Kerry’s plan on outsourcing faces mixed reviews

One of the central themes in U.S. Senator John Kerry’s presidential campaign is ending tax breaks for companies that send jobs overseas. But the IT community is split on whether Kerry’s plan would actually keep jobs in the U.S.

The Kerry plan, outlined at, doesn’t spell out many details, but Kerry advocates eliminating “special tax breaks” for U.S. companies with overseas subsidiaries. Under current U.S. tax law, U.S. companies with overseas operations can defer paying taxes on income at those operations until bringing the profits back into the U.S.

The Kerry campaign has criticized president George W. Bush for “encouraging” offshore outsourcing. Bush’s advisors have suggested that limiting offshore outsourcing may hurt the U.S. economy in the long term.

“Right now, we’ve got a choice,” Kerry said in a statement released in August. “We can keep on subsidizing companies who send jobs overseas, or we can reward companies who keep them here in America, where they belong.”

The Kerry plan lacks details, noted Joe Tasker, senior vice-president and general counsel for the Information Technology Association of America (ITAA), which has opposed most moves to limit offshore outsourcing. The ITAA sees a number of ways to help U.S. IT workers compete with workers in other nations, including an emphasis on training and opening more global markets to U.S. products.

The ITAA argues that by limiting offshore hiring, the U.S. could start a trade war in which other nations cut back on their purchasing of U.S. IT products.

“(Kerry) sees there’s an incentive to move jobs offshore, and he wants to eliminate that incentive,” Tasker said. “But (the Kerry plan) is really just not that clear.”

The Kerry campaign didn’t respond to a request for more information on the outsourcing proposal.

Profits from overseas subsidiaries of U.S. companies are currently taxed — generally at a 35 per cent rate — only when the company returns those profits to the U.S. Supporters of this policy argue the profits are already taxed in the country where the subsidiary is based, and without the U.S. tax deferral, those profits would be taxed twice. Kerry’s plan seems to distinguish between U.S. companies that move jobs overseas in an attempt to reduce U.S. labor costs and those that open foreign production facilities in a foreign country when the facility serves customers in that country. Companies that locate production in a foreign country that serves that country’s markets would continue to have the U.S. taxes on those facilities deferred under the Kerry plan.

Provisions in two corporate tax bills in Congress — the House-passed American Jobs Creation Act and the Senate-passed Jumpstart Our Business Strength (JOBS) Act — would temporarily reduce the tax on income returned to the U.S. to 5.25 per cent. Republican sponsors of the bills argue the lower tax rate would help the U.S. economy by encouraging companies to reinvest money in the U.S.

Others called the Kerry plan a step in the right direction. Marc Hebert, executive vice-president for marketing and partner relations for Sierra Atlantic Inc., called the Kerry plan a “clever idea,” but he questioned whether it would stop any IT companies from hiring overseas workers. Sierra Atlantic, an enterprise e-business software company based in Fremont, Calif., also has offices in India, Malaysia, Singapore and the company promotes its offshore outsourcing capabilities to its customers.

“It sounds like a good idea to equalize taxes generally,” Hebert said of the Kerry plan. “But I don’t think it will change outsourcing behavior.”

Sierra Atlantic markets its offshore facilities as a way for its customers “to do more with less.” Herbert called the Kerry plan a smart political issue for the Democrat, but said many IT companies have already begun to see the benefits of overseas labor.

“I think we’re in front of a new wave of outsourcing,” he said of the IT industry. “I think there’s some inevitability to it.”

A study commissioned by the ITAA and released in March estimated that 104,000 U.S. software and services jobs were moved overseas in 2003, but 90,000 more jobs were created as a result of the cost savings associated with offshore outsourcing. In estimates released in May, Forrester Research Inc. expects that 830,000 U.S. jobs will move offshore by the end of 2005.

With those numbers, Scott Kirwin, doesn’t understand why anyone would be against the Kerry plan. Kerry’s plan alone won’t stop U.S. companies from sending jobs overseas, but it could help, said Kirwin , founder of the 560-member IT Professionals Association of America Inc.

Kirwin, based in Wilmington, Del., also called on Congress to limit the H-1B visa program as a way to help U.S. IT workers. H-1B visas, which are capped at 65,000 this year, allow workers from outside the U.S. in specific fields, including IT, to take jobs in the U.S.

“(The Kerry plan) is just a start,” he said. “It’s not going to stem the tide completely. Our group supports Kerry’s plan, or anyone’s plan, that would close these loopholes.

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