Perhaps not surprisingly in this still-depressed economy, offshoring is cast as a convenient scapegoat in a couple pieces of recent legislation.
As Beth Bacheldor writes on CIO.com, the House of Representatives last week passed the American Jobs and Closing Tax Loopholes Act by a vote of 215-204, sending it on to the Senate, which will consider it next week. The 433-page bill is a big mishmash of spending proposals that will renew a number of expired tax breaks, extend federal unemployment benefits and eliminate loopholes that some politicians say encourage American companies to move overseas.
I wrote about some of these so-called tax loopholes last spring, including transfer pricing, in which multinational companies reduce their U.S. taxes and keep profits offshore in low-tax jurisdictions through their calculations of the prices associated with transferring goods and services between their divisions, and deferral, which allows U.S. companies to delay paying taxes on overseas earnings until those profits are returned to the United States.
The anti-offshore sentiment came through clearly in the remarks of Speaker Nancy Pelosi, D-Calif., to lawmakers just before they voted on the bill. She said:
... So if you have one thing to say about this bill to your constituents, you can say that today, you voted to close the loophole to ship U.S. jobs overseas and giving businesses a tax break to do so. It is not right. It will be corrected today.
Multinational companies like IBM and organizations like the Technology CEO Council have issued statements opposing the bill. In reality, of course, it will likely take more than elimination of tax breaks to convince companies to move overseas operations back to the United States. Perhaps a better approach, suggested by Caterpillar Chairman and CEO Jim Owens in this interview with Knowledge@W.P. Carey, would be introducing a territorial tax system that taxes multinational companies on the profit they earn here.
Now Sen. Charles Schumer, D-N.Y., has introduced legislation that would impose a 25-cent excise tax on companies that transfer calls with U.S. area codes to foreign call centers. It would also require companies to tell customers to which country their calls are being transferred, and companies would have to report quarterly their total customer service calls received and the number relayed overseas. Said Schumer:
If we want to put a stop to the outsourcing of American jobs, then we need to provide incentives for American companies to keep American jobs here.
I took an excellent course in college in which we discussed the Smoot-Hawley Tariff Act's role in turning the stock market crash of 1929 into the Great Depression. President Herbert Hoover signed Smoot-Hawley into law in 1930. It imposed tariffs on imported goods and services in an effort to protect U.S. jobs and goods against foreign competition. Instead, America's trade partners retaliated with tariffs of their own, which led to a lengthy slump in the world economy. I know I'm not the first person to trot out this bit of history, but I think it's especially relevant today considering the growing amount of profit U.S. companies earn in emerging markets, a trend that isn't likely to reverse for years.