Obama's Tax Proposal Shakes Silicon Valley: On a Richter Scale of 1 to 10, 'About a 20'

Ann All

Up until now, much of the tech industry has embraced President Barack Obama. Techies seemed to appreciate his groundbreaking, tech-infused approach to campaigning, a nine-page technology position paper he introduced during the campaign, his BlackBerry addiction and that he named the nation's first CTO, along with his appointment of groups to help him determine national tech priorities and to figure out ways to boost research-and-development spending.

 

Not to mention, at least some tech companies appear to be in a good position to receive government stimulus funds.

 

But at least some big tech players may now feel more like throttling Obama than embracing him, thanks to his proposal to eliminate three popular tax-avoidance methods employed by companies with offshore operations, including tech giants such as Cisco, IBM and Microsoft.

 

Bloomberg runs down the methods targeted by Obama: "check the box" rules, and deferred foreign profits and transfer pricing, both of which I wrote about in March. In theory, this will help the federal government raise some $190 billion over the next decade. According to an administration statement cited in the article, U.S.-based multinationals paid about $16 billion in U.S. taxes while earning about $700 billion offshore, or an effective tax rate of about 2.3 percent. The top marginal tax rate for U.S. companies is 35 percent.

 

More flashpoint numbers from the article: General Electric has deferred tax on a cumulative $75 billion over the past decade, according to filings. HP has deferred U.S. tax on $12.9 billion since 2005. Microsoft has accumulated $7.5 billion that has never been taxed by the United States. AIG, a favorite symbol of corporate hubris, deferred $3.9 billion in taxes on its foreign earnings in 2008, the same year it took federal bailout funds.


 

Not surprisingly, companies' take on the issue is that the proposals, if passed, would raise their cost of operations and put them at a disadvantage when competing against overseas rivals based in countries with lower corporate tax rates, according to SiliconValley.com. Silicon Valley companies will be among those lobbying against the proposals. Said Carl Guardino, CEO of the Silicon Valley Leadership Group:

On a Richter scale of 1 to 10, this is about a 20.

The group is sending representatives to Washington this week, to discuss the deferral proposal and several issues with federal officials and congressional leaders. One possibility for compromise: a proposal that would allow multinationals to repatriate overseas earnings at a reduced tax rate. According to SiliconValley.com, Sen. Barbara Boxer, D-Calif., backed legislation earlier this year that would have temporarily reduced the tax rate to 5.25 percent for overseas earnings repatriated within a year. The bill was dropped when opponents said a similar tax holiday in 2004 yielded few U.S. jobs.



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May 5, 2009 6:02 AM SydFella SydFella  says: in response to Ken Broggelwirth

Good Point mate but you have to step back a little and think when the concept of 'globalisation 'was invented and incorporated by the US. US basically bullied every one into it because it benefitted from it then. Now the tables have turned because it no longer benefits the US. I can understand form a national perspective but US needs to understand that they can't make the world change to suite them. It has happened in the years gone by but it will not happen in the years to come. US too are becoming an ordinary player in the global scheme of things.

Cheap Labor is not the only reason why the jobs are going to other locations. It's the HUGE potential of those markets that is very attractive to all multinational. At the end of the day the money goes back into the US Economy. Food for thought mate, the US multinationals stand to earn a lot more from the markets outs side the US than in the US because of the rise of India and China. You are correct with the observation of technology inventions by the Americans but you fail to recognise that it's mostly the non Americans who have been a major factor for such a development. Look at all the techies, scientist, and doctors around you. They might be American citizens but they come from somewhere else. The US companies recognise that if the migrants, now US citizens have contributed so much, imagine the potential of the talent from the countries they come from.

The only way outsourcing strategy has hurt the US is in the perception of people. Media and people have over hyped the situation hence every one is dissatisfied from point go. Ask Obama to look at the money these companies have saved and invested in the form of investment and creating new jobs. It might not be like for like but they are jobs none the less. Question to you ..have the people who have lost jobs gone back and unskilled themselves ? I don't think so .. Outsourcing in a raw nerve which Obama can and the media will use to their advantage.

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May 5, 2009 11:13 AM Ken Broggelwirth Ken Broggelwirth  says:

Well if the intention is to increase US jobs plus raise tax revenue, he probably needs to have a plan that gives a tax incentive back to those same companies that create new jobs in the US and/or create green technologies and jobs in the US. At the same time, foreign companies still rely largely on sales in the US, need to be factored in so that they don't have an unfair advantage over US companies. Who knows what will eventually come of all this once it gets to congress, but we really need to look to shifting our strategy to overall make us more competitive going forward. The systemic problems that currently exist weight heavily on US industry and if no changed for the better make the US economy unsustainable over the long haul. Its either pay me now or pay me bigger later.

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May 5, 2009 11:48 AM user1131624 user1131624  says:

President Obama plans to  close the tax-AVOIDANCE (something real life persons -- 'not legal persons like corporations' would face steep penalties or even jail for employing'0 loopholes in order to use the money to finance tax incentives to American companies that employ Americans and conduct their research and development on American soil.

In essence--- BIG BUSINESS NEEDS TO GROWUP, STOP WHINING, AND PAY THEIR SHARE OF TAXES!!!  OH YEAH!  OR  GIVE BACK THE BAILOUT MONEY!!!

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May 5, 2009 11:51 AM user22345 user22345  says: in response to Ken Broggelwirth

If you want the US to advance technology at home, then yes implement.  More tech jobs for Americans.  Look at how many good paying tech jobs have gone to India and elsewhere.  Hmmm, more higher paying jobs in the US, MORE taxes paid, more money "Hopefully" to pay for the national debt (LOL "Interest Only" loan).

Have to start somewhere, green jobs will cost more than they produce.  For GOD's sake, don't use Spain as your business model!!!

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May 5, 2009 12:11 PM Ken Broggelwirth Ken Broggelwirth  says: in response to user22345

Yes and this is another point worth making. Even if for the short term US industry crys that it can't compete without giving all our jobs to foreign companies or shifting operations over seas, there are plenty of examples of how that strategy hurt us in the long haul. All the great technologies eventually were snatched away from us by letting out best inventions be made and designed on foreign soil in the quest for cheap labor. Those same countries were quick learners and ended up eating our lunches. Stop thinking short term. US companies have made billions on us, its time they ante up and look at the long term. If they participate financially but with a game plan to improve our (their own) competitiveness we will all win. At the same time we may be able to stop borrowing from China and possibly stop climate change before its too late. Maybe even fix the spiraling cost of healthcare. Shake it up President Obama. We counted on you to push change (no matter who is crying). Its go time!

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May 5, 2009 12:15 PM Dave Dave  says:

I don't have a problem with President Obama closing tax loopholes (and I didn't vote for him).  However, they should be combined with a lowering of the corporate tax rate (I'm also a small business owner) in order to keep American companies competitive with foreign ones.

user1131624, are you serious?  The tech companies haven't taken (nor were they offered) bailout money.  Also, you're mistaken if you think that these incentives will balance out the closed loopholes.  When they don't and American companies start to lose market share to foreign ones, you can shout "OH YEAH!!!" all the way to the unemployment office.

Good luck.

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May 5, 2009 12:27 PM Don Fair Don Fair  says: in response to Dave

How about,

Placing an import charge on any product that is made by foreign labor for an american company. Why should it be thought of as american made if only the Board of Directors and the CEO are American. Don't we insist that Toyota et. al. make cars here to avoid import duties. Why give Chysler and friends a break. God knows they wave the flag like mad when they want help.

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May 5, 2009 12:34 PM Ken Broggelwirth Ken Broggelwirth  says: in response to Dave

Yes. The balancing act should include a variety of incentives, like domestic corporate tax rate, but that in itself will not spur reinvestment in US companies and jobs. It needs to be targeted in such a way as to not impact US companies bottom lines IF they make the right choices. Choices that keep tech development here and investments here, and jobs here. At the same time it needs to be affordable for US citizens to have healthcare (not just wealthy people) and to send their kids (or themselves) to college so as to train the US workers of the future. This is critical if we are to survive as a nation. In case anyone was fooled by the waves of employment in services, financial, and mortgages (fools gold) which provided short term employement for only as long as people were able to debt themselves into oblivion. And again, pay attention the largest numbers of unemployed over the past 10 years have been white collar. How many mortgage professionals are now unemployed and losing their own homes. Tech companies aren't involved with bailouts but may have helped to pricipitate some of the problems by continually offshoring jobs and dumping on US workers (tech and otherwise) to the point where the only way to buy a house was to keep refinacing (cashing out). Now whats wrong with that picture? We need a fix, we are out of time kids.

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May 6, 2009 11:10 AM Tall Tall  says:

Just as described in the latest movie "The Obama Deception" things will get worse

Watch the movie, think about it:

http://www.youtube.com/watch?v=eAaQNACwaLw

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May 6, 2009 11:38 AM Adam Adam  says: in response to user1131624

"BIG BUSINESS NEEDS TO GROWUP, STOP WHINING, AND PAY THEIR SHARE OF TAXES!!!"

When a majority of Americans begin to understand that corporate taxes are ultimately paid by the customers of those corporations, perhaps we will see an end to the kind of economic nonsense you're spouting.

Higher corporate taxes lead to higher prices (which then lead to a clamour for import duties on foreign competitors' products... which then leads to foreign countries placing import duties on American products, and higher prices for everyone) and/or corporate cost-cutting, which is most often accomplished through layoffs.

Lower corporate tax rates would lead to lower prices for consumers and increased investment and employment in this country.  You would think the only losers would be those who favor bigger government (due to lost tax revenues), but you'd be wrong there too.  Google "Laffer curve" for details.

The real losers are the poor (those who can least afford price inflation) and the unskilled (those whose jobs are the first to go -- as when the minimum wage is raised).  Those groups overlap significantly.

Calls for higher corporate taxes are made only by those (and yes, there are many of you out there) who have no understanding of the laws of economics, and are motivated purely by wealth envy and leftist propaganda.  It would be amusing if the rest of us wouldn't suffer as much as you will from the policies you support.  What's most pathetic is the refusal on the part of those who call for help for "the poor" or "the disadvantaged" to understand or even to consider the actual affects of their policies on those they so self-righteously claim to care about.

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May 11, 2009 1:08 AM George Kovachev George Kovachev  says:

It was about time someone did the right thing for the people. Otherwise this outsourcing game would have completely decimated the industry.

Yes, primarily managers care about the bottom line and their own success. The well being of their work force is a secondary consideration. Thus, the game of outsourcing was the tool of choice to make managers look good.I am sure IBM, Microsoft, and the other big companies will make the argument that the Obama plan limits their competitiveness. However, it also limits the competitiveness of those companies who try to get on the US IT market but don't create American jobs - these companies can be both foreign and domestic.

The corporate coffers are in for a pinch. And it will happen. I suggest they keep their lobbyist budgets on hold because it will be money badly spent. Instead, they could focus on productivity and agility - something US companies excel at.

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May 11, 2009 5:34 AM Fed Up With Hyperbole Fed Up With Hyperbole  says: in response to HariN

This is hogwash.  90% of the perceived excess compensation of executives comes from options and options only generate economic resturns to the executive if the stock price goes up meaning shareholders get benefits as well.  Look at the shareholder's equity of any company (which measures actual cash investmnts) compared to the market value and tell me that shareholders haven't gottent any returns.

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May 11, 2009 5:37 AM Fed Up With Hyperbole Fed Up With Hyperbole  says: in response to George Kovachev

Businesses exist SOLELY to provide a return to shareholders - that is why they are created.  yes, in doing this, they make commitments and have obligations to others (like employess) but any one who thinks that businesses owe anyone anything needs to wake up and recognize that we are a capitalist society.

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May 11, 2009 11:53 AM Fed Up With Hyperbole Fed Up With Hyperbole  says:

Kudos to Adam - he seems to be the only one that realizes that corprations don't pay ultimately pay taxes - only customers, shareholders and employees do through higher prices, lower returns or lower employment respectively.  Calling these types of things "loopholes" is just retoric to get the media and other people of equally limited technical understanding behind something.  This tax proposal won't raise a single job in the United States because taxes only plays a small part in the decision that any company makes to have operations elsewhere.

Although there are obvious differences because companies have different cash management options than people do, this tax proposal is concpetually the equivalent of a) a person (you or me) investing in a company (that hopefully makes money) and b) being asked to pay taxes on my share of the money the company makes regardless of whether it pays me a dividend.

In the end, this will ultimately make a host of US based international comapnies fundamentally non-competitive because they will be facsing costs their competitors don't.  It also wouldn't be surprsing to see some major companies choose to move their headquarters and official domains to foreign soil.

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May 11, 2009 12:18 PM David David  says: in response to Adam

I don't pretend to have the answers and theoretically (which is where most of the economists, law makers and politicians spend their time) lowering the corporate tax rate sounds good.  But it only works if the corporate stakeholders are willing to re-invest the new found profits in long term strategies that benefit everyone instead of putting it into their own pockets.  It is the exception - not the rule - to see businesses invest their profits into the very communities and people that have made them what they are today. 

The poor to middle class citizen doesn't have the disposable income to invest in wall street to become a corporate shareholder, so they don't gain anything by a company increasing or doubling the value of their stock.  Unless the corporate shareholders are willing to share it, they are the only ones who benefit (what did the mortgage executives do with their earnings?).  I'm not saying they have to give it away (although if your heart tells you to...), but I suggest investing it in communities - and I don't mean local government.

It is a matter of fact that, for the most part, businesses today are driven by personal and corporate greed; therefore, giving them a tax break only serves to line their pockets and doesn't really benefit the US or global economy in the ways the 'theorists' would like us to think it would.

All that said, I'd like to give them a chance to prove me wrong.  I still believe that if you never give someone the chance to do the right thing you can guarantee they never will.  Until there is a change of heart - it can't be fixed.

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May 11, 2009 12:29 PM HariN HariN  says: in response to Adam

Adam,

What you say is true where appropriate laws and procedures are in place to protect  consumers, effective corporate governance to protect shareholders and labor laws that protect the interests of employees.

What is happening in today's USA is that the consumers are charged based on their afforability (determined not just by their income but by their appetite for debt), shareholders are passive and stiffed (see all those attempts to stall even a advisory vote executive compensation).  The employees are held back through threat of outsourcing and moving our employment standards down towards third world level instead of helping the employments standards of third world to something more civilized.

The main (if not only) beneficiary of status quo are the executive management, who get the lion's share with the leftover gong to plethora of counsels, management consultants and lobbyists that feed of the trough.

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May 13, 2009 12:22 PM bertie wooster bertie wooster  says: in response to Tall

yes please use something other than your cerebral cortex and you might see what a bunch og bunk this video portrays

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