Tax Impact of Offshoring

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 Saint 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."

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