Addressing a highly sensitive issue in a casual blog post is risky. So let’s tackle two highly sensitive issues this week!!!
I want to preface my proposal(s) with an argument that I am surprised is not made more often by proponents of outsourcing:
Outsourcing is increasingly a countervailing force to brain drain.
I say ‘increasingly’ because, in its early days, outsourcing was just replacing a national brain drain (educated workers in poorer countries leaving for richer countries where they could make more money) with a sectoral brain drain (trained professionals in poor countries, such as doctors, leaving for call centres where they could make more money).
But now that higher value processes in healthcare, IT, finance, etc. are being outsourced, it’s possible for an educated, trained professional to stay in her home country AND stay in her field of expertise AND make a good salary.
True, even though that worker is staying in her home country and using her skills and education, most of it is going to benefit a company somewhere else. But there are still several net benefits to this situation:
- An educated middle class is being created in that country, with all the advantages to democracy that follow.
- Those workers will be paying taxes in their home countries rather than to Western governments. This should improve public services, infrastructure, etc. especially since #1 will create a check on corruption and mismanagement of public funds.
Let’s focus on tax incentives for US companies that send jobs offshore. These are not as straightforward as some politicians make them sound, so they’re an unwieldy tool, but for now, they’ll have to do. There is no specific “Outsourcing Deduction” but because companies are allowed to deduct business expenses, they can write off the cost of closing a facility in the US and opening one somewhere else. Moreover, some companies successfully game the US tax system by claiming a deduction for taxes paid to foreign governments without paying taxes to the US. Democratic efforts to tighten these loopholes have been filibustered.
In my opinion, there’s nothing inherently sinister about the current incentives. I don’t think they’re evil, just unnecessary; usually a company decides to outsource a particular function because it makes economic sense, not because of the tax incentives. So why subsidise something that was going to happen anyway?
But simply preventing companies from writing off expenses related to outsourcing or claiming deductions on foreign taxes is too heavy-handed, not to mention politically impossible. Here’s my proposal:
2. Adjust the amount of foreign taxes paid that a company can deduct based on how prosperous that foreign country is. The percentage could be indexed to GNI, GDP per capita, or some other measure. As an example, a company could claim a bigger deduction for taxes paid in Uganda than in India, and a much bigger deduction for taxes paid in the DRC than in the PRC.
Well, let’s make the rather straightforward assumption that outsourcing is inevitable. So as a company is deciding where to locate a new facility, it now has several more factors to consider. A poorer country that might otherwise not have been considered, perhaps because the cost of relocating there or of giving sufficient training to local workers was too high, is now in the running because the company could deduct a higher percentage of its foreign taxes.