Economic Security: The Gut Effect

By Larry Dignan Print this article Print

Will the movement of high-paying technology jobs gut the U.S. tax base?

Will the movement of high-paying technology jobs gut the U.S. tax base?

In all likelihood, the impact will be muted. Economy.com estimates 800,000 back-office jobs will disappear forever over the next five years. Assuming an average salary of $60,000, that's lost wages of about $50 billion. Multiply by 1.2 to account for the trickle-down effect, and lost wages add up to $60 billion.

The total tax loss comes to $13.4 billion—$7.5 billion in lost Social Security and Medicare revenue, $4.4 billion in federal revenue and $1.5 billion in state and local government taxes. In comparison, U.S. involvement in Iraq has run $4 billion a month.

Nevertheless, analysts say the tax issue shouldn't be ignored. For starters, companies are likely to choose to increase hiring in lower-salary countries even when the economy recovers. Electronic Data Systems is shooting for 20,000 offshore workers by the end of 2004, up from 9,500 currently. EDS's workforce is expected to remain at about 140,000.

"This can't be good for the middle class," says Virendra Singh, an economist at Economy.com. "The biggest effect is that people will lose well-paying jobs. I think some will land someplace else, but I wouldn't count on all of them. Some will move down the ladder."

Singh says his estimate is likely conservative. The middle class—broadly defined as those earning between $35,000 and $75,000, based on U.S. Census statistics—occupies 33.8% of the population. Citizens making more than $75,000 occupy 24.6% of the population with 41.6% falling below $35,000.

The tax impact could also be larger as higher-quality jobs move offshore. Forrester Research projects 288,281 manager jobs moving offshore by 2015, up from 37,477 in 2005 and zero in 2000. Computer jobs will migrate to the tune of 348,028 by 2015. Advocates for offshore outsourcing say any tax hit will be temporary—based on the belief that permanently displaced employees will find new careers. "You can see the creative destruction," says Cadence Design Systems CEO Ray Bingham. "It's the continuous flow that drives the U.S. economy. In the intermediate term there'll be displacement, but it'll be a net positive for the economy."

That outlook, however, doesn't factor in costs such as unemployment insurance, which will cost the government money, and tuition bills to retool skills.

Ronil Hira, associate professor at the Rochester Institute of Technology, says the short-term tax hit should be examined. "I think the short term matters," says Hira, who adds that these displaced workers are also consumers who will buy other goods and services.

Bottom line: No one knows what the ultimate tax hit will be. Statistics on how many manufacturing jobs have been lost and whether those workers are permanently underemployed aren't available. Experts say an ideal statistic would track a technology employee who lost his job due to offshore replacement; and how long it takes that person to regain the previous salary level.

That statistic, however, doesn't exist.

This article was originally published on 2003-09-05
Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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