Is India the Next California?

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And by that, I mean is India going to become so expensive that it loses its attractiveness as the preferred destination for outsourcing certain kinds of jobs? This News.com piece suggests that age-old dynamic is already underway, as India saw 14 percent wage inflation last year.

Of course, that doesn't mean India will end up as poor, any more than Europe and the U.S. got poor once they started sending jobs overseas. But the general hunt for relatively cheaper souces of labor mean more good news for China, Eastern Europe, and other places that may soon be getting jobs that would have gone India today.

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  1. the tax situation is really screwy, because US corporations must pay tax on their earnings globally. the same holds true for individuals

    there are many situations where corporations can not get credit for foreign taxes paid, so would end up tax twice, which would drastically reduce or even eliminate their income

    everyone realised that this was stupid, but couldn’t make the sensible change of solely taxing based on US activities. So they created a variety of ways of making tax on foreign income fair and rational, primarily through foreign sale corporations and other sundry credits

    The most widely used vehicles to make tax fair were recently declared illegal by the WTO (as they were blatant dodges of US rules, and were thus “unfair” even though it simply put US firms at an even tax footing with the rest of the world…). Kerry’s proposals are a tax cut in form only, in practice they would be a serious increase in actual tax paid, rather than theoretical tax owing.

    These changes would result in many more companies being domiciled in bermuda/barbados. Kerry’s “cuts” while supposedly bringing in more revnue would likely bring in less, do to the increased incentives to offshore the ownership… Remember that the best incentive to move anything offshore is high taxes. The best way to bring more onshore is to lower taxes. Ideally, the US would realize that only people should be taxed and that corporatins are a convenient but inefficient way of raising money. While it is hard for individuals to structure their lives tax efficiently, corporations pay tens to hundreds of millions of dollars each so that they minimize taxes.

    but politically its a bad deal… crappy

  2. hey,

    So if I’m reading you right, the “fairness” of the current tax code in this regard is open to interpretation, but there’s at the very least a rational reason for the provisions that Kerry claims favor outsourcing, and while Kerry’s proposal might decrease the incentive to outsource labor, it would in turn increase the incentive to outsource corporate ownership. And the whole thing is inherently screwed up because of the bogus nature of the corporate tax in the first place!

    Got you right?

    Anyway, thanks!

  3. Spain is in a similar position; it was the most important low-wage region of the EU and attracted many employers such as Renault. Now, the new entrants in Eastern Europe are taking its place.

  4. Kerry’s claiming there’s tax incentives to send jobs overseas that he wants to undo. While I’m against anything to restrict global competition, if he’s right that current tax law actually favors foreign workers, then I’d say he’s right that that should be changed. Anyone know if there’s any truth behind that claim?

  5. Fyodor-

    Based on my experience on this forum, and based on the mind-boggling number of clauses in the US tax code, I think it’s safe to say that people will soon deluge you with examples of all sorts of incentives for and against sending jobs overseas. And some of these incentives will be classic pork (lobbyist pays Senator to add an exemption for some arcane case) and some of it will at least look more legitimate (e.g. legitimate accounting issues of how to account for profits earned in overseas transactions, and whether those acrue to the US parent firm or to the foreign subsidiary).

    If the tax code is big enough, you can blame it for anything. Which is not to say that some of the blame isn’t deserved.

  6. As a moderately pro-NAFTA liberal, I’ve been a little put off by Kerry’s somewhat protectionist rhetoric, in contrast to Clinton, who was brave and honest enough to tell Democratic primary voters “it doesn’t work that way anymore.”

    But so far, Kerry’s proposals (like the tax reforms) have been much more pro-trade than the Gephardtian language he’s used to describe them.

  7. “But the general hunt for relatively cheaper souces of labor mean more good news for China, Eastern Europe, and other places that may soon be getting jobs that would have gone India today.”

    Anywhere but China.

    We have already given our most powerful enemy state “most favored nation status”. We have already sold them ICBM technology. We have already leaked nuclear weapons technology to them.

    Outsourcing to them is not in our national interest.

    YES to Eastern Europe – NO to China.

  8. “Wage inflation?” What is that? “Inflation is always and everywhere a monetary phenomenom,” sayeth Unca Miltie, which means that, to the extent that the rupee-factories in Dehli are not churning out new “money” faster than growth in the Indian economy warrants, any rise in the level of wages on the sub-continent is secular, and not a symptom of the inflation of the money supply.

    A secular rise in wage levels is just what free-traders have always predicted and hoped for, right?

    Kevin

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