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Monday, September 27, 2010

New Bill, Where is the Market failure?

An article titled “Democrats’ tax bill targets outsourced jobs,” discusses tax cuts and removing some taxes on businesses that remove jobs from the United States. According to the article, the bill would cut “favorable tax rates” for businesses that outsource jobs to other countries and give tax incentives to companies that create jobs for a U.S. employee that is replacing a foreign worker in another country. American companies receiving a tax break for outsourcing jobs would seem to help the consumer but it seems that there should be no government incentive for outsourcing. Likewise it seems that there should be no government incentive to give tax breaks to companies taking jobs from one country to another. One tax break creates consequences for the foreign workers and the consumers receiving cheaper goods. The foreign worker will become jobless and if the cheaper labor costs resulted in a cheaper good for the consumer than both the workers and the consumers will be negatively affected. The tax that allows companies to receive benefits for creating jobs outside of the U.S. improves the consumer assuming that the reduced labor reflected reduced prices of goods but hurt the workforce where the jobs were removed.
The article also discusses the possible policing of the new bill. In order for companies to claim the tax breaks they would have to prove that the job created was outsourced previously. Either tax break generates more government involvement where it would seem that there shouldn’t be any. The movement of jobs in and out of countries should be controlled by the labor market and the consumers desire of the good not incentives produced by the government. In the article, a tax analyst stated that, “politically it makes sense, but economically I’m not sure it will work.” The analyst’s statement seems to reflect the market should control where jobs go rather than the government. The government’s involvement in these businesses doesn’t seem to fix a market failure. Businesses should move freely and not incur a tax benefit whether they decide to move out of country or stay in country.

Rooney, Ben. “Democrats' tax bill targets outsourced jobs”. CNNMoney.com. http://money.cnn.com

I don't see an explanation for why there isn't a market failure. I agree there isn't, but I don't see a direct explanation for why there isn't. Try explaining this in terms of the three elements of an externality: unintentional, nonmarket, interdependence.
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