Taxing American Competitiveness

Few noticed this August when lawmakers passed an emergency bipartisan measure to spend $600 million to help secure the US border with Mexico by funding new unmanned aerial drones-better known for their pinpoint attacks on terrorist strongholds in Pakistan-and adding 1,500 new border enforcement agents. Even less attention, unfortunately, was paid to a provision in the new law that discourages high-skilled workers from coming to the United States-all under the false political guise of "border protection" and budget demands.

Regrettably, what might be good politics is bad policy for America. It is unlikely to raise revenue, will inflict damage to American competitiveness, sour US relations with India, and above all send the wrong signals about US attitudes to open global markets.

Indeed, it's hard to see the bill, crafted by David E. Price (D-NC) in the House and Chuck Schumer (D-NY) in the Senate, as anything other than a transparent bid to be seen as "doing something" on immigration after years of failing to pass comprehensive reform. But with public outrage about government spending rising, proponents wanted to make the expenditure "budget neutral." Accordingly, Schumer inserted the visa provision, enabling him to claim that it does not add a dime to the deficit.

The first problem is that the Congress's budget neutrality numbers simply don't add up. The law calls for fees for the H-1B and L-1 immigrant visas to increase by $2,000 and $2,250 respectively for companies with 50 or more employees in the United States-if more than half of the company's employees are on H-1B or L-1 visas. This provision effectively doubles the existing total government fees for the affected companies, predominantly Indian information technology (IT) services firms. The government's annual revenues are expected to rise to roughly $135 million, based on about 65,000 H-1B and L-1 visas issued annually.

In anti-immigration fantasy land, where the US labor market is perceived to be overrun by hundreds of thousands of cheap, high-skilled Indian workers, such a fee might seem like a plausible cash cow. But the real world of the US labor market in 2010 looks very different.

Demand for high-skilled visas is extremely volatile, rising dramatically in times of high growth and slumping during recessions. According to our calculations, based on data for fiscal year 2009, the actual demand for high-skilled H-1B and L-1 visas in a relatively sluggish economy will be about 20,000 visas-far below the target of 65,000. There goes Schumer's budget neutrality.

Congress or the administration might try to make up the revenue shortfall by expanding the extra fees to cover more H-1B and L-1 visas, a step that would hurt a greater number of US companies. Mainstream US business groups that declined to oppose the bill may come to regret their indifference once they too are hit with this extra cost.

The second problem with the new taxes is that they will inevitably fall on the very sector-information technology-in which the United States is most competitive. American IT services and software companies dominate their global industries and are critical to the growth of the domestic economy. Together with foreign competitors, the sectors, according to the Federal Reserve, have accounted for more than half the increase in US productivity growth since 1995. It is as if a country that exports textiles were to impose a large tariff on, say, cotton.

A typical example of those affected by misguided US visa policies is Sanjay G. Mavinkurve, an Indian-born, Harvard-educated computer user interface expert who helped design a precursor of Facebook and now works for Google. Mavinkurve has had to work in Canada because the lack of US high-skilled visas has made it impossible to move his wife and family to the United States.

Without explicitly saying so, the law clearly targets India, home of the world's fastest-growing IT services companies. Indians received about half of all H-1B and L-1 visas in 2009, and compose most of the roughly 50 percent of all H-1B and L-1 recipients who work in computer-related occupations in the United States. Despite US President Barack Obama's endless declarations that the US-India "strategic partnership will continue to grow," this is a direct snub to India's most powerful domestic advocates of economic liberalization. India's commerce minister has already lodged a complaint with the US trade representative about the new visa bill.

The Obama administration should tread carefully. If India shifts its economic orientation away from the United States, the costs would far outweigh any of the political benefits or fiscal revenue from this visa fee policy. India could choose to retaliate by buying more Airbus planes from Europe, importing more cars from Japan, or moving toward a trade agreement with the European Union that discriminates against US exporters. So when Obama lands in New Delhi on his upcoming trip this fall, he could find himself in the middle of an ugly trade skirmish with a rising Asian superpower.

Finally, consider the symbolism of the bill: It aims to keep low-skilled immigrants out of the country (i.e., Mexicans) by deterring high-skilled immigrants from other parts of the world. This bizarre coupling sends an unfortunate signal about America's commitment to keeping markets open. It is willing to hit its most competitive sector, and forego the benefits of globalization, for small, short-term political benefits.

Before August, the most charitable way to describe the trade policy of this Congress, the administration, and increasingly US state governments (which have again begun to penalize companies that purchase services from foreign IT companies) was to say that there was no policy at all-but at least there was a willingness to prevent a protectionist backslide. With this new law, even that can no longer be said. If Congress wants to secure America's borders, it should have the political courage and wisdom to do so but without endangering the very open borders that are key to sustaining global prosperity.