We are told that banks are sitting on over $2 trillion that they have in excess reserves with the FED. Also, we are told that corporations are sitting on $1 trillion in excess cash and other liquid assets, and for various reasons they are not inclined to either invest it or distribute it as dividends to their share holders. Let’s focus on this $1 trillion that corporations are said to be sitting on. A trillion dollars is a whole lot of money. I think it was Thomas Sowell who put it into perspective recently when he said that if one million dollars had been spent every day for the last 2010 years, it would amount to about $733 billion or still $267 billion short of a trillion. So how can we motivate corporate America to start investing this mountain of money and get our economy growing again?
Professor of finance, Mihir A. Desai, at Havard Business School has an idea for a carrot and stick approach to getting corporations off the dime , sort of speak. He recently had this article published in the Washington Post. As a stick, he proposes a 2% tax on the excess cash being held by corporations. He realizes that correctly defining what constitutes “excess cash” would be necessary to avid unintended consequences. Here is why he thinks this tax (stick) would motivate companies to put their cash to work.
Consider the potential effects of a temporary 2 percent tax on corporations’ “excess” cash holdings. With the returns on their cash holdings approximating zero, managers would have to explain to their investors why earning a negative 2 percent return would make sense as opposed to either investing or disgorging that cash to shareholders.
The carrot that the professor suggests is a temporary holiday on the “repatriation tax”. He explains:
A large fraction of corporations’ excess cash – as much as two-thirds, according to some estimates – is held outside of the United States to avoid the “repatriation taxes” that occur under the U.S. system of worldwide taxation. Simply put, multinational firms currently have an incentive to keep money abroad.
Apparently the government is in a Catch-22 situation on corporate foreign earnings. If they tax the repatriation of foreign earnings the companies are not inclined to bring the cash home; but if the government doesn’t tax this income they are encouraging companies to invest in other countries and not in the US. A lovely kettle of fish. Do you think maybe, if the US corporate income taxes weren’t the highest in the world, that maybe they would be more inclined to invest here at home? Just a thought.
Later the professor suggest that his carrot should be coupled with accelerated depreciation and a reduction of the corporate income tax to a more reasonable level. I must say that I like the combined carrot of a moratorium on the repatriation tax, faster depreciation and a lowering of corporate taxes. These steps I believe could have a very positive effect on our economy. The stick, the 2% tax on so-called excees cash I think is a very bad idea. The excess cash comes from profits on which the companies have already paid taxes either to the US government or to some foreign government. To double tax this money would just be plain wrong. With the carrot as described by Professor Desai, I’m not sure a stick is necessary or constructive.
So that is what I think. What is your opinion?