HIRE Act | An “Outsourcing Tax” Is a Misguided Approach

Senator Bernie Moreno’s (R-OH) Halting International Relocation of Employment (HIRE) Act is a proposal to discourage US companies from outsourcing jobs and services abroad for products consumed by Americans. At its core, the bill would impose a hefty taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. penalty on certain cross-border service transactions. The idea, according to Moreno’s statement, is to “hit [companies] where it hurts: their pocketbooks” if they “hire foreign workers instead of Americans.”

The proposal is disastrous on all fronts. It imposes punitive extra layers of taxation—at least two more, reaching triple taxation—on legitimate business functions. It’s probably administratively unworkable. It will encourage companies to forgo US residence. It opens tax ideas that could ultimately be deployed against the US. But the greatest problem is simply that the vision is wrong to begin with. The US should take pride in being the world’s headquarters.

But let’s begin with a brief explanation of how the proposal works: the policy concerns “outsourcing” payments. “Outsourcing payments” are, roughly, payments sent abroad by a US company for services that will ultimately be used in a product for US consumers. In the event the payment finances production for both US and foreign consumers, the payments can be divvied up into US and non-US fractions, with the proposal applying to the US fraction of payments.

The payments will be punished in two ways. First, they will be denied deductibility against the income tax. Second, they will be subject to an additional 25 percent excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on their gross value. And as one might expect of a complex international tax provision, there’s the usual bevy of compliance and administrative costs. Companies will be required to report such transactions, and the Treasury will be tasked with developing regulations that pre-empt attempts at circumvention.

Triple Taxation on Legitimate Business Practices

The plan is effectively triple taxation relative to the normal single layer applied by traditional global income taxes. Take a simple transaction where a US firm uses a foreign input. The revenues are counted for US income taxes, but the payment to the foreign producer is deductible under US income tax. (It is then counted as income in the country where the foreign production happens.) All in all, the US portion of value-added is taxed in the US, and the foreign portion of value-added is taxed only abroad, thanks to US deductibility. Under the HIRE Act, the foreign portion of value-added would still be taxed abroad, but it would also return to the US tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. through the cancellation of deductibility, adding a second layer. Finally, the 25 percent excise tax adds a third layer.

If this plan applied only to business practices that were clear negatives, perhaps the deeply non-neutral tax practice could be forgiven. But this is not the case. There are plenty of jobs with ample rationale for serving the US but locating abroad. For example, consider buying a European product with your credit card. Payment processors might have European employees to help maintain relationships with European financial institutions and direct your payment in the intended direction. There’s also the utility of time zones. Some firms require software engineers to work in shifts across the globe to always be “on call” to respond if software malfunctions. Skilled foreigners can take the shift that runs from, say, 1 a.m. to 9 a.m. in California, and do so during working hours in their home countries. These business practices are clever and helpful to Americans, and unworthy of even one extra layer of taxation, much less two.

And it gets worse: one could at least imagine the possibility that a product created in the US is used as an input in a foreign service that serves US customers. For example, a US company might pay a foreign contractor who uses US enterprise software in his office, which itself was developed with the help of foreign employees. In this case, parts of the value chain may bounce in and out of the US multiple times, stacking cascading HIRE Act liability and layers well beyond triple taxation.

Unfeasibility

Critically, the HIRE Act is contingent on knowing two things at once: where production is happening, and where consumption is happening. It depends on tracing foreign work that serves US consumers. It’s well and good for tax economists to theorize about processes where the location of production and the location of the end consumer are both clear simultaneously. However, this is often impossible to determine in practice.

For example, at large software companies, some employees work entirely on internal tools that don’t directly serve paying customers, but instead instrumentally help the company. For example, consider an engineer whose job is to identify when machines in a data center have failed or are likely to fail and need replacement. Those machines could be running software for any product in the company, for any customer, in any country where the company has a data center. And improvements to the failure detection software, and consequent improvements in hardware and software reliability, will reduce cost of goods sold and therefore benefit US consumers by varying amounts from software product to software product depending on its usage of the kind of data center the engineer analyzed.

You can know where the software engineer lives, but not necessarily where his customers are. And conversely, for any given group of customers, you can know where they live, but not necessarily which producers helped them. The HIRE Act insists on knowing both, but it won’t. At best, it will direct the Treasury to create regulations to find a clumsy solution.

Inversions

The HIRE Act is fundamentally a residence-based tax proposal. It cannot, for example, penalize Swiss companies for payments to German engineers. It can only penalize US companies—sometimes called US persons or US-resident companies.

The problem with adding too many residence-based criteria to a tax system is that it encourages inversions. Essentially, if HIRE applies to US companies, but not Swiss companies, then why not choose to be a Swiss company instead? (In reality, it’s a bit more subtle than this; for example, a foreign biotech startup might angle for acquisition by a Swiss pharmaceutical giant rather than an American one, and the Swiss pharma conglomerates will outpace the American ones over time.)

The US tax system has suffered this problem before, largely before 2017. Reforms since then have made US residency much more competitive, and indeed, some new work by Congress and the US Treasury—such as the elimination of expense allocation in the 2025 tax law, or the G7 deal to exclude US resident companies from certain Pillar Two liabilities—helps bolster that competitiveness. But the HIRE Act would be a strong step backward.

The Can o’ Worms

The more diplomatically strategic reason to avert unprincipled taxation of foreign services is to avoid legitimizing the tactic in general, which would end up harming the US. While the US certainly imports many services, it runs a large trade surplus in services. Most of the world’s most valuable companies are American giants that primarily sell services, not just in the US but globally. The US is already battling foreign digital services taxes, and a UN convention may target US companies with gross-based withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. taxes on services.

Thus far, recent administrations have made reasonable efforts to contain and mitigate these attempts to tax US services exports. But a new tax on other countries’ exports would weaken the US rhetorical standing on the issue and give other countries negotiating leverage, effectively opening a can o’ worms that would best remain shut.

Accept the US Role as the World’s Business Leader

Ultimately, the biggest flaw in the HIRE Act is a myopic economic vision. The US is a winner of globalization, with stewardship over 17 of the world’s 20 largest global companies. And indeed, its share of the top 100 or top 200 companies is similarly dominant. Part and parcel with dominating world business is having foreigners under US management. The US is better served by making peace with its role in business leadership.

One obvious concession leaders must make is to delegate. The US labor force cannot do everything at once. When a New York-based customer calls the Spanish-language help line at 4 a.m. Eastern time, perhaps it is justifiable to have a Colombian living in Spain pick up the phone. This frees up American labor for more pleasant and better-paying work.

Even with skilled roles, it is important to think clearly about the trade-offs. Suppose there are some talented groups of people located in Osaka or Bangalore or Stuttgart. Should US companies allow them to prosper under foreign management and maybe even compete with Americans down the road? Or should they integrate them into US economic hegemony?

There’s a place for looking out for US interests first before global interests. One can expect US elected officials to have that inclination, and that inclination is likely the intent of the HIRE Act. But in terms of vision and execution, it’s a miss.