Friday, March 27, 2009

Law Street in The Economic Times (March)

Hi Readers,
Bangalore is IT centric and yes the slow down in US has had an impact on Bangalore soil. In fact, everyone here is wondering what stand Prez Obama will adopt at regards outsourcing. Any attorney worth his or her salt has a flair for words, the Prez is no exception. Read on by clicking here, or shall we say, read between the lines.
As always, the column is also cut and pasted below.
Happy Ugadi and Gudi Padwa.
Best regards,

What next?

 Protectionist measures do damage in a flat world
 Taxes should be used as carrots not sticks
 Capitalism forces should be allowed full play

Is shipping jobs overseas the same as outsourcing? Is outsourcing not frowned upon if no existing American jobs are lost? Is outsourcing permissible if carried out by captive subsidiaries of US companies? Then again, if the answer to this last question is yes, the objective is the same – whether a US company is serviced by its own captive or a third party. Lower costs means more returns to shareholders and a more vibrant economy. The only difference being that a captive subsidiary can repatriate dividends to the parent – but then most captive subsidiaries operate on a cost plus model.

In his speech to the Congress, in late February, Prez Obama said the Administration will eliminate "incentives for companies that ship jobs overseas." His words have merely left us guessing. In other words, will Obama punish those US companies that outsource work? Or will he provide tax incentives to US companies that create jobs in America? On the cards are “tax reform policies”, but only time will tell whether these will be a carrot or a stick.

Zenobia Aunty dug up some historical facts from cyberspace. Yes, in today’s instant era proposals which are more than a year old count as history. On August 2, 2007, US Senators, Dick Durbin, Barack Obama and Sherrod Brown proposed a legislation to reward companies with a 1 per cent income tax break, that produced 90 per cent of goods and services in the US, paid a living wage, provided health benefits to at least 60 per cent of employees and supported their employees when called to active duty (read wars).

In other words, there was no ban on outsourcing; just an incentive to US companies for on-shoring (if one may coin this word). Of course, this proposal also had its own questions – it spells out 90 per cent of goods and services that are produced in the US. Now if a car manufacturer imports auto ancillaries – would he not fall in this criterion, even if the car is otherwise manufactured in the US and provides employment to tons of people? In this flat world, it is increasingly complex to draft policies, which would serve the spirit of the legislation.

Talking of employment, H-IB visas are in the news again (the current annual cap is 65000 visas). These visas enable aliens (yes this is an actual term) to work in the US. Even US companies and not just Indian software giants apply for such visas.

Reid Hoffman founder of LinkedIn, in his recent column in ‘The Washington Post’ advocates removing the cap on H-IB visas and imposing a payroll tax beyond the benchmark salary for each extra visa. Thus, US companies if they need to can hire workers from overseas and at the same time they contribute back to the American society by paying a payroll tax. Capitalism forces will ensure that the additional tax H-IB workers are called in when actually required, and not merely because they are relatively cheaper.

This columnist hated economics as a student, but realises that capitalism has become a more complex term, today. Governments are treating tax cuts as a sure fire solution to increasing demand. Yet, research shows that during the Great Depression and in the 1990’s in Japan, cuts in taxes did not effectively increase demand because customer confidence was very low. Thus, fiscal policy failed to reduce unemployment. Today the matter is more complicated, because an increase in demand may mean an increase in imports in the US for day to day consumer products. This may not stimulate job creation, not in the US, at least.

On an entirely different note, Zenobia Aunty points out that: At the time of writing this column, the US Senate is all set to discuss the Levin Bill, aimed at targeting off-shore tax havens. As US money is stashed in these tax havens, Senator Levin feels that tax havens “are undermining the integrity of our tax system and increasing the tax burden on middle income families.” This Bill puts a greater burden on taxpayers to show that their tax arrangements are legitimate.
Zenobia Aunty stresses: Fair enough, the US like any other country in the world has the right to prevent tax abuse. However, outsourcing is neither tax abuse, nor tax avoidance and policies are perhaps best not drawn up to prevent it.

Perhaps the current situation in the US calls for a direct impact on employment – perhaps reducing the minimum wage rate to lower costs or a ceiling in management salaries? But these issues must be left to market forces to provide an optimum balance. Government tinkering is best left to the minimum. If the US adopts protectionist measures it will not only harm itself, but in the process it will also harm the global economies and this is a catch 22 situation. Countries such as China and India are projected to grow by double digits over the next five years. It is imperative for the US to gain a foothold in these markets. Protectionist measures will not help in doing so.

But as the title of this column says: What next? Time alone will tell.

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