Category: Economy

Yesterday was the last day to file taxes in the majority of the United States. The deadline is April 15th of each year, but this time an extra working day was given because the 15th fell on a Saturday, which is a non-working day for most of corporate America. Statistics are interesting, and in this case surprising that about 6% of American taxpayers (including legal as well as illegal aliens) request an extension of deadline. I never understood this, but I guess it just goes to show that people working in the hi-tech industries (bulk of taxpayers by my own account) are by and large procrastinators.

Now, while we are on the topic of statistics, let me mention that according to figures from the American Internal Revenue Service, about 44% of Americans are taxpayers. This is a great statistic simply because it takes the total population of the US in consideration along with the total number of taxpayers, while completely neglecting the number of undocumented aliens who file their taxes. This is because the IRS does not reveal these numbers to anyone. The IRS works on the premise that its main job is to get everyone in the US to pay taxes, not to enforce immigration laws.

An increasing number of such “undocumented” aliens are filing for taxes simply in the hopes of one day getting the “paper” making them a legal US citizen. This is a phenomenal thing. There’s lots of debate going on about granting these aliens legal status, and the fact that they pay their taxes makes a stronger case for them.

Another interesting fact is that the number of Americans filing a return with zero taxes due is also increasing rapidly every year. Does this mean that the economy isn’t growing at all? Does it mean that the number of poor people are increasing in the US? The answer to the second question is a “yes” from one of my earlier posts. Is the fact that an increasing number of Americans aren’t subject to any taxes at all an indicator of the tax law’s love for the middle class? I am baffled, and maybe someone can offer an explanation.

By the way, April 15th is also Leonardo Da Vinci’s birthday, the day Lincoln died, the day GE was incorporated, the day the Titanic sank, and the day that McDonald’s served its first hamburger! (wsj.com)

Just discovered that the H1-B visa cap for FY2006 has been reached. This signifies an acceleration in the demand for H1-B visas by corporate America when compared with the demand last year. The USCIS would not issue any H1-Bs for applications that are received after Wednesday, August 10th, 2005. The “cut off” date was October 1st, 2004 in the last financial year.

This is an interesting trend that clearly proves that the US is still the dream destination for tech workers from around the world, and that the economy is still growing. FY2005 marked the introduction of an additional 20,000 cap-exempt H1-B visas for professionals who have an advanced graduate degree from an American University. As of now, only 10,000 applications have been received in that category for FY2005, and only about 8,000 for FY2006. Infoworld has an interesting article that reports responses from various trade and industry groups about this USCIS announcement.

I am, personally, surprised that the cap was reached so early this year, especially when less than 4,000 applications were filed during the first 2 months of its availability. Of course, since I have a graduate degree from NCSU, I still have time to get one of the remaining 12,000 FY2006, or 10,000 FY2005 H1-B visas if need be!

I spent a good amount of time at Vel‘s place last evening drinking a couple beers and talking about the economy, university life, and other general stuff. During the course of our fun conversation, and after I had had 2 beers, the topic of the H1-B Visa provisions was brought up.

I believe that the H1-B Visa program, if implemented well, could actually curb the offshoring of jobs to a great extent. Ofcourse, like Vel said, an H1-B employee is akin to a regular employee for all practical purposes. Offshoring is inevitable, and the low end jobs are always going to be offshored to a cheaper country/location. We have seen this everywhere including India.

Before I explain my thesis, we must realize that one of the factors fuelling offshoring is the lack of a good primary education system in America. It is increasingly becoming harder for technology companies to find skilled and qualified people within this country. At the same time, it is crucial for these companies to maintain “primary” presence in the US on account of a good judicial system, mature company laws, and availability of global marketing resources. For example, Intel has 60% of its business outside America today. This is a common scenario across technology companies as the developing world plays catch-up and comes up as a big market for American products.

As a lot of people have pointed out, H1-Bs work with their American peers in America to further enhance the economy by paying taxes, buying billions of dollars worth of goods and services etc. This also means that they are being paid at par with the current wages prevalent in their industry. So, how exactly is this better than just offshoring the entire group to a cheaper place for the parent company?

You have to understand that it is not always cheaper to set up new operations in a cheaper country. We touched upon this last evening, and one argument against this was that it is always going to be cheaper in the long run. Well, when you offshore, you also have to factor in the quality of labor, and the value of such an investment. Value is derived from project turn-around times and other factors. These factors include local government policies etc. It is cheaper to offshore mundane tasks like call centers, basic IT development, and even telemarketing. At the same time, it is very difficult to offshore anything strategic. It is cheaper in other countries because of the availability of a large quantity of “mundane” labor. The very best is still in the developed world, and especially the US because of the quality of life and the higher institutes of learning that ensure that the very best stays in the US.

Sure, we are seeing the offshoring of research as well as product development now, but this is because of the growth of the developing world’s economies as a whole. USA is unable to keep development on its shore at such a high pace, and a lot of it has to do with politics, Govt. policies, and again, lack of etremely qualified and diversified people here.

Now, imagine if companies like Microsoft had their way, and the H1-B scheme was liberalized. The local companies would be able to hire the top talent from the world and stop other countries from getting forward. Sure, offshoring would still continue abated, but it would be more strategic than not. Surely, there is a reason why companies want to hire foreigners when they could just as well go with cost. I have been a firm supporter of the belief that costs catalyse offshoring, not fuel it. If costs were the only factor, then there would be no software companies in the Western Hemisphere. The McKinsey Global Institute has links to some very good articles and a panel discussion that touches on the need for a more liberal H1-B program.

If the H1-B caps are maintained at their current levels, at a time when the US economy needs more specialised workers than ever, it could prove catastrophic in the long run. I see offshoring as a short term solution. Other countries are not at all in a position politically, economically, or even socially to be havens for a global business. A car made by Ford in Mexico could cost the same as a car made by Toyota in the US. What matters is that Ford is still an American company and Toyota is a Japanese company having a bigger American business unit than a Japanese one.

I hope that the US policy makers realize this sooner than later.

Addendum: Interesting read – Immigration and Offshoring: The Graying of America