Overseas Outsourcing

• One of the most common types of outsourcing involves firms' hiring workers overseas. These workers, who operate remotely in contracted foreign manufacturing facilities or providing IT services, earn lower wages than their American counterparts and receive fewer benefits. The United States does not have tax penalties for firms that outsource labor overseas. However, some nations that are targets of American firms' outsourcing impose their own tax penalties. For example, in 2004 the Finance Ministry of India enacted Circular 5/2004, which imposes relatively high corporate income tax rates on American firms that operate and earn money in India.
  
  

Domestic Outsourcing

• Domestic outsourcing, which involves using contract workers within the same country, is not subject to any special tax penalties. This allows businesses to replace full-time employees with temporary or contract workers during times of financial difficulty. If the new workers allow the business to earn the same level of income, profits rise as costs decline and taxes remain steady. Even measures such as India's Circular 5/2004 do not impose their penalties on domestic firms that outsource within the countries where they are incorporated.
  
  

Loss of Tax Benefits

• One type of tax penalty that affects firms engaged in both domestic and overseas outsourcing is the loss of tax benefits. These benefits apply only to firms that hire full-time workers and employ them domestically. For example, a 2010 American jobs bill waives Social Security taxes for firms that hire workers with 60-day histories of unemployment. Likewise, outsourcing eliminates the tax deductions that firms can claim when they contribute to retirement plans for full-time employees. These benefits disappear when a firm terminates a domestic employee in favor of outsourcing.
  
  

Political Issues

• The question of formal, federal tax penalties on outsourcing firms is a point of political contention in the United States. While some politicians believe that such a penalty would boost domestic job creation, detractors claim that businesses need access to outsourcing in order to compete globally and remain profitable for the sake of shareholders around the world. The number of specific tax penalty strategies available to federal regulators, and the diverse financial needs of businesses, complicate the issue even further.