Cash holdings and tax distortions

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.

This entry was posted in Economics and economy, Taxation. Bookmark the permalink.

11 Responses to Cash holdings and tax distortions

  1. Darryl Adams

    Until you can remove the distortions inherent in national tax regimes, this will occur.

    Unless you have a global tax rate that is. (cries of world government conspiracy!)

    The issue for me is this money is doing no good (apart from being available for banks to multiply by loans and financial transactions). Even shareholders lose out.

    Paul Keating saw Company Tax as a witholding tax on shareholders. You can scrap it and as long as you have strong and fair individual tax laws you lose nothing in real terms. It is just easy to collect company tax in comparison

  2. Token

    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.

    This morning I listened to another lecture from a union rep blaming the problems at Qantas on bad management decisions when it came to investing in capital.

    At the same time there are articles like this demanding managers invest money on any project to stimulate the economy no matter the ROI.

    The AFR is showing it is the paper for people who emote, not think rationally when it publishes such stupid crap.

  3. Token

    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.

    Nobody who understands the industry would ever write a paragraph as stupid as this.

    Healthcare is and continues to be an industry that demands care with capital investments due to the ever competing demands.

  4. Andrew

    How companies accumulate cash (capital intensity in R&D in tech and healthcare, etc.) and the distortionary tax incentives is only part of the story. Plenty of mature companies in other industries are also cash cows – the question is why some choose not to/not pressured into investing it or returning it to shareholders, for which we conventionally look at agency problems and governance failures, dividend/buy back smoothing and clienteles, and uncertainty about future investment opportunities and requirements and access to finance, underlaid by the longer term trend toward retention (seemingly at any cost) resulting from exec remuneration patterns and personal taxation.

  5. Bruce

    Apple invests its cash. They are not sitting on it. They have a very large and secretive investment vehicle.

    Which is illustrative of the problem. Companies invest only when it makes sense. They have hurdle rates for NPV or IRR, and if a project is proposed which doesn’t have a risked return which exceed the hurdle then they don’t invest.

    At the moment in the US there isn’t a hurdle return available because the political class is so impoverishing the ordinary people they cannot afford to buy stuff. When demand is falling current capacity can fulfill it without investment. Prices are low because there is excess capacity. So no new capacity can exceed hurdle as it would be competing with other depreciated assets.

    It all comes down to bureaucratic burdens. Lift the burden, reduce taxes and suddenly people can afford to buy that swimming pool or caravan. And companies have to invest and expand to meet the demand. Right now in the US the Democrats are crushing demand due to Obamacare, so no wonder the Apples are not building new plant and equipment. They couldn’t sell the product from it. They are better off investing the cash for a low risk return, which is exactly what they are doing and why they are doing it.

  6. Max

    Right now in the US the Democrats are crushing demand due to Obamacare,

    I think this who Obamacare fiasco could tip the US (and perhaps the world) into another downturn.

    Imagine all the transactions that ARN’T occurring simp[ly because people dont know if their healthcare costs are going to blow out by 1 – 5 Grand next year.

  7. Simon

    So are the cash hoards generating an income or just buffering the companies against downturns? Is this a high percentage of the free cash the US has to invest or just a lot of companies with relatively little plant and assets waiting for the next golden opportunity to become apparent?

  8. wreckage

    Why would companies having enough cash to weather a downturn be a problem?

  9. stackja

    Trust Obama and the ALP? Or keep a reserve?

  10. JohnA

    Simon #1100178, posted on December 6, 2013 at 12:35 pm

    So are the cash hoards generating an income or just buffering the companies against downturns? Is this a high percentage of the free cash the US has to invest or just a lot of companies with relatively little plant and assets waiting for the next golden opportunity to become apparent?

    Good questions. I have some more.

    1. Did the survey include or exclude the finance sector? [I am presuming someone has an axe to grind]
    2. How were the calculations made – at an instant in time (say from published balance sheets), or as an average of cash balances? If the latter, over what period?
    3. How do the figures quoted compare to the daily turnover of the surveyed corporates? Could this be transaction funds? IOW what is the velocity of (the) money? (Could Mr Hacker [Yes Minister] have an opinion?)
    4. And how do the quoted figures compare to any legislative requirements for liquidity, if any?

  11. .

    The issue for me is this money is doing no good

    Peasant.

    The State ought to income manage this person.

Comments are closed.