Barack Obama bashes outsourcing again

Barack Obamaraises pitch against outsourcing.

Barack Obama News Updates! US President Barack Obama on Thursday once again targeted outsourcing of jobs overseas by American companies, increasing the pressure on local firms in an attempt to secure some benefit ahead of the crucial November elections in his country.

Obama, speaking at a rally in Parma, Ohio, the state which banned outsourcing of work overseas by government departments, said he remained firm on ending tax breaks for American firms that sent jobs abroad.

“One of the keys to job creation is to encourage companies to invest more in the United States. But for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries,” Obama said, flanked by Ohio governor Ted Strickland, who is trailing in the polls and is fighting to retain his governorship.

Obama’s party, the Democrats, faces a hugely disillusioned and angry electorate on November 2, and is widely expected to lose control of the House of Representatives. The US president has spent the last few days trying to rally his base with promises to protect jobs and spur economic growth.

His reference to ending tax breaks does not mean that US companies get tax breaks for shipping jobs overseas. Instead, the US tax code allows them to keep the income they earn overseas without incurring a tax liability.

In order to encourage more local hiring, Obama also gave a speech in January this year where he suggested a $5,000 credit for every job a company created (net new job) and an overall limit of $500,000 credit per company for availing such benefits.

Rosanne Altshuler, a Rutgers University economist specialising in international taxation, told ET in an interview earlier this year that the president could make it more difficult for firms to avoid US tax on income earned abroad by keeping it abroad.

“Obama wants to reform this part of the law (called ‘deferral’). He would make it more difficult for firms to avoid US tax on income earned abroad by keeping it abroad,” said Ms Altshuler, a former senior staff economist for President George W Bush’s advisory panel on federal tax reform.

While there is still no specific proposal elaborating how Obama plans to end the tax breaks, such measures could mean that large outsourcing customers such as GE and Citibank might have to pay certain taxes on their income from international markets, making it less attractive for customers to send IT projects to cheaper offshore locations such as India. To this end, Obama is proposing reforming the taxation of the overseas income of multinational corporations.

Under current law, firms don’t pay taxes to the US government on income earned abroad until they bring the money back to the United States, Ms Altshuler added. Many experts say that ending these tax breaks will not stop outsourcing. The economic logic of sending jobs to low-cost centres is so compelling that companies will keep doing it, they add.

“Let’s face it — companies will do whatever it takes to remain competitive, and offshoring of non-core activities is an important tool. We are already struggling to rival cheaper offshore locations in manufacturing, and sending IT projects to India will help us remain competitive,” said a senior official at one of the top US tech firms. He requested anonymity.

Experts such as Rodney Nelsestuen, senior research director at US-based TowerGroup, said while Obama’s policies could help the government reduce its unemployment costs, the companies would not just hire to get the credit, but also try and balance it with actual economic need.

“The proposal is only a part of a larger proposal that includes spending on infrastructure in the US, creating a permanent credit for R&D expenditures, and giving a 100% write off for capital improvements in the year they are made. Also, the potential to reduce tax revenue overall given that only those who would hire anyway will get the benefit is a significant concern,” Mr Nelsestuen said.

Nevertheless, the development is unwelcome and unpleasant for the $50-billion Indian outsourcing industry, which has had a hugely successful run since the millennium bug, or the Y2K problem.

More than 3 million jobs have been created and a huge infrastructure has sprung up to take care of the myriad needs and demands of the US companies. The industry has faced bad press since the Obama administration took office in January 2009 with the president himself declaring last year that he wanted jobs in Buffalo and not Bangalore.

Last month, the US Congress approved a measure to increase fees for the H1B visa applicants in order to raise money for building a fence on the US-Mexico border. About 65,000 Indians apply for H1B visas every year. The Ohio ban was also announced some time after that.

Read more >>