Hue and cry about nothing?

There has been widespread condemnation of the recent announcement of anti-tax haven policy by the United States government in the Indian media and people have expressed concerns that this will lead to job migration back to United States from India. Mr. Obama in his speech also emphasized this point that the new policy aims to reward companies that create jobs in Buffalo rather than Bangalore. But the tragedy behind this that both the public and media have not separated the populist speeches and the real effect on the current labor market.

In India also during elections and policy announcements, we see politicians making hyperbole claims as part of playing to the gallery and this policy announcement is also a similar example. The first question we need to look here is how much tax rates play a part in the final investment decisions. Though the differences in instutionalised tax rate can be large as 30% in India to 40% in United to zero in Cayman Islands, the actual tax rate paid by companies cab vary a lot from this rate since the government subsidies and the very complicated tax laws present in every country plays a role. Even if the difference in tax rates can create a positive difference in NPV for two investments, other factors like availability of resources both human and machines, strategic policy, local laws, competitive advantage etc are more important in making investment decisions.

Even if the argument is made that tax rates does make a difference, the question is how much of an influence will it have for jobs in India. According to Wall Street Journal Editorial " The current tax law in United States require US multi-national to pay taxes according to local tax rates and when the company brings the profit back to US for paying dividends or investment, the US company is liable to pay tax at US rate at this profit while claiming a credit for the tax paid in local country. So if say in Ireland where tax rate is 12.5%, the US company brings back the profit to US, then the company will pay a tax at the rate of (40%-12.5%) where tax rate in US is 40%. What the Us government's new initiative aims to do is that the period for which profit that can be kept in foreign locations is reduced so that the company can bring those profits quickly and invest in United States." But by this logic, this new policy doesnt have much influence for India since India has already high tax rates and the investment in India is not due to tax arbitrage but due to labor/knowledge arbitrage.

I read that Mr. Yashwant Singh made this also a poll issue which shows how much the politicians all over the world are well connected in criticising each other and in the end getting their own way with their respective electorates.

I dont have any knowledge about tax laws and may be these policies would have effect on Indian jobs in future but the underlying thing remains that taxes are not the only input towards investment decision and till we maintain a liberal investment climate with availability of quality human resource, we will continue to attract investments and creation of Indian jobs. Globalisation hopefully in its second avtar is an irreversible phenomena and any attempts for protectionism will backfire.