I sometimes wonder if the idea of parallel universes is right and if I’ve slipped through a crack:
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 definition of “excess cash holdings” will be critical. But such levels easily could be defined relative to industry benchmarks from periods that featured more standard corporate savings behavior. Alternatively, a measure of accumulated nondistributed earnings could also serve as the basis for the tax. Accumulated earnings taxes have been used in the past, although sparingly, with particular reference to individuals who incorporate for business purposes.
In non-academic speak, the above comes down to “let’s tax corporate savings accounts.” This is remarkable, and further underscores the belief of those, including the author of this piece, that companies are permitted to engage in commerce by the benevolence of the federal government–which may arbitrarily change the rules whenever it wishes.
The author understands that companies are sitting on cash because of “the absence of investment opportunities or … indecision among corporate executives.” However, he fails to explain that this absence of opportunity and indecision is a directly attributable to the government’s wildly changing tax and regulation environment for these businesses.
Should not all of us be more careful with investments and financial decisions when the future is more uncertain than normal? How does one justify a taking of cash holdings under a rule of law with respect for property rights?
Don Surber adds a few thoughts to the mix:
In his own words: “Ideally, firms would invest their excess cash funds in new projects in the United States. President Obama’s proposal to allow for immediate expensing of investments could help ensure that firms were tilted toward spending that excess cash on new projects within the United States. A reduction in the corporate tax rate that would bring the U.S. rate in line with worldwide norms would also help enormously in directing these cash hoards toward investment. But even cash disgorged through dividends, share repurchases or mergers would have a potentially stimulative effect compared with corporations banking the funds.”
He would risk capitalism in America merely on the hope that companies would invest here?
Why would investors put their money in a banana republic that considers having cash on hand to be hoarding?
Speaking personally, I wiped out the corporate hoard this year to follow up on a business opportunity. This next year’s budget includes less business investment and a whole lot more hoarding–because it is getting extremely hard to see what the economic/business/tax environment will be 3-6 months from now, let alone 2-5 years.