Will Corporate Tax Changes Create Jobs?

When the Obama administration announced plans to close the corporate tax loopholes for companies generating profits overseas, many IT professionals praised the move, speculating it would discourage U.S. corporations from outsourcing technology jobs. But the proposed changes may not reverse any trends toward IT outsourcing, or spur the return of jobs to the U.S., which were lost to lower-cost overseas workers. Early responses from many multinational companies, including some tech firms in the Silicon Valley, conclude the proposed changes might negatively impact job growth by limiting the ability of U.S. companies to compete in the global economy and redirecting funds toward federal tax coffers that might otherwise be used for job-creating innovation.

The outsourcing of tech jobs is an emotional topic, but the need to compete with foreign workers is a challenge that’s not going away. Here are two clips from recent news stories about the proposed changes in overseas taxation laws.

From the San Francisco Chronicle:

Businesses – including a large and vocal number in Silicon Valley – are furious because they believe that paying the legal corporate tax rate will put them at a competitive disadvantage. They may be right; the American corporate top tax rate is much higher than most of our international competitors’, which is why so many companies have dedicated so much time and energy toward avoiding it.

From Mehul Srivastava, writing for BusinessWeek’s Eye on Asia Blog, referring to President Obama:

Take, for instance, his fixation on Bangalore. Talking about the old tax code which he intends to reform, On May 4, Obama described it as one "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Great stuff. But what does it actually mean?

To figure that out, one needs to keep in mind the difference between outsourcing and offshoring. Offshoring is when a U.S. company sends jobs that once existed within that U.S. company overseas to a subsidiary of its own – for instance, if an IBM coding engineer’s job gets moved to Bangalore, but the new employee is still an IBM worker. Outsourcing is when a U.S. company pays another company altogether for doing that job – much of it ends up in India, but a grocery store in Kansas could outsource its book-keeping to a firm in Topeka.

The difference matters, especially since the way this tax code revision is written, it could, theoretically make off-shoring slightly more expensive for U.S. companies, with the extent of the increase depending on the tax rates of the country the jobs go to. (For countries like Ireland, which the president mentioned, the corporate tax is as low as 12.5%. In India, the corporate tax for foreign companies can actually be higher than the U.S.’s – as much as 44% in some cases. )

But its impact on outsourcing? As far as tax experts – and the Indian IT industry has a lot of them – can figure out? Nada. Zilch.

And:

As far as outsourcing goes, which arguably has resulted in a large number of jobs being created in India instead of the U.S., the impact is even less. The U.S. subsidiaries of Indian companies like Infosys or TCS do have some earnings in the U.S. or from non-India based operations but the bulk of the earnings – which add up to billions of dollars a year – are generated in India. So far, there is nothing in the Obama budget or even the statement from Monday that affects Indian outsourcers directly.

So, what do you make of all this? Post a comment below.

— Leslie Stevens-Huffman

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