"We NEVER justify an outsourcing decision on TAX alone."

But does it tip the decision one way or another? I'm sure it does.

I don't think anyone has suggested that taxes are the only input to the decision process, so this is a straw man.

It's interesting though. Conservatives usually consider taxes to be the only motivation of interest. If taxes are too high, they thing, people won't work hard. As if the taxes are the only consideration.

So it's a bit disingenuous for conservatives to, suddenly, decide that taxation is not an issue. If taxation isn't an issue, then their whole tax cutting agenda goes up in smoke.

Another thing: If taxes aren't an important consideration, why do companies pressure states for big tax cuts in return for building a plant in the state?

Tax laws change, but so do markets. And companies arguably have an easier time influencing tax laws than on the whims of the markets.

All of Kerry's plan adds up to the fastest way to kill off the economy I can think of.

Paul O'Neill has said that only an idiot makes business decisions based on taxes.

At any rate, here's a question: if Kerry's plan succeeds in reducing outsourcing, how can it possibly be revenue-neutral?

I honestly think outsourcing is about more than just jobs, jobs, jobs (as Mr Kerry claims), but rather it may be a natural economic progression!

We seem to be in a changing economic period, where less skilled jobs are being moved overseas, and the American work force is forced to retrain for more high-tech positions. A lot like the early 1900's.

However....... with all the yelling, sometimes it's hard to seperate the issues from the hyperbole. I sincerely hope that in the coming months and debates that John Kerry and President Bush can focus on the things that really matter, and stop yelling at each other.

I was reading the excellent essays at ElectionAnalysis.com and even though they try to present a balanced approach, there is still a lot of emotion in the mix.

But the constant threat of terrorism, Iraq, national security, and even the personal integrity of the candidates will and should play a large part in making this very important decision. I think Mr Bush is ahead in these catagories.

Hmmm.

"We seem to be in a changing economic period, where less skilled jobs are being moved overseas, and the American work force is forced to retrain for more high-tech positions. A lot like the early 1900's."

I think you're a little behind the times on that viewpoint. In case it's missed your attention a great many high-tech and IT jobs are being outsourced now. So are jobs in a lot of other professions. As an example tax returns are being done in India now. Mortage banking research is being done in India. In the Phillipines there are companies that inspect and review MRI scans for American hospitals.

These aren't exactly low skilled labor. So what exactly were you thinking that people should be retrained for?

Ed,

Those jobs may not be low-skilled, but they are subject to the laws of supply and demand. We send 1040 tax forms to India because there are a lot more 1040s than CPAs who will do them for $20. So it is a choice between using software or using a Hindu, and not destroying CPA jobs (yet).

Anyway, comments on the original posting...

Thanks to Dan for citing that the US taxes revenues from overseas sales, and that's the real reason why companies are moving to Bermuda. Raising taxes on overseas sales will accelerate the move--stupid stupid stupid. If Kerry wanted to bring back the Benedict Arnold CEOs, he'd drop the freaking overseas sales tax. Fat chance.

As to the infatuation with Rubin, my personal opinion is that he's gotten a free ride. He did two things: (1) he threw gasoline on the tech-bubble fire, and (2) he got out before the payday. Witness the change to Glass-Steagall act, which allowed insurance companies to sink their money into the bubble mania--that's gasoline on the fire. Poor old Greenspan is cranking up the interest rates (which bit us HARD when the bubble finally burst), and doing everything he can to downtalk the market, and Rubin is eagerly pushing it along. I really really dislike Rubin.

Um, Rubin sure did a good job getting the budget balanced...

The budget was balanced not on what President Clinton or Congress for that matter did directly, but because revenues increased because the economy exploded. If I remember right, the economy had two periods where it picked up in the 1990's. One happened just before the election of President Clinton for his first term, of course that came out too late to help the first President Bush. The other happened after the Republican led Congress forced President Clinton to agree to an agressive plan to balance the budget in five years. Of course, being the skilfull politician he is, President Clinton managed to claim credit. It can be argued the government contributed indirectly to these spikes, but direct evidence is lacking as far as I know.

I agree with Dan that I found Kerry's proposal much less populist than expected; especially when Kerry said he was going to shrink the government. I don't think he really meant it, but the fact he felt compelled to say it means certain ideas (i.e. little government) are having sticking power, even if niether party practices it.

Scott, when you said Kerry was going to cut the size of the government, the first that when through my mind is he is going to cut the defense department again. If I remember right, President Clinton cut the size of the Federal Government as well. But if you take the cuts in the Defense Department off the table the size of the Federal Government actually went up. I know there are things in the DoD that need to be cut, but there are times when I wish the rest of the Federal Government was under the same level of scrutiny.

Richard-

The 90's slashes in military spending were bipartisan. Bush 41 called for cuts in at least one of his state of the union addresses. The size of federal government excluding interest, social security, and medicare stayed about the same size throughout the Clinton years. If Bush wins reelection this year he will leave a ton of interest and a balloning entitlement crunch that Rubin couldn't even handle.

my second sentance should include military spending along with interest and entitlements.

“Paul O'Neill has said that only an idiot makes business decisions based on taxes.”

I would say that only an idiot would make business decisions solely based on taxes. There is no way that a sensible business plan can ignore the tax rate. John Kerry’s economic advisors are trying to do their best with a bad hand. In private, I’m sure they don’t believe what they’re saying. It still causes more harm than good. They are, however, attempting to assist a candidate who has put his foot into his mouth. Howard Dean forced Kerry to blurt out some really stupid things. Will this work? No, the Democrat base is too radicalized. They might despise George W. Bush---but there are limits to their willingness to sacrifice for the unity of the Party. Also, have we already forgotten Ralph Nader? He is certain to blast Kerry for allegedly surrendering to those exploiting the proletarians.

I have a couple of observations about the Kerry proposal, which I make without being an expert on international tax matters.

First, I have never seen taxes enter into the thinking on any outsourcing decision until the decision was essentially made. Sure, at some basic level they do, in that people rarely outsource to France, but even in these obvious cases the real considerations relate to the quality and cost of labor, logistics and transportation matters, and rent. While all of these things may be derivative of tax policy, they are more a function of the foreign country's tax policy than U.S. law. Sure, at the margin somebody somewhere has probably made an outsourcing decision based on U.S. taxes, but it is silly to think that any realistic revision in corporate taxes will have a material impact on outsourcing.

Oh. I have been privvy to any number of outsourcing decisions, FWIW.

Second, the one year tax benefit is worthless, or close to it, for the big public companies that are the subject of the criticism here. Public companies that are not struggling to hang on to cash care about one thing, which is future GAAP earnings. A one-time tax benefit will be the equivalent of a one-time gain -- nice to have from a balance sheet point of view, if it leaves a little more cash lying around, but worthless from a P&L point of view and therefore worthless from a stock price point of view. Who would pay more for the stock of any public company just because it is getting Kerry's one-time benefit? Transcendentally silly, if you ask me.

Small addendum: If the total reduction in the top rate results in an actual reduction in the total corporate taxes paid by any particular company over the long haul (more than a year), it might get credit from the Street for the incremental GAAP earnings, and its stock price might go up. Since Kerry believes that his proposal will be revenue neutral all in, but not with respect to any individual company, this probably means that there will be winners and losers. Still, I stand by my point that the one-time benefit is not worth much to public companies.

I think after reading the comments on this blog for a while I finally have it figured out. Clearly the Kerry plan is flawed. After all, Kerry is a Democrat and hence he is not trustworthy. Thus if it is a good plan, he actually means the opposite. The only indicator Kerry might be telling the truth about his plan is if it will obviously harm the US.

I also learned that all the good that happen during Democratic presidential happen despite of the government while all the good things that happen during GOP administrations are due to good policy. Of course the opposite is true as well, bad things during Democratic administrations are the fault of government, bad things during GOP administrations are bad luck. The little known corollary to this rule is that bad things that happen at the start of a GOP presidency are the fault of the preceding Democrat, not bad luck as you might assume. It is a subtle point, but a very important one to know if you want to be fluent in GOP-gibberish. Thank you to all who have allowed me to clarify these rules, they will undoubtedly be valuable in all future policy analysis and examinations of history.

I just wanted to add that while I am sure there are companies that don't consider tax policy when making decisions, there are also companies that do.

I once worked on the financial structure of a joint venture between two American companies for the purpose of selling product in the US. Because of tax policy and tax rates the JV was structured to be incorporated overseas once it started generating revenues. So don't believe that all companies ignore tax policy when making business decisions. It might be silly to consider taxes, but companies do lots of things that don't make a lot of sense.

As a sidebar to the story I do not recall what the impact of the JV structure was on where the jobs were going to be located.

Has the world tax stucture changed dramatically in the last 20-25 years? Or has technology and logistics? To take an earlier example, what would the cost have been to have a tax returned prepared in India 25 years ago? Sending information overseas by fax, long distance AT&T at 1200 baud, or shipping documents over and back with strict time deadlines. Technology has opened the lower cost alternatives. I'm inclined to believe changes in tax codes hasn't

Bonus question: How many of the jobs being outsourced didn't exist 25 years ago?

Hmm.

1. "To take an earlier example, what would the cost have been to have a tax returned prepared in India 25 years ago?"

You mean by using a dedicated fax line? Not all that much. You could always purchase blocks of bandwidth if you were going to use them. Or you could negotiate a specific usage rate. So tax returns could have been done in India decades ago.

2. "Technology has opened the lower cost alternatives. I'm inclined to believe changes in tax codes hasn't"

*shrug* is there really much of a difference between faxing a set of documents and emailing them? Significant enough for someone think it's economically viable? That's ridiculous.

3. "Bonus question: How many of the jobs being outsourced didn't exist 25 years ago?"

And here's another bonus question. How many people didn't exist 25 years ago? Or another one is what businesses didn't exist 25 years ago? Or perhaps what businesses have gone bankrupt since 25 years ago?

All meaningless and absolutely pointless. People keep coming back to technology as some sort of reason for outsourcing. It is not technology that is the cause for outsourcing. It is wages.

What part of this is so damn hard for people to understand?

Screw this. I'm starting my own blog. At least then I won't have to repeat myself every damn day.

Ed said:

"It is not technology that is the cause for outsourcing. It is wages."

Who else is willing to argue that Indian or other Aisa rim wages were identical to US wages 25 years ago?

Ed:

I can tell you that most federal and state governments would not accept a faxed copy of a tax return, even if the signature on it were original. I speak as someone who has been doing pension and non-profit returns for 15 years. Otsourcing did not become practical until electronic filing and the ability to e-mail pdf files became commonplace.

Faxing wasn't common 25 years ago. It came into common use around 1989, which is 15 years ago. But that's beside the point, really.

To repeat my earlier comment, offshore tax preparation competes with software, not with CPAs. The software versus CPA battle was fought several years ago and the CPAs lost.

Have the software jobs been moved offshore also?

“It is not technology that is the cause for outsourcing. It is wages.

What part of this is so damn hard for people to understand?”

All that matters is that costs are lowered. This results in lower prices for consumers. Businesses can then invest the saved money into more productive uses. Some people will regrettably have to find news jobs, but the greater good has been served. We overall become a wealthier nation. Indeed, what part of this is so damn hard for people to understand? It’s the same question I’ve been asking myself.

From this morning's Tax Notes Today. I just add this as a supplement to the debate.

"Kerry's plan also came under fire from congressional taxwriters. House Ways and Means Chair William M. Thomas, R-Calif., said in a statement that Kerry's plan to change international tax laws revealed him as a "hypocrite" and "economic isolationist."

"The plan is hypocritical, Thomas said, because Kerry voted in the Senate Finance Committee to approve S. 1637, which would repeal the FSC Repeal and Extraterritorial Income Act (ETI Act) -- which was judged to be an illegal export subsidy by the World Trade Organization. It also would expand the subpart F deferral rules that Kerry's plan attacks. "

All of Kerry's plan adds up to the fastest way to kill off the economy I can think of.

Posted by Bithead at March 27, 2004 07:37 PM

Feeling a little partisan? Surely you can think of a lot of faster ways to kill off an economy? Pushing aside the rhetoric, his plans seem fairly benign to me. I personally favor doing away with business taxes, but I don't see where favoring exporting firms is more economically efficient than what Kerry plans.

“...but I don't see where favoring exporting firms is more economically efficient than what Kerry plans.”

We should have tax policies in place that make it moot if you export jobs. The present system merely tries to prevent companies from being double whammied. Economic inefficiencies are inadvertently encouraged anytime the tax rate either encourages or discourages job outsourcing.

Kerry's plan would actually cost US jobs and drive some corporations overseas.

Kerry is a joke on economics; his plan would be economic suicide.

This is the John Kerry economic plan: raise taxes...and then raise more taxes. However, because Kerry knows that tax hikes don't sell in elections, he goes one step further: amidst all of the tax hikes, offer up some meaningless, symbolic tax cut. Then hope that gets all of the attention.

So with Kerry it's like he takes away 10 dollars from us while giving us 1 dollar back, and then expects us to applaud him for giving us the 1 dollar.

Kerry is pathetic...simply pathetic. He must think voters are fools.

Dan: don't be oddly encouraged. That's like saying you're encouraged by Attila the Hun because he actually said a nice word once.

Kerry is all smoke and mirrors. The bottom line is that this guy is a tax hiker from way back...it's in his blood.

Plus, with Kerry's record of flip flops on virtually every major issue, who can trust him or what he promises?

Kerry's promises aren't worth a plug nickel...

The Wall Street Journal has a good piece on the Kerry plan to dupe Americans:

The money quote:
"The effect would be to speed up the very migration of business overseas that Mr. Kerry says he wants to stop."

“Kerry is pathetic...simply pathetic. He must think voters are fools.”

John Kerry is the victim of the Howard Dean curse. He’s caught between the proverbial rock and hard place. The Dean campaign forced Kerry further to the left the he originally wanted to go. He now has to get back to the center while not coming across as a flip-flopper. This is virtually impossible.

My imagination is getting the better of me. I foresee a discussion in my crystal ball some fifty years from now:

child: Who was Howard Dean?

liberal father: He was the scum bag, piece of %@$&* excrement who significantly hurt the Democrats back in 2004.

child: Isn’t it wrong to use vulgar language? After all, I’m only five years old.

liberal father: It is except when you refer to Howard Dean. Then it is morally justified.

Irony abounds given Kerry's recorded profanities, no?

Going waaay back to Ed's first point about MRI readings and tax/mortgage preparations: I'd argue that those are no longer high-tech jobs.

"high-tech" is often used as a code phrase for "sitting at a computer and entering numbers". Or HTML coding.

Like with Henry Ford's revolution, automation is taking over a lot of previously knowledge- and time-intensive tasks. Take, for example, MS Excel macros and formulas. Not long ago, you'd need to know Visual Basic (or other programming knowledge). Hell, not long before that, it was merely Basic, no Visual. Now your average desk worker can drag and drop and wizard to his or her content - without any more schooling than hitting your F1 key.

So rather than wonder where all the wages and jobs for these "industries" have gone, maybe the question should be: Why did so many people buy so completely into the idea that all we needed to do was study computer languages and we'd all have high-paid jobs for ever?

Speaking of flip flopping...Bush
http://slate.msn.com/id/2096540/

Kerry

http://slate.msn.com/id/2096540/
Even from the same source. Gotta love Slate hehe

Grrr let me fix that link

Bush flip flops..sorry had inept computer moment there....

http://www.dailykos.com/story/2004/3/7/213753/1954

Hmmm.

"I can tell you that most federal and state governments would not accept a faxed copy of a tax return, even if the signature on it were original. I speak as someone who has been doing pension and non-profit returns for 15 years. Otsourcing did not become practical until electronic filing and the ability to e-mail pdf files became commonplace."

I didn't suggest that anyone would fax the government the tax returns. I suggested that the documents required to prepare the tax returns could be faxed to India.

When the tax returns are completed then they could either be faxed back, and then transcribed or shipped back by air freight.

And yes, people were doing air freight back then.

"So rather than wonder where all the wages and jobs for these "industries" have gone, maybe the question should be: Why did so many people buy so completely into the idea that all we needed to do was study computer languages and we'd all have high-paid jobs for ever?"

Because, back when manufacturing was getting outsourced, people were told that the next great thing was to become a "knowledge worker" and that becoming one would lead to a stable, successful career.

Which turned out to be a complete pile of dog crap.

So I'd expect that a little hesitation to uncritically accept the viewpoint of the pundits has some justification.

Man I've got to tell you. I think what I need to do is go back to school. I haven't done this much damn reading on economics since I studied the stock market back when I was a kid. :P

I'm still waiting on a response from the BEA and BLS on how transshipments are handled and if they are in fact handled as imports and thus deducted from the domestic GDP calculations for the purpose of generating productivity values.

:P

(and before this gets interjected into the discussion, outsourcing doesn't affect me personally. ok? no advice posts, please.)

"What is striking about the candidate's economics team is that all of its members - not to mention nearly every adviser they are reaching out to - served the Clinton administration in one way or another....

...the fixes that Mr. Kerry and his core economic advisers are beginning to offer are clearly rooted in Clinton economics, which is resolutely centrist. Fiscal responsibility and deficit reduction, hallmarks of the Clinton years, are bedrock orthodoxy in the Kerry camp, too.

So is faith in the private sector's powers to generate prosperity. Job creation will come from corporate America, not government, once the right incentives and subsidies are in place, the war room says. In fact, the Clinton-era god of deficit reduction and private-sector supremacy is also worshiped in the Kerry camp. "This group is consulting literally daily with Bob Rubin," Mr. Altman said. "He was the best secretary of the Treasury since Alexander Hamilton and he is the single most influential figure in business and finance."....

The galaxy forming around Mr. Altman is particularly important. Mr. Rubin is there, of course. Lawrence H. Summers, Mr. Rubin's successor as Treasury secretary, is consulted - although now, as president of Harvard, Mr. Summers takes no active role in the campaign.

OK, The praise of Rubin might be a bit over the top, but I find a lot of this reassuring. "

There's really not much reassuring in having the warmed over Clinton economic team working with Kerry.

We should have tax policies in place that make it moot if you export jobs. The present system merely tries to prevent companies from being double whammied. Economic inefficiencies are inadvertently encouraged anytime the tax rate either encourages or discourages job outsourcing.

Posted by David Thomson at March 29, 2004 01:04 PM

Yes, and current policy isn't necessarily neutral. Switching the sign is hardly going to change overall efficiency.

I'm still waiting on a response from the BEA and BLS on how transshipments are handled and if they are in fact handled as imports and thus deducted from the domestic GDP calculations for the purpose of generating productivity values.

Posted by ed at March 30, 2004 05:11 PM

Transhipments aren't part our productivity values. Per the BLS website:

"Annual indexes for manufacturing and its durable and nondurable goods components are constructed by deflating current-dollar industry value of production data from the U.S. Bureau of the Census with deflators from the BEA."

The Census of Manufacturers runs every 5 years on the second and seventh years of the decade. They are supplemented by annual surveys. These programs look at value added. Continuing the BLS description:

"These deflators are based on data from the BLS producer price program and other sources. The industry shipments are aggregated using annual weights, and intrasector transactions are removed. Quarterly manufacturing output measures are based on the index of industrial production prepared monthly by the Board of Governors of the Federal Reserve System adjusted to be consistent with annual indexes of manufacturing sector output prepared by BLS." Source: http://www.bls.gov/news.release/prod2.tn.htm

"We seem to be in a changing economic period, where less skilled jobs are being moved overseas, and the American work force is forced to retrain for more high-tech positions." posted by: John Palmer

Are you saying it is ok to take peoples jobs as long as they are "less skilled"?
That if your parents had enough money to send you for further education that you are better and more skilled at what you do than a person with a lesser paying job. It's ok to take the poor bastard's job, he's used to being poor?
The truth is that jobs of all skill levels are being outsourced.
----------------------------------------
"Faxing wasn't common 25 years ago It came into common use around 1989, which is 15 years ago."posted by: Ursus

In 1902, Dr Arthur Korn invented an improved and practical fax, the photoelectric system.
In 1914, Edouard Belin established the concept for remote fax photo/news reporting.
The American Telephone & Telegraph Company (AT&T) worked to improve telephone facsimile technology, and in 1924, the telephotography machine was used to send political convention photos long distance for newspaper publication.
On March 4, 1955, the first radio facsimile transmission was sent across the continent.
----------------------------------------
"All that matters is that costs are lowered. This results in lower prices for consumers. Businesses can then invest the saved money into more productive uses. Some people will regrettably have to find news jobs, but the greater good has been served. We overall become a wealthier nation. Indeed, what part of this is so damn hard for people to understand? It’s the same question I’ve been asking myself."
posted by: David Thomson

Are you still stuck in the trickle down theory? If you keep giving the rich corporations more money they simply become richer. Yes there is more wealth in the nation as a whole, but it is concentrated more and more into fewer and fewer hands. What I wonder is why the consumer has to pay for the gambling habits of the rich? i.e. the stock market and ipo fiascos.
--------------------------------------

"We should have tax policies in place that make it moot if you export jobs. The present system merely tries to prevent companies from being double whammied. Economic inefficiencies are inadvertently encouraged anytime the tax rate either encourages or discourages job outsourcing."
posted by: David Thomson
David, the word moot means "worthy of discussion" do we really need the government to pass policies which point out to us (we who have lost our jobs to outsourcing) that it is worth discussing? I think not. By the way most of these corporations pay no taxes whatsoever, I know that my taxes and my social security have gone up not down. I hear all the time that the rich pay most of the taxes because they pay 64% of the total income tax. They have 98% of the income wealth yet only pay 68% of the tax. Who do you think pays the other 32% with only 2% of the wealth.
Henry Ford understood that capitalism only works when the common man has capital. Instead of lowering the taxes for those who do not need or even want tax relief, more jobs should be created and wages should be brought up so the common man will have the working capital to sustain our precious system.
Excessive greed breeds poverty.
There is much more to business than the bottom line, that is only a shortsighted
temporary benefit to any company. Ethics. Remember that word?