Please Don't Take Away Our Tax Breaks!

Filed in archive Opinions & Insights on February 27, 2009

Photo courtesy of iStockphoto, Image# 3068294

As a long-time participant in the outsourcing industry, I was not surprised by India Inc.'s hyperbolic reaction to the budget presented by President Obama this week. No doubt, the removal of tax advantages for outsourcing will affect some contracts, although it is even more likely that the incentives for hiring domestic workers, along with the general mood here in the U.S. will have a greater effect ultimately.

That being said, it is instructive to look at the reactions from outsourcers as they face the end of a fiscal advantage that they've enjoyed during the last decade. First, they assert that the removal of this tax break will cripple U.S. competitiveness - "like cutting their nose to spite their face." I find that assertion to be speculative at best, particularly when the U.S. is clearly being crippled by significant and structural unemployment even today. If a move from offshore back to onshore employment helps pull the U.S. out of its current slump, then arguably the entire world will benefit.

Second, it is being seen as a threat to U.S. national security. Again, a stretch. While the U.S., by necessity, is cozying up to Pakistan to address its war on terror, it is clear that the economies of the two nations, India and Pakistan, couldn't be more divergent. As a trading partner, rather than a recipient of aid, Pakistan is distantly behind India. And there's no indication that could change anytime soon.

Ultimately, the removal of tax breaks will do one thing - and this is what the outsourcers fear. It will shift the economics, making it necessary for the Indian outsourcers to sharpen their value proposition (and perhaps leave a bit of profit on the table) to remain competitive. Couching this argument in international competitiveness or national security terms won't change this simple fact.