President Barack Obama announced a plan that seeks to close loopholes used by companies and individuals to avoid paying taxes. In particular, the President Obama wants to make companies pay the proper tax rate on overseas profits.The goal, he said, is to end a “tax scam” by shutting down overseas tax havens that let U.S. multinational corporations and some individual taxpayers avoid paying U.S. taxes while ordinary Americans take up the slack.
Payments by US companies who create jobs overseas are treated as normal expenditures – but the new law (if passed by both Houses of Congress) will entail companies to pay tax on these expenditures as well (increase of almost 50%).
The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. This is just marginally true.
This and the related tax proposals are often referred to as “Say No to Bangalore, yes to Buffalo”.
At one level, this protectionist policy will do little to change the job losses in the US. It may hurt the US more than India. While Bangalore got mentioned, I am sure the theme applies to China as well which has been a dominant supplier to the US.
Now, if indeed it is the differential tax rates that President Obama is trying to fix, the gains would be marginal as US companies pay a tax of 33% in India as against 35% in the U.S.
Outsourcing boom was all about better quality at lower cost; I don’t think the US can provide either for many sectors including outsourcing. Most of the big companies save 75% of their cost by outsourcing and the number goes higher for high-end BPOs.
In my view, it is simple rhetoric and grandstanding.