Outsourcing could drain tax coffers, critics say

SAN JOSE, Calif. — As U.S. companies shift jobs to low-paid workers in developing nations, a growing number of economists and politicians worry that offshore outsourcing could damage the nation's fiscal health by draining tax coffers.

Although proponents of offshoring dismiss such concerns as far-fetched or naive, some tax experts say the migration of lucrative technology jobs to India and China is shrinking U.S. employee tax contributions and could exacerbate state budget shortfalls. Others say offshoring could erode already-strapped Social Security, Medicare, workers compensation and other payroll-deduction funds more quickly than anticipated.

Few researchers have studied offshoring's potential drain on public coffers. But up to one-quarter of lost wages translate to lost tax revenues, by conventional accounting methods. So if 3.3 million white-collar jobs and $136 billion in wages move overseas by 2015 as Forrester Research predicts, that means federal, state and local tax receipts could decline as much as $34 billion.

"Here's the big reason why tax revenues are declining: All these jobs are leaving the country," said John McGowan, professor of accounting at St. Louis University. "We need to start talking about this problem and not just blithely saying, 'Free trade is the solution' just because it boosts corporate profits and Wall Street likes it."

Cynthia Kroll, senior regional economist at the University of California, Berkeley, said offshoring could jeopardize U.S. dominance in emerging fields such as genetics and nanotechnology. She estimates that about one in nine jobs nationwide — one in six in Silicon Valley — could be vulnerable.

"If (research and development) is coming out of India, will the next wave of growth bypass us entirely?" Kroll said. "We need to pay attention to what India and China and these other countries are doing to get these new rounds of investment."

Democratic presidential candidate John Kerry is calling for a 5 percent corporate tax cut and changes to federal funding eligibility so software engineers could get retraining grants that are now reserved for blue-collar workers. Roger Altman, Kerry's senior economic adviser, said a national health care program would trim business costs, and tax credits for new jobs would keep positions from emigrating.

"The idea that we can't compete against India because of India's low wages — that's a myth," Altman said. "We need to make this country more competitive. That comes down to making employers more competitive so they're not under the same pressure to move jobs offshore."