Can We Motivate Corporate America to Invest?

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?

11 thoughts on “Can We Motivate Corporate America to Invest?

  1. “Consider the potential effects of a temporary 2 percent tax on corporations’ “excess” cash holdings.”

    Here is my take – when the government says “temporary”, what they really mean is “not yet permanent”. Unless it is good for America, then it is “soon to expire”.

    I agree completely with you on this one. We complain about corporations sending jobs and cash overseas, but we (the government) never seem to connect the dots on why. Of course they immediately jump to the most obvious conclusion – big business hates America and wants to destroy the country that provides them the majority of their wealth and success so that the company can help bolster the much less important economy of Ireland and Latvia.

  2. I think I can saddle up with you on this one. We need to separate out Big muti-national corportions v the Mom and Pop small businesses. We need to encourage the Entrepreneural spirit once again. Small becomes larger, with more employment.

  3. Jim…I think the real question I how the hell do you get all of these snow flake thingys on your site? Very cool.

    This article really opens up a whole Pandora’s box thing for me. I question those hordes of cash, the trillion sitting off shore that can’t be repatriated duty free, and why any company would not want to use their own money to avoid commercial lending facilities and rising interest rates. Apple is sitting chilly on one of the greatest cash hordes of all…and they don’t pay dividends.

    1. I wish I could take credit for the snow flakes but they are courtesy of WordPress and will be turned off on Jan. 4.
      Is all the cash real. I don’t know. But a lot of sources that should know say it is so. If they don’t have any use for all that money, they could send a little my way and I definitely would spend it into circulation.

  4. The point of your entire post, which you make very well, is to simply point out how unfriendly our government is to business. Of course big business isn’t going to bring any portion of their profits home, if they suspect they will be taxed the second time. No matter how much some Democrats want to convince us that the the corporations and the wealthy are bad, that isn’t necessarily the case.

  5. What they could do is allow corporations that invest in job creating projects in the U.S. to avoid taxes all together for a certain number of years, then tax at a much lower rate after that time. If companies wanted to outsource after the no tax period, they would then be taxed at a higher rate. Might make it worth keeping some jobs at home.

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