Follow the money: how does industry pay programmers' salaries when the required intellectual property is offshored?

Abstract

Abstract: There has been much discussion about offshoring in the computer and data-processing industries. For instance, the issue of job shifts due to globalization in the software industry has been addressed in a 2006 ACM report [ACM:06]. Complementary to those discussions is the offshoring of intellectual property (IP), the capital complement of the labor and capital balance which drives our high-technology industries. The underlying economic model -- involving taxation and reimbursement of workers from the revenues that their products generate -- has not been explicated and is largely unknown in our community. This article presents the issue of software income allocation and the role played by IP when offshoring jobs. We also explain why there is such a lack of insight into the economics of software, from the investments made to the profits being accumulated, and capital then becoming available for investing in new projects. The intent of this article is to make computer scientists aware that preceding a flow of jobs in computing is actually a flow of IP. Especially the ability to create valuable software greatly depends on prior technological prowess. The processes that allow IP to be moved offshore are formally legal, although the resulting accumulation of massive capital in tax havens is drawing governmental attention and putting pressure to change tax regulations [ACM:06, pp.39, 256]. However, the changes proposed in those discussions ignore the crucial role of IP in generating such capital. In addition to advocating transparency about IP transfer processes, the article presents one radical suggestion, namely eliminating corporate taxation as a way to avoid the distortion that is now driving the outflow of IP and provides much of the motivation for keeping capital and IP offshore. This article does not address the risk of misappropriation of IP when offshoring, a related but orthogonal issue; it only covers processes that are legal. That risk is addressed throughout the ACM report [ACM:06, pp.11+25]. Tax incentives, a much larger economic factor for businesses than misappropriation of IP, are cited in the report, but the role of taxhavens is ignored [ACM:06, pp.35,41,112,177, 188].