That isn’t to say they should, or would. But it does illustrate how much money they actually have on hand. Having perhaps $5 trillion sitting on their books is dramatically more money than they really need. So much money that it may be subject to a special tax if it weren’t for a little loophole. Perhaps I should elaborate.
There’s a line in the tax code that says if a company has too much cash then that cash can be taxed. The idea being that a company is holding cash that actually belongs to the shareholders. This is usually distributed as a dividend. By imposing a tax on the cash the government is forcing the company to distribute the cash. The government has a vested interest of course because when that money is distributed the shareholders will report it as income which is then taxed.
However, there is a loophole that keeps the IRS from enforcing this on some of the money corporations have made. If the money was made overseas and it stays there, it won’t be taxed. It can’t be taxed as income, and can’t be taxed under the cash penalty. So how come profits made overseas aren’t taxed? One can make such an argument. Imagine you make smartphones. You make the smartphone in China and sell it for $600 with a $400 profit. If you never bring that $400 back to the US, it will never be taxed. Even though the company is based in the US, should the US government really have a claim to that money?
If that money does come back to the US, it will be taxed. As a result trillions of dollars are sitting overseas with companies that have made profits there. Many say they will bring it back to the US if the government gives them a tax holiday. The government isn’t playing ball. So the companies are content to sit on this cash hoping to get a break and bring that cash home.
Because until they bring it home, they can’t really use it. Which is why a company with tens of billions on its balance sheet might borrow money to pay a dividend.
So what to do? We have companies with billions they can’t use and an economy in need of some extra investment. These corporations say they’ll use the money to create jobs if we give them a tax holiday, but there’s no guarantee of that. Surely some jobs will be created, but much of the value would be returned to shareholders, where it should be. It’s a pickle for sure.
The goods news is we’d rather be in a position where companies have this cash, than not. Should our economy become dire, an injection of capital in some form or another is available via a tax holiday. But, as the government is likely thinking, should the economy become dire, companies will need that cash anyway to stay afloat and will bring it over paying the tax penalty. Hopefully, we don’t get to a situation to see who blinks first. Hopefully, we can just simplify the tax code and bring that cash home.
Read: Idle cash piles up: David Cay Johnston
Image: borman818
 By The Weakonomist |
The Weakonomist is the face of Weakonomics. Click the puppy to learn more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts above. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing we say can be construed as financial advice. |
