As a corporation, the traditional thing to do with cash you don't need is to return it to your owners, either through dividends or through share repurchases: If the owners wanted to own money sitting in a bank account, they could put the money in a bank account themselves. If they wanted to own a company, they'd be better off owning just the business part without a chunk of low-return cash attached. Beyond basic liquidity needs, a pile of cash can only drag a company down.
Naturally, returning money works much better when taxes on dividends are low, or when stock prices are low (so you can give the remaining owners a better bang for the buck). Both taxes and stock prices have risen since the crash, however, and spending a cash horde on taxes or on overpriced company stock are a worse drag on the company than holding it.
Tech companies specifically have seen their historical predecessors disappear very quickly - Sun and SGI nearly evaporated, IBM has had 16 quarters of shrinking earnings. So tech company execs hoard cash in the hope that if they get blindsided they'll have time to recover. I'm pretty sure this is Eric Schmidt's explicit strategy.
Also, as someone else noted, a lot of this cash is "trapped" overseas as it would cost 35% to repatriate it to the US. The logical thing to do would be to move more operations out of the US to balance expenses with revenues but I guess there are issues with doing that.
"Nearly Half of So-Called “Offshore” Funds Already in the United States"
"Corporations are able to invest their foreign earnings in U.S. assets without treating them as “repatriated” and subject to taxation, because the federal tax code, specifically Section 956(c)(2), already allows U.S. corporations to use foreign funds to make a wide range of U.S. investments without incurring tax liability."
That doesn't change anything. Cash on hand, even outside of the US lowers cost of capital, potentially almost to zero.
Paying the money to shareholders would imply double or triple taxation before the money is with the shareholders. (once, returning the money (corporate tax), once capital gains tax, then income tax or corporate tax again in the case of corporate shareholder). Just so we're clear, that means 35% and then another 35% or 50% tax, or 57% up to 67% tax.
So I think the original argument stands. The company has a choice. Either spend 3x the money on something that will make the stock price go up (like creating an offshore entity buying your own stock if you want to do this rather directly), or give 60% to the US government, 40% to the shareholders. That's why buybacks, which have been proven inefficient to say the least, still happen. They'd have to be 3x as inefficient to break even.
And from the perspective of the management itself : that's either a trillion dollars under their direct control (not quite property, but ...) or 400 billion payout to shareholders, none of it under their control. As long as they can get away with it, they'll keep it. Just look at what Amazon does to it's shareholders.
If you expect your shareholders to get much better overall tax treatment on the money sometime in the relatively near future, it makes a lot of sense to hold on to it.
Especially with respect to money earned abroad, I'd think that's a decent guess. In particular, I'd expect there will be another one-time-only-we-really-mean-it-this-time repatriation holiday in 2017 or 18.
> In particular, I'd expect there will be another one-time-only-we-really-mean-it-this-time repatriation holiday in 2017 or 18.
Nobody even really takes advantage of those because it isn't about repatriation. It's about the interest.
If you have a pile of cash (really investment securities) held by MegaCorp in some low tax jurisdiction, it pays the low tax rate on the interest the money generates. If you repatriate the money and then invest it in the same things MegaCorp was, now the taxes you owe on the future interest are in the high tax jurisdiction. Nobody is interested in doing that even if you could repatriate the money tax-free.
The only reason to repatriate the money is if you want to spend it, which large investors don't do with most of their money (because they make far more than they spend), and which anybody can do at any time by selling shares, which has preferable tax treatment to dividends anyway but has the unfortunate side effect of leaving the entire pile of cash (and all subsequent interest) inside the original corporation forever.
The only way to get around this is to stop taxing investment income. Which is of course completely unfair to everyone else unless you also stop taxing earned income and tax consumption instead. The objection then being that taxing consumption instead of income is advantageous to rich investors who spend a smaller percentage of their income than other people, except that that is the status quo.
Qualified dividends are taxed at the long term capital gain rate. One time, special dividends aren't, but that's just a reason to use a regular dividend instead.
Investors could just sell shares if they wanted to raise money, but then they lose out on future growth in the company's value. Sending out profits to shareholders in the form of a regular dividend allows owners to have a concentrated investment in the business the company is in rather than it being diluted with some low risk / low return pile of investments.
The 2004 holiday saw about $312B repatriated. That may not be a huge number compared to the $1.9T discussed in the article but it hardly supports the claim that "nobody even really takes advantage".
> Qualified dividends are taxed at the long term capital gain rate. One time, special dividends aren't, but that's just a reason to use a regular dividend instead.
That's not what I mean by preferred tax treatment.
If you get $120 as a dividend then you have $120 worth of taxable income. If you sell $120 worth of shares which you bought at $100 then you have $20 worth of taxable income. Even if the rate is the same, you're still paying significantly less in taxes because less of it is considered income.
> Investors could just sell shares if they wanted to raise money, but then they lose out on future growth in the company's value. Sending out profits to shareholders in the form of a regular dividend allows owners to have a concentrated investment in the business the company is in rather than it being diluted with some low risk / low return pile of investments.
Yes, that is the problem we would like to prevent.
But investors prefer that bad thing to happen over paying more taxes, so it does.
> The 2004 holiday saw about $312B repatriated. That may not be a huge number compared to the $1.9T discussed in the article but it hardly supports the claim that "nobody even really takes advantage".
I obviously didn't mean that literally zero people take advantage of it. That is not a large percentage of the total. And how much of that "repatriated" money is actually still in the country and not just an instance of people taking advantage of the tax holiday by moving money into the country during the holiday to reset their tax basis in it and then moving it back out to a tax haven again?
I doubt even a Republican would be willing to lower corporate income taxes. Nominal rates haven't been touched for quite a while; politicians opted instead to just allow the loopholes and safe havens to continue lowering the effective rate, and corporations seemed to be happy about that.
The likely reason for corporations holding onto cash is the lesser impact deferrals can make in today's markets. Companies are becoming larger and larger umbrellas every year, and as the need to hire new people presents itself, the unfortunate realization for them is that they must look to the bigger cities for their best talent. NYC, LA, SF, DC, etc., are the best places to acquire talent, and they are also home to some of the highest tax rates in the country.
This makes talent acquisition increasingly expensive, and that means less money that can go to the offshore safe havens that allow deferrals to be so lucrative for companies. So, companies hire as little as possible, and though corporate revenues are decreasing rapidly as a result, it's better for them than having to face a rather unstable business environment in the US, where all your massive infrastructure and talent investments may be useless in just a few years' time.
I believe that the US is becoming increasingly unfriendly to businesses, and the lack of political cooperation in DC is showing executives just how true that reality is. My contention is that businesses are holding onto cash because they may need to make sudden and quick moves in the near-future. They will either make huge hiring moves and will build out massive new infrastructure to support it -- or they will GTFO of the US while they have the chance.
>I doubt even a Republican would be willing to lower corporate income taxes.
I think a lot of people expect some type of future repatriation period that would allow these companies to bring their cash stateside at a reduced tax rate during a short temporary window. It is something the government has done in the past and it probably makes sense to do again sometime soon. I wouldn't want to be the CEO who overpays taxes by billions just because I wasn't patient enough to wait for another one of these tax break windows.
These tax repatriation deals are getting to be like "immigration reform". Once you start doing it, no matter how much you say "This is the last time! Honest!" people factor the next amnesty into their calculations. In both cases the fact that people believe it will happen increases the likelihood they are correct.
I would love to see the US corporate income tax eliminated, but this kind of one-time tax amnesty thing is bad policy.
> In both cases the fact that people believe it will happen increases the likelihood they are correct.
More like the people that want it to happen have enough collective influence to buy off Congress to make it happen so long as there isn't a pesky POTUS with an itchy veto pen finger.
Doesn't matter. If companies can afford to wait (and they can), Congress will eventually be seduced by the prospect of billions in free tax money. When Congress finally does it they can pay off all their interest groups without raising taxes. Nobody has to be paid off.
As time goes on, that pot of money gets bigger and bigger. The more people expect a tax amnesty, the more companies will just leave the money where it is instead of repatriating and paying taxes at the current rate, which just sweetens the pot even more.
Also, the president isn't any less beholden to donors. Do you think Obama would stand in the way of something Goldman Sachs (#3 donor) wanted? I don't.
> If the owners wanted to own money sitting in a bank account, they could put the money in a bank account themselves.
This logic is completely absurd. The assumption of a shareholder trusting a company to hold cash "in a bank account" is that there's value in the ability for the company to deploy it rapidly in the event that they need it. If the shareholders held it in their collective bank accounts, then in the event that the company had an opportunity requiring a big chunk of cash, they'd have to go through some complicated (and perhaps too slow) steps to acquire it.
I have a brokerage account and a checking account, and an ATM card for the latter alone: and yet I keep a reasonable sum of money in the brokerage account so that I can execute a trade with short notice (i.e. without first waiting for a cash transfer from my checking acct). By your logic, "If I wanted to hold cash in the bank, I would hold it in a bank".
I dont think that is what he meant. I think he meant that investing in a company who's value is 30% stock is like investing 70% into an company, and 30% into a low interest savings account.
That said, I don't agree. A company having cash reserves has value beyond money sitting in a personal savings account.
Naturally, returning money works much better when taxes on dividends are low, or when stock prices are low (so you can give the remaining owners a better bang for the buck). Both taxes and stock prices have risen since the crash, however, and spending a cash horde on taxes or on overpriced company stock are a worse drag on the company than holding it.