It’s India’s turn to find out what Barack Obama is all about. The US President’s free-market credentials have never been solid, and Obama has just given emerging economies more reason to question his economic policies. Obama kicked up a storm on Monday when he proposed altering the US tax code that makes it easier for companies to “create a job in Bangalore, India, than (to) create one in Buffalo, New York”. In terms of substance, this isn’t an earth-shattering declaration that hurts India’s information technology or outsourcing businesses. But as far as symbolism goes—and the president who came to power chanting “Yes, we can” is all about symbolism—the proposal is only adding fuel to the global slowdown’s fire.
At issue are offshore tax havens where firms set up subsidiaries as well as the US corporate tax code that provides companies with loopholes. For instance, consider the matter of deferring taxes on income earned abroad. A US company that operates in India can defer the US’ 35% corporate tax rate on its Indian expenses since it also pays some tax to the Indian government. The company is only taxed by the US on its post-tax Indian profit if it chooses to bring that money back to the US. Obama complains that companies rarely bring money back; rather, they keep investing offshore. He plans to close the loophole by taking away the option for the original deferral unless profits are repatriated.
This is curious logic: Instead of creating a more competitive domestic environment that would persuade US firms to keep their money in the US, Obama is trying to dissuade them from investing offshore. That’s not to say investment in India will cease: Lower labour costs still make Bangalore a more attractive outsourcing destination than Buffalo. But the mere suggestion from the leader of the world’s largest economy to scale back the forces of globalization for the sake of Buffalo, but at the cost of Bangalore, is unnerving. Obama’s populist measure may bring in money to US coffers in the short term, but doesn’t do what Obama wants for the long term—create jobs. For that, companies need a better environment to invest in capital and labour. Tax loophole or not, hindering the free movement of goods and services will hurt America, and, in turn, the world.
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