. multinationals that instead should go to the U.S. government, this could be remedied by a future administration fully engaged in fashioning a robust regime of international, corporate taxation.
Additionally, the U.S. fisc could stop Pharma’s exit strategy by defining the location of corporate headquarters on an economic basis (be that employees, sales, or whatever – we economists are ready to help!) rather than the current approach that uses shareholder vote or value. Short of that, the U.S. should at a bare minimum extend the expiring anti-inversion tax code penalty from the 2017 tax bill indefinitely, effectively taking Pharma’s get-out-of-the-U.S-tax-free card off the table. For those who believe the Obama anti-inversion regulation and a relatively low U.S. tax rate of 21% are sufficient impediments to keep Pharma from bolting in 2028 and beyond, there seems little harm in humoring the rest of us by extending the inverter penalty anyway. From my perspective, the strength of Pharma’s tax nonparticipation demands as many lines of defense as we can muster.
