While I am often lambasted by my peers for being a harsh critic of the Obama administration over many issues, it appears that they have gotten something right. In October, the Wall Street Journal reported on the administration’s delay of a tax spike on American firms doing business abroad (Click Here). This is particularly interesting as it runs contrary to a campaign promise that Obama made early last year. The issue stems from a provision in the tax code which is run very differently from all of the other developed countries:

Nearly all industrialized countries tax domestic companies only for revenues earned at home. The U.S. taxes companies on world-wide profits. But current U.S. law allows American multinationals to defer paying taxes on revenues earned abroad until companies repatriate them, usually in the form of cash dividends to the parent company (WSJ).

The Obama administration sought to end the deferral on those taxes. Obama made the argument as many have before that this sort of behavior encourages businesses to “ship jobs overseas”. The reality is quite different. As we are seeing a newly globalized economy, it is important for firms to be able to utilize worldwide resources and revenue streams. Ultimately, the more profitable an American company is, the better off its employees will be. There will always be jobs available for Americans at these firms, especially at higher levels, so long as they remain American firms. If taxes are increased (or in this case they are purported to be expedited), it becomes less profitable for a company to be based in America. The same way we have seen a mass exodus of companies out of California in the past decade to the states with fewer regulations and lower taxes, we run the risk of companies deciding to base themselves solely outside the U.S. therefore moving all the firm’s jobs from the States.

The buzzword “outsourcing” often gets thrown around, and usually quite improperly. Outsourcing involves allowing any other firm (in the U.S. or abroad) to complete a portion of your supply chain, whether it is the manufacture of a certain item, the transmission of information, or transportation of goods. When Amazon employs UPS to ship a book to you, they are outsourcing the transportation of goods to an American company. Offshoring on the other hand is when a business moves part of its own management, or manufacturing process to another country. An example of this is when you call a customer support phone number and get transferred to someone in another country. However, that could be offshoring or outsourcing, depending on whether or not the company is retaining control over their customer support, or allowing another firm to manage it for them.

What does this all mean for the United States and India?

As the President seems to have (temporarily) realized, the lowering of costs for business and increased revenue allows companies to grow. If this means that software development occurs simultaneously throughout the day in the States, and in India then not only does this benefit America, but we must understand that in the new age of global economies, everything is interwoven. What is good for India’s economic and job stimulus isn’t necessarily bad for America. Indeed if such a process benefits an American company, it will allow them to grow, and do more business in America. Even if they don’t pay taxes on the money which they make doing business in other places, it will still increase tax revenue in America as these business are allowed to grow. The leaders of the big businesses mentioned in the Wall Street Journal article realize this, and that is why they went in mass to plead with the president to stop his attempt at retribution on companies (especially in the financial sector) for their past failings. Raising taxes during a recession is not the right way to stimulate America’s economy. Unless we start to turn things around, by cutting outrageous spending and stimulating growth, we will have even more to worry about in terms of the competition in the global economy.

What do the readers think? Are there any positive aspects as I have suggested for the American economy if we don’t punish American companies for doing business abroad?

-Michael Minasian