Tax Proposal Risks Alienating Tech Sector

During the presidential campaign, candidate Barack Obama wooed the tech world. His tech-savvy campaign team, advisers such as Google CEO Eric Schmidt, and promises to hire a tech czar raised expectations that he would be the most tech-friendly (nevermind tech-savvy) president ever.

Now, he appears poised to betray the tech sector as part of an effort to pay for the many spending programs we've seen come down the pike. This May, the Obama administration put forward a proposal to change tax rules applicable to U.S. companies with foreign subsidiaries, all in an effort to spur domestic job creation in the midst of an ongoing economic crisis.

The proposal was little noted at the time, but it has increasingly attracted attention from quarters perceived to have been fairly Obama-friendly in the context of last year's presidential campaign.

It turns out many in the tech sector are deeply concerned with the administration's proposal to "stiffen the rules on the credits American firms can claim for the foreign taxes they pay, and limit how much companies can defer tax payments on their foreign earnings," according to Economist.com. Not only is this proposal an effective tax hike (which Obama's advisers should know will not help the economy), it's also one that many business leaders, including in the tech industry, believe will hurt, rather than help, U.S. job creation and retention.

According to a study by the Business Roundtable (discussed in The Richmond Times Dispatch), the growth of U.S. companies' business operations abroad does not diminish job creation in America, but instead, spurs it: More than 20 million Americans (or about 19 percent of American workers) are employed by companies that maintain overseas operations, many of which, in turn, serve the 95 percent of global consumers the group says live outside the United States.

John Castellani, president of the Business Roundtable, argues that if those U.S. companies were "hit with a big tax hike, as the administration proposes," it would "undoubtedly impact job security for the millions of U.S. workers who support their companies' overseas operations." And, as mentioned above, that could be especially the case for companies operating in the tech sector that Obama courted heavily and considered allies during last year's presidential campaign.

In June, Microsoft CEO Steve Ballmer was quoted by Bloomberg as saying if the proposal were implemented, Microsoft would be "better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S." -- an over-the-top statement, perhaps, but one that speaks to the very real concerns major tech employers have about what the administration wants to do.

The same Bloomberg article noted that Symantec Chairman John Thompson "said software companies are frustrated by being called tax cheats and compared with companies that moved their headquarters to low-tax countries such as Bermuda."

Tech America, a group that describes itself as "the leading voice for the U.S. technology industry" and boasts 1,500 member companies, recently put out a paper titled "U.S. High-Tech Jobs Depend on Overseas Investment," which states that "tax deferral Is crucial to the viability of the U.S. tech industry." As if that weren't enough, the Tech CEO Council has argued that repealing deferral "would cost at least 159,000 jobs or $7.3 billion in payments to workers, the equivalent of all the health care workers in Colorado. Under certain conditions, ending deferral could affect as many as 2.2 million jobs, or nearly one of every 60 American workers." So, then, the tech industry is unimpressed with what the administration is proposing and appears to be getting more vocal about it. As well it should.

Barack Obama spoke about the importance of innovation to the U.S. economy quite regularly as a candidate, and he was right to do so. Unfortunately, raising taxes is no way to spur innovation, or job creation, for that matter. If this proposal gains traction, this may be one instance in which some of Obama's supporters may rethink the assertion that change is what they need.