There is a piece in the AFR this morning looking at cash hoarding.
US companies carry an estimated $US1.35 trillion ($1.49 trillion) of idle cash, and Australian firms have around $71 billion sitting in the bank.
So the usual explanations for this are things like precautionary demand and fears of a deflation (I don’t get that one – I can understand why you’d want to be holding cash if a deflation occurred but I can’t see how that could happen). The other expalantion revolves around US tax law and profit-shifting.
The cash hoarding is also quite sector-specific with technology companies among the biggest US hoarders, holding $US515 billion or 56 per cent of the cash pile.
Apple single-handedly accounts for 10 per cent of all US corporate cash, even after activist investors David Einhorn and Carl Icahn forced a return of some of its cash.
Healthcare firms, too, are large hoarders and account for 17 per cent of the cash. Analysis by the St Louis Fed identifies these two sectors as “research and development-intensive”. The high cash balances in these sectors could be explained by the less capital-intensive nature of these businesses, and the higher profits, and therefore cash, they generate.
Technology and healthcare firms also tend to be global, creating the tax incentive to keep cash held offshore rather than repatriate funds.
Those firms with valuable IP are able to profit-shift by locating their IP in low-tax strong IP protection jurisdictions. In fact, I believe that a strong IP protection jurisdiction must be a low-tax jurisdiction too. The easiest way to expropriate IP is to tax it.
Now the tax-lobby argue that tax induced cash hoarding is a distortion in the market. Sure this is a governance problem – after all the investors would like the money – but firms like Apple are not capital constrained in the US and so don’t under-invest there due to the cash hoarding. I suspect that would be true of all those cash hoarding firms. So all positive NPV projects in the US are being taken.
The distortion isn’t that firms minimise their tax – the distortion is the tax regime itself.