Tax credits have no place in free market economy

May 11, 2009

Aren’t we glad President Barrack Obama finally did away with the tax incentives for the outsourcing industry? Historically, tax credits are government rewards for good behavior, say for reducing your carbon imprint, buying a hybrid car, getting a solar plant installed on your rooftop etc. Even with those sort of activities, there is no empirical evidence that tax credits incentivise good behavior.

Two years ago, KPMG did a survey of small and medium-sized enterprises (SMEs) in UK finding that 70% of those businesses were not even aware of an R&D tax credit scheme, let alone apply for it, even though it would have improved their cash flows, during tough times. Surprisingly, the government had spent quite a bundle in advertising the scheme. But these SMEs were not bothered. So much for government attempting to incentivise innovation!

It doesn’t work. If it did, we would not have so many polluting vehicles on the road, the green cover would not have disappeared to a mere 20-23%, there would be more spending on health, infrastructure, education and alternative energy resources and less on defense, military and police establishments. But that’s not the case.  Every one knows tax cuts (or tax credits for that matter) are temporary measures to boost consumer demand and kick-start the economy. When recovery begins, the cuts are withdrawn. The outsourcing model has delivered and firmly established its roots as something that makes good business sense. So perhaps it was time, to without the tax crutches that this model stood on.

Perhaps, as one blogger points out there could have been a better way for the Obama government to deploy $800 billion and get the economy back on track. But it took the easier route. In addition, there is no real evidence that a temporary tax policy change does a lot for the economy. Yet his market logic is often completely lost on tax framing authorities.

Historically, casting aside the ideal of “hands–off” government, significant government intervention has existed in most capitalist economies since the Great Depression in the 1930s. In the US, this has existed in the form of subsidies, tax credits, incentives, and other kind of exemptions. So why should it be surprising that Obama also took the easy route.

The mistake perhaps lay in reposing too much faith in one man. One man doesn’t run an establishment, especially when it comes to taking tough decisions. So I am not surprised, if Obama also felt cowed down under pressure.

In beginning of 1990, Outsourcing is started as a cost saving measure, now US companies are outsourcing not for cost saving any more. They outsource because of various other factors like skills availability, local market demands, increase business efficiency, increase innovation, etc. In this globalized economy the outsourcing business model  is here to stay, only because it makes tremendous economic and business sense.

So what if the government has withdrawn the few sops, that mainly benefited the big entities and I am sure they won’t feel the pinch.


One Response to “Tax credits have no place in free market economy”

  1. Not Really on May 15th, 2009 10:28 am

    You wrote:
    “They outsource because of various other factors like skills availability, local market demands, increase business efficiency, increase innovation, etc”

    This is not true. These are the new EXCUSES for outsourcing. The real reason for offshore outsourcing is the perceived lower cost. Nothing more. Many companies are realizing that offshore outsourcing actually costs more in the long run. These companies then decide that it is not worth it.

    Has an outsourcing company ever tried the pitch “Yes it will cost you much more, but think of the skills availability, local market demands, increase business efficiency, increase innovation.” That outsourcer would be shown the door before he could complete his presentation.

Got something to say?