In a recent policy paper, researchers with the Federal Reserve Bank of St. Louis examined how much cash corporations were sitting on, and why. They found big companies are piling up record amounts of cash – essentially taking money out of circulation.
So why is this a problem? Well, when corporations pile up large amounts of cash (~ $5 trillion in 2011), it restricts the availability of capital in our monetary system. Think of Scrooge McDuck and his giant silo of cash. If Scrooge invested his money – allowing people and businesses to borrow it – the economy would be recovering more quickly. Instead, corporations are doing their best Scrooge McDuck impression. This restricts the ability of small businesses to borrow, and is one of the reasons recovery from the Great Recession has been so tepid.
The authors excluded financial and utility companies from their analysis because they tend to hold cash for different reasons (think Bean Stearns, Lehman Brothers, etc). Excluding those firms, the Fed finds aggregate cash holdings of corporations was around $1.6 trillion in 2011, a massive jump from from 2002 ($822 billion).
Even after controlling for external factors that could explain this change – such as firms’ growth, an increasing number of firms in the sample, or inflation – the authors found the ratio of cash to net assets more than doubled, from less than 6% in 1990 to more than 12% in 2011.
The authors conclude there are two main reasons these corporations are holding so much cash: 1) the flexibility offered by having a large amount of cash on hand, and 2) not wanting to pay taxes.
To the first point, corporate leaders are worried they will not be able to find credit when needed. Keeping a large amount of cash on hand alleviates the need to secure a loan, but also restricts the credit markets and reduces borrowing opportunities for other firms. Thus, hoarding cash is a vicious cycle that tamps down economic activity.
The second motive for hoarding is simple: corporations do not want to pay repatriation taxes. From the Fed’s analysis:
Many countries, including the U.S., tax their citizens based on their worldwide income. In particular, taxes due to the U.S. government from corporations operating abroad are determined by the difference between the taxes already paid abroad and the taxes that U.S. tax rates would imply. Importantly, such taxation only takes place when earnings are repatriated. Therefore, firms may have incentives to keep foreign earnings abroad.
Corporations argue this is a good reason for a “repatriation holiday” – a corporate giveaway that would allow corporations to bring cash back to the U.S. tax free. Why do firms with billions in the bank need another tax break, you ask? Their lobbyists argue it will spur investment and hiring in the U.S., despite evidence showing otherwise.
Take the repatriation holiday of 2005, when the Bush Administration offered a corporate tax holiday that was promised to spur U.S. hiring and investment. It offered corporations – at least, those with great accountants and sophisticated tax shelters – the chance to bring income back to the U.S. nearly tax free. Eight hundred companies took advantage of the legislation, to the tune of $312 billion total.
However, the promised hiring and investment never materialized. In a report on the results, the National Bureau of Economic Research reported that nearly 92 cents of every dollar went to shareholders in the form of dividends and buybacks – and not to hiring, purchasing or reinvestment.
In fact, many of the corporations that brought back billions in tax-free profits, “laid off domestic workers, closed plants and shifted even more of their profits and resources abroad in hopes of cashing in on the next repatriation holiday” – which generated even more offshore profits:
- “Merck brought back $15.9 billion in October 2005. The next month, it unveiled a restructuring plan to cut 7,000 jobs. Over the next three years, about half those cuts were made in the United States, where the company’s employment fell to 28,800 jobs, from 31,500.” – NYT
- “Hewlett-Packard repatriated money, $14.5 billion, and soon after it announced it was eliminating jobs, 14,000.” – NYT
Corporations already pay painfully low federal tax rates. According to a recent report from Citizens for Tax Justice, 9 out of 10 Fortune 500 companies surveyed paid a lower federal tax rate than the average American family.
The Fed report authors conclude that modifying U.S. tax policy may play a part in helping overcome the slow recovery from the Great Recession, although they don’t make specific recommendation. In any case, let’s just hope it doesn’t include another corporate tax cut.