Should the U.S. Tax Companies for Shipping Jobs Overseas?

Should U.S. Tax Companies For Shipping Jobs Overseas?
Should U.S. Tax Companies For Shipping Jobs Overseas?

Intel (INTC) co-founder Andy Grove posed an interesting question in a July 1 Bloomberg Businessweek column: "[W]hat kind of a society are we going to have if it consists of highly paid people doing high-value-added work and masses of unemployed?"

Consumer-related spending accounts for roughly 70% of U.S. GDP growth by some estimates, but today's consumers have less to spend. June employment statistics released Friday showed a loss of 125,000 jobs for the month, and overall, the U.S. has 7.4 million fewer jobs now than in December 2007. Worse, GOP senators' decision to block a vote on the extension of benefits will cause 1.7 million out-of-work Americans to lose their unemployment checks, which could lead to a further decline in spending and additional economic setbacks.

Given that, creating new jobs ought to be our country's highest priority, and some people look to the high-tech sectors to lead the way. But Grove thinks those jobs won't come from Silicon Valley -- unless the U.S. starts taxing companies for jobs they move offshore.

Is he right? Perhaps surprisingly, it doesn't make sense politically, although the idea could have economic merit if he had good answers to many fundamental questions.

Policies Have Shifted Work Overseas

U.S. government policies have encouraged globalization, which translates into shipping jobs overseas. Programs such as NAFTA have lowered the cost of shipping jobs south of the border, and there's no economic penalty facing U.S. companies that decide to ship jobs overseas. Those at the apex of the corporate ladder have done a fabulous job of lobbying for policies that favor globalization at the expense of the American worker.

These policies have shifted manufacturing jobs to places with lower wages. As Grove points out, Foxconn, a Chinese computer, cell phone and electronics manufacturer, employs 800,000 people, while Silicon Valley unemployment remains higher than the national average. Foxconn, which has made headlines after a spate of worker suicides, has 250,000 employees making Apple (AAPL) iMacs, iPods and iPhones alone. For every Apple worker in the U.S., 10 people in China are manufacturing the company's products.

A Two-Tier Society

Moreover, all these unemployed have helped create the two-tier economy that Grove fears. According to Harvard Magazine, 66% of income growth in 2001 to 2007 went to the top 1% of Americans, while the other 99% got the rest. That's a 60% average income boost for the superwealthy -- and a measly 6% increase over six years for everyone else.

Unemployment is hurting the bottom more than the top. While the U.S. jobless rate is now 9.5%, the bottom 40% of the labor force suffers from a 17% rate, while for the top 30% it's just 4%, also according to Harvard Magazine. Meanwhile, Wall Street, which includes a solid share of that top 1%, paid itself near-record bonuses -- up 17% in 2009 to $20.3 billion -- and is on a hiring binge.

Lean Global Startups Won't Hire Enough Americans: The Case of Zendesk

The start-ups that some hope will contribute to rebalancing the distribution of wealth have become much leaner than they used to be. Mike Grandinetti flies around the world coaching start-ups: In an interview, Grandinetti told me that many entrepreneurs he meets do social networking, mobile content and gaming, and need relatively small amounts of capital to get off the ground. They can raise the $500,000 to $1 million in capital that they need from angel investors and wealthy individuals, and seek to avoid going public due to the high costs of complying with the strict rules of the Sarbanes-Oxley Act, which was passed to increase corporate accounting standards and accountability in the wake of the Enron scandal.

Moreover, as Grandinetti pointed out -- and I think Grove would agree -- many of today's start-ups are now born global. This means companies like Denmark's Zendesk, which offers tech support through "software as a service" (SaaS) for as little as $9 a month, can operate globally with little capital and few employees, but still attract clients like Starbucks (SBUX) and Twitter. Zendesk was founded in Denmark and opened offices in Boston and San Francisco to help support such clients.

But Silicon Valley still has some value to global start-ups. That's because they still want the Valley's venture capital when they decide to scale up. The reason, according to Grandinetti, is that no other country in the world has a VC industry whose partners have so much experience working with start-up founders to help them build their companies sufficiently to be of interest to public investors or corporate acquirers. In 2009, Zendesk followed this trend -- raising $6 million from Benchmark Capital, whose partner, Peter Fenton, joined Zendesk's board.

Rebuild "Industrial Commons" by Taxing Overseas Labor

Lean firms like Zendesk show why Grove doubts that start-ups can solve America's unemployment problem. He proposes that the U.S. institute a tax on work moved offshore and put the money raised into a fund that can be used to scale up companies with U.S. workers. America needs to rebuild its "industrial commons," he writes, alluding to the conceptual manufacturing counterpart of the field where all of a community's dairy farmers can take their cows to graze.

Grove imagines putting the revenue earned from taxing offshore labor into a "scaling bank" that companies could use to bolster their American operations. As he wrote, "Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted."

Proposal Begs a Lot of Questions

Is this a good idea? It would immediately raise taxes on any business that uses workers offshore, and those higher taxes would be passed on to U.S. consumers of those products in the form of higher prices. In theory, such a move would be popular with those who were hired through the proceeds of the tax. But those same people would also be paying higher prices for products made overseas.

This raises all sorts of questions:

  • Who would decide how to spend the proceeds of the tax?

  • Is Grove suggesting that the government ought to decide which companies get the money and which don't?

  • Who would staff such a decision-making body?

  • What criteria would decision-makers use to direct the money to profitable and growing enterprises employing American workers?

  • And after so many manufacturing jobs have been shipped overseas, how would we ensure that American workers had the training they needed to do the jobs this proposal might create?

Grove is one of America's most accomplished executives, but I believe he needs to think this idea through a bit more.