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Old 04-04-2014, 12:46 PM  
KC native KC native is offline
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Idle cash piles up

Idle cash piles up: David Cay Johnston
http://www.reuters.com/article/2012/...86F0GK20120716
Mon, Jul 16 2012
By David Cay Johnston

(Reuters) - IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.

The Fed's latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today's dollars, triple the Fed figure.
Why the huge gap?

The Fed gets its data from the IRS, but only measures the flow of funds in the domestic economy. The IRS reports the worldwide holdings of U.S. companies, which I think is the more revealing measure.

From the companies' point of view, it makes perfect sense these days to hoard cash.

First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens.

Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows.

That is nearly $1 trillion of increased profits over two years, while actual taxes paid rose less than a tenth as much, BEA reports show. Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose. The result: more cash.

Bigger profits are good news, but it would have been better news had those increased profits been put to work, not laid off in accounts paying modest interest. Hoarding corporate cash in bank accounts, Treasuries and tax-exempt bonds poses a serious threat to the economy, as Congress recognized when it enacted the corporate income tax in 1909.

Let's get some perspective on these gigantic figures, all measured in today's dollars.

The 2009 cash reported to the IRS equaled America's entire economic output that year from New Year's Day through May Day.

This cash pool came to $16,700 for every man, woman and child in the United States, a 53 percent real increase from 2004, my calculations from IRS data show.

Looked at yet another way, these companies had 11.3 percent of their assets in cash, or enough to pay their 2009 corporate income tax bills, which amounted to $148 billion, more than 34 times over.

In short, U.S. companies hold vastly more cash than is needed to finance their operations.

For investors, companies holding 11.3 percent of their assets in cash lowers returns. Did you buy shares of American Widget so executives could park profits in savings accounts?

For workers, idle cash means idle hands and minds. With one in five Americans unemployed or underemployed, and real median wages in 2010 back down to the level of 1999, this is no time for capital to go on an extended holiday.
For taxpayers, untaxed profits subtly reduce corporate tax burdens and increase the tax burden on individuals. Because taxes owed on offshore profits are not adjusted for inflation, they depreciate at the rate of inflation. That means a double whammy for taxpayers as government pays interest on money it borrows while its accounts receivable from multinational corporations lose value.

Since the income tax system began, Congress has authorized a tax on excessive accumulated earnings to limit damage to the Treasury -- and the economy -- when companies hold far more cash than their operations require. Without the accumulated earnings tax, corporations can become bloated tax shelters instead of engines of growth.

A business holding more cash than its operations reasonably require can be hit with a 15 percent levy under Section 531 of the Internal Revenue Code, on top of the 35 percent corporate income tax. The Tax Court even devised a mechanical test in 1965 for how much is too much.

Historically the IRS has levied only privately owned firms or publicly traded companies with few shareholders. But Internal Revenue Code Section 531 applies to all corporations. President Ronald Reagan signed Section 532 (c), which made that explicit, though with an exception for untaxed offshore profits.

After reviewing decades of literature on these code sections, I cannot fathom any rational basis for giving multinational companies an exception to the cash hoarding rules, which discriminates against purely domestic firms.

Some of the multinational corporations say they will bring home what could be more than a trillion dollars if Congress will give them an 85 percent tax discount. The companies frame this as creating jobs. But as I showed in an earlier column, unless there are strict rules, the money can be used to buy back company stock while destroying jobs.

Want to motivate companies to put some of those trillions of dollars of idle cash to work creating jobs, paying dividends or sharing the burden of taxes? Call 1-202-224-3121 and tell your senator or representative you want Section 531 vigorously enforced - now - and the offshore loophole closed immediately.
(David Cay Johnston is a Reuters columnist. The views expressed are his own.)
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Old 04-07-2014, 01:05 PM   #76
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You already answered why net debt levels have risen, but here are some additional links:


"Although corporations are sitting on record cash levels, their net debt levels are back to their 2008 highs. This debt has not been spent on organic growth, but rather on stock buybacks and dividends."
http://www.usatoday.com/story/opinio...bates/6238707/


Companies outside this group have actually been taking on more debt. According to S&P, net debt of non-financials has been rising globally in the past few years as companies have taken advantage of historically low interest rates to lock in cheap funding.
http://www.ft.com/intl/cms/s/2/1e1b9...#axzz2yDBp39RE


"But some experts say the deleveraging is over and releveraging is well under way, with corporate borrowers taking new loans hand over fist from investors hungry for higher returns.


"Leverage is getting back to where it was precrisis," said Christina Padgett, head of leveraged finance research at Moody's Investors Service. "After the crisis, companies were behaving more conservatively and lowering their debt."
http://online.wsj.com/news/articles/...42891563817588



"When governments run large deficits the private sector has a large cash surplus and can repay its debts. Unfortunately this has not happened this time around. In the UK and the US the reason is quite simple. Companies have been leveraging up by buying back equity. The latest figures show UK companies buying back equity at an annual rate of 3 per cent of GDP and in the US at 2.3 per cent."
http://blogs.ft.com/andrew-smithers/...ash-with-debt/
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Old 04-07-2014, 01:49 PM   #77
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Quote:
Originally Posted by AustinChief View Post
This is a perfect example of US companies choosing to jump through all sorts of hoops and paying foreign taxes and interest on domestic loans rather than pay exorbitant domestic taxes. When you see companies willing to go to these lengths, the correct response is not some useless attempt to "force" the money home. The correct response is to look at a "sweet spot" in our tax levels that make this kind of crap not worthwhile.
How though? This isn't a problem limited to the United States. These companies aren't paying foreign taxes either. Ireland offers Apple's subsidiaries varying rates between .05 and 2% and Apple still avoids it mostly. You can't beat 0% tax rate.

Quote:
Apple Operations International is registered in Cork, Ireland, but has “no physical presence at that or any other address,” according to the report. Indeed, the corporate entity has existed for 30 years and apparently never had a single employee. Of the three people on its board, all Apple employees, two live in California; 32 of its last 33 board meetings took place in Cupertino, and the Irish director participated in seven of them. Its assets are managed by a Nevada company, and held in bank accounts in New York.

It falls in a strange loophole: Because it is not managed and controlled in Ireland, that nation does not tax its earnings, even at the low Irish corporate income tax rate. And because it is not registered in the United States, it has owed no American taxes.

"According to Apple, AOI’s net income made up 30% of Apple’s total worldwide net profits from 2009-2011, yet Apple also disclosed to the Subcommittee that AOI did not pay any corporate income tax to any national government during that period."
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