Friday, February 27, 2009

Obama's Policy on Outsourcing and Offshoring: "Exporting America" by Taxing U.S. Energy Consumption and Foreign Revenues of U.S. Multinationals

President Barack Obama told Congress on television February 24, 2009, that he wanted to focus on energy, education and healthcare. He wants to eliminate the tax breaks for companies that send jobs offshore and avoid protectionism. Sadly, his proposal is full of economic stimuli for increased local costs of doing business in the U.S. and abroad. It’s a stimulus package for outsourcing and offshoring. It makes Lou Dobbs’ book “Exporting America” look tame.

Taxing U.S. Service Providers through Greenhouse Gas “Climate Revenue” Published on February 26, 2009, President Obama's $3.6 trillion budget proposal would create a tax on U.S. energy producers that pollute using greenhouse gases (GHG’s) and high carbon footprints. For a copy click here.

Such energy producers would be taxed billion under a “cap and trade” program to generate “climate revenues” from “auctioning emission allowances that are reserved for clean energy technology initiatives.” [Table S-2, page 115.] The tax (which the budget proposal calls "receipts" or "offsets to outlays") would be in the form of a market for GHG-reducing activities such as pollution-free energy production or preservation of forests, etc., under the 1997 Kyoto Protocol that the U.S. signed but never ratified. Obama's anticipated "climate revenues" amount would grow from $78.7 billion in 2012 to $237 billion in 2014 and $646 billion into 2019.

Unilateral Approach: Emissions Trading without Kyoto Protocol Commitments. The Kyoto Protocol has a reported 170+ countries as Kyoto Protocol members. According to the UN, these include Brazil, Russia, India and China but no mandatory emission level controls apply to China or India, which reportedly refused to ratify the protocol. The Kyoto Protocol contemplates the use of three mechanisms for environmental protection: Emissions Trading, The Clean Development Mechanism (CDM) and Joint Implementation (JI).A diplomatic balance would require some quid pro quo from American trading partners that might be "free riders" President Obama's omission of any commitments to the Kyoto Protocol shows his unilateral approach to climate control and environmental protection. A diplomatic initiative and ratification might make sense so that environmental benefits are linked to free trade. A better legal framework would involve universal adoption of these policies through a treaty or convention. Without reciprocity mandated by a widely applicable international agreement like the WTO trade agreements, the United States would be giving an increasingly large cost advantage to foreign service providers for the outsourcing and offshoring of business processes that are based on consumption of energy.

Tax Pass-Along to Consumers and Business Customers. Economically, the U.S. energy wasters will pass through the costs of paying for their sins by increasing local energy costs to local employers who run local work places in the United States. In turn, local employers will pass the costs along to customers. Business customers (whether foreign or local) will seek to avoid the tax by hiring foreign service providers who won’t pass any “climate revenue” tax to the users. The “cap and trade” auction thus constitutes an indirect tax on U.S. businesses that hire and house a lot of personnel. Home-based teleworkers would bear the tax too.

Impacted Businesses. This operating cost increase in business operating costs will hit U.S.-based data centers, server farms, call centers, help desks, web developers, application programmers, market researchers, stock market analysts, reviewers of legal documents in litigation, engineers and other knowledge professionals. In short, the "climate revenue" "receipts" will hit all U.S. employers, big and small.

"Climate Revenues" Not Dedicated to Environmental Improvement: Wealth Redistribution Takes Precedence over "Investment" in Climate Protecting Infrastructures. The uses of the auction proceeds are not dedicated to environmental improvement. This follows the approach of Social Security (where taxes flow into the government's general account) and disregards a dedicated account (such as the Federal Highway Trust Funds, adopted in 1956, to require that federal gasoline taxes pay only for improvements in interstate transportation).

Income Reallocation through Carbon Credits. Since it will be used to pay a flat $15 billion a year for “climate policy - clean energy technologies” and $63.4 billion (to $68 billion in 2019) for tax subsidies for workers (many of whom do not pay taxes) through a “Make Work Pay” program, the new “climate revenues” would create entrenched constituencies to receive a redistribution of wealth. The “climate revenues” are not dedicated 100% to converting to more energy efficiency.

Taxation on Offshore Income of Foreign Operations of U.S. Companies. The budget attacks “loopholes” that have existed for decades and are already subject to tightened “controlled foreign corporation” rules for “deemed dividends” under “Subpart F” of the Internal Revenue Code, 26 U.S.C. §951 et seq. Forcing repatriation of foreign profits of foreign subsidiaries will put American corporations at a tax disadvantage compared to foreign manufacturers and foreign service providers.

Winners. Who wins? Offshore-incorporated manufacturers and service providers. India, Inc.; China, Inc. Latin America. TCS, Infosys, Wipro, WNS, Accenture (a Bermuda company), Toyota, Nissan.

Losers. Who loses? Domestic American corporations that have foreign subsidiaries producing local revenues from locally delivered services. U.S. manufacturers that use a large amount of energy in production, including steel makers, automobile manufacturers. Cognizant, EXLService, IBM, Hewlett-Packard, Affiliated Computer Services, Computer Sciences Corporation, General Motors, Ford, Chrysler, UAW, International Brotherhood of Teamsters.

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