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The Great Corporate Cash-Hoarding Crisis


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Kit
- 1311 days ago - america.aljazeera.com
Companies are sitting on mountains of liquidity, thanks to government policies; the losers are the economy and all of us



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Kit B (276)
Thursday March 20, 2014, 1:07 pm
Photo Credit: Comstock/Thinkstock



A troubling change is taking place in American business, one that explains why nearly five years after the Great Recession officially ended so many people cannot find work and the economy remains frail.

The biggest American corporations are reporting record profits, official data shows. But the companies are not investing their windfalls in business expansion, which would mean jobs. Nor are they paying profits out to shareholders as dividends.

Instead, the biggest companies are putting profits into the corporate equivalent of a mattress. They are hoarding what just a few years ago would have been considered unimaginable pools of cash and buying risk-free securities that can be instantly converted to cash, which together are known in accounting parlance as liquid assets.

This is just one of many signs that America’s chief executive officers, chief financial officers and corporate boards are behaving fearfully. They are comparable to the slothful servant in the biblical parable of the talents who buries a fortune in the ground rather than invest it. Their caution, aided by government policy, costs all of us.

Offshore hoarding

This rising sea of liquid assets holds back economic recovery in at least two ways.

First, the economic engine sputters when profits are not recycled through the economy — when they are not invested in new plant and equipment, not spent on research and development, not paid out as higher wages or larger dividends. The flow of funds between buyers and sellers, employers and workers, companies and their investors is the fuel required to rev up the economy.

Congress understood this in 1909, when the corporate income tax was adopted. Worried that companies would become bloated with cash, slowing the economy, Congress put a stiff 15 percent penalty tax on excessive pools of cash. Thousands of small business owners who have hoarded cash have had to pay that penalty over and above their taxes.

But in 1986 Congress changed the rules, retaining the penalty tax on domestic cash hoarding but allowing multinationals to hold unlimited amounts of cash so long as they sent the money offshore. This act incentivized the enormous world of offshore tax avoidance we see today, as chronicled in my book “Perfectly Legal” and other books such as Nicholas Shaxson’s excellent “Treasure Islands.”

Second, the accounting techniques American multinationals use to siphon profits out of the U.S. delay their taxes for as long as they wish, shifting tax burdens to everyone else, which thereby puts a damper on the overall economy.

This siphoning of profits out of the United States cost the Treasury between $57 billion and $90 billion in 2008, Kimberly Clausing, an economics professor at Reed College in Oregon, estimated after analyzing corporate disclosure statements.

Cash sent offshore cannot be invested in expanding American operations. However, Congress does permit the money to be used to buy federal debt — Treasury notes and bonds. More about that in a moment.

My analysis of the latest data from the Federal Reserve, the IRS and corporate reports shows that American businesses last year held almost $7.9 trillion of liquid assets worldwide.


Those who follow the news may be surprised, because the figure that’s been mentioned lately has been just under $2 billion. That figure, which comes from the Federal Reserve, is only for domestic cash. The Fed makes its calculations (from the latest Flow of Funds report) using IRS worldwide data after subtracting offshore money.

My estimate is conservative. I did not count cash due to American companies from their offshore subsidiaries as accounts receivable because the IRS does not provide fine details on these additional trillions of dollars.

But even my $7.9 trillion estimate is so huge that it may be difficult to understand, so let’s review some ways to put it in perspective.

Consider the debate over federal spending. Uncle Sam spent $3.5 trillion in fiscal 2013. Corporations hold liquid assets equal to all the money the federal government spent that year plus 2012 and three months of 2011.

The cash hoard also equals all the sales rung up by all 6 million American businesses every three months. And four years of 2013 profits, which totaled $1.9 trillion.

Corporations now hold $2.30 for every dollar of cash they had in 1994, after adjusting for inflation.

The total corporate cash reserve also amounts to almost $25,000 per American, up from $13,000 per American in 1994 (again after adjusting for inflation). And this cash is highly concentrated, most of it held by the 2,800 biggest companies, IRS data shows.

Since 1994, liquid assets have grown at about six times sales, my analysis of the official data shows. When liquid assets grow six times faster than revenues, it tells you that companies are hoarding cash, not investing or spending.


Turning taxes into profit


These facts also demonstrate that America’s CEOs, chief financial officers and corporate boards fear the future because instead of investing their cash they hold onto it. But even if cash hoarding comforts weak-kneed executives, it makes no sense for investors, workers or taxpayers.

Investors do not need a company to hold their extra cash. That’s what savings accounts are for.

Workers need companies to invest in the future, replacing old factories, purchasing new equipment and engaging in other activities that employ people in pursuit of bigger future profits.

Taxpayers also get a terrible deal. When companies siphon cash out of the country it reduces their immediate federal income taxes. Congress spends the money anyway, which requires borrowing. Companies then loan Washington the money they did not pay in taxes, collecting interest.

This means companies that do this turn a profit on their taxes. Consider a company that defers a $1 billion tax for 30 years, using the cash to buy federal debt paying 4 percent interest in an era of 3 percent inflation. The company will collect more than $2.2 billion in interest, while inflation will erode the value of the tax to $401 million, a nearly 60 percent reduction. From the government’s point of view the tax is converted from a source of revenue into an expense.

In the parable of the talents (Matthew 25:14–30), the returning master praises two servants who invest the fortunes entrusted to them, earning big gains. But the servant who buries the gold and merely returns it is denounced as “wicked and slothful” and is cast out.

Corporate executives and directors who hoard cash are modern slothful servants. If we want jobs, wealth, lower taxes and a prosperous future, they should also be cast out.

*** Graph at Site**
******

By: David Cay Johnston | Op-Ed | Al Jazeera |

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of "Perfectly Legal", "Free Lunch" and "The Fine Print" and editor of the forthcoming "Divided: The Perils of Our Growing Inequality."
 

Nancy M (197)
Thursday March 20, 2014, 1:15 pm
"Instead, the biggest companies are putting profits into the corporate equivalent of a mattress. They are hoarding what just a few years ago would have been considered unimaginable pools of cash and buying risk-free securities that can be instantly converted to cash, which together are known in accounting parlance as liquid assets."

They are also paying increidble salaries with bonuses to people who are ruining companies, the banking system, etc.

I realized this in 2008! And money is only good if you spread it around. No wonder we are a mess.

"Money is like manure. You have to spread it around or it smells."
J. Paul Getty

Read more at http://www.brainyquote.com/quotes/authors/j/j_paul_getty.html#el2HL22JAWLPFZ4i.99"
 

Alan Lambert (91)
Thursday March 20, 2014, 1:41 pm
They want Obama to do what GW (Jar Jar) Bush and Reagan did. Allowing businesses to "repatriate" cash at VERY low tax rates (5% or less) or tax-free.
 

JL A (282)
Thursday March 20, 2014, 5:31 pm
For those who shy away from economic analyses, this one is written with enough hand holding that anyone should be able to comprehend and see how it harms them.
 

Mitchell D (131)
Thursday March 20, 2014, 5:49 pm
Short sighted idiots, or...are they doing it as a concerted effort to keep Obama's economy looking bad? Or, both?
 

Debra Tate (17)
Thursday March 20, 2014, 8:03 pm
Noted
 

Athena F (131)
Friday March 21, 2014, 12:16 am
Thanks Kit, and spammer flagged
 

Dandelion G (373)
Friday March 21, 2014, 11:26 am
Excerpted from the article:
First, the economic engine sputters when profits are not recycled through the economy — when they are not invested in new plant and equipment, not spent on research and development, not paid out as higher wages or larger dividends.

Congress understood this in 1909, when the corporate income tax was adopted. Worried that companies would become bloated with cash, slowing the economy, Congress put a stiff 15 percent penalty tax on excessive pools of cash.

But in 1986 Congress changed the rules, retaining the penalty tax on domestic cash hoarding but allowing multinationals to hold unlimited amounts of cash so long as they sent the money offshore.

My Comment:
Now who was in power in 1986 when Congress changed the rules. The Republicans maintained control of the Senate, while the Democrats maintained control of the House of Representatives.

As I've said before, neither Party has been our friend. Both have had their hands in creating this mess, some more than others, but it has been both. If you keep poking the other Party in the eye without seeing the faults of your own Party, we are never going to get this mess fixed. It seems we have to keep repeating this mistakes over and over again. Some things still work in 2009 that worked in 1909.

Excerpted from article:

Second, the accounting techniques American multinationals use to siphon profits out of the U.S. delay their taxes for as long as they wish, shifting tax burdens to everyone else, which thereby puts a damper on the overall economy.

Corporations now hold $2.30 for every dollar of cash they had in 1994, after adjusting for inflation.

My Comment:
I advise everyone to take the time to read this article and particular attention to the section Turning taxes into profit......

I like the summary:

In the parable of the talents (Matthew 25:14–30), the returning master praises two servants who invest the fortunes entrusted to them, earning big gains. But the servant who buries the gold and merely returns it is denounced as “wicked and slothful” and is cast out.

Corporate executives and directors who hoard cash are modern slothful servants. If we want jobs, wealth, lower taxes and a prosperous future, they should also be cast out.

On that last part I say....Aho!
 

Freya H (361)
Friday March 21, 2014, 4:16 pm
We need to stop sitting on our butts and mewling, and GET ACTIVE!!! Our country is going straight to hecksapoppin thanks to these shamelessly greedy pieces of worm-ridden filth. They laugh at us and send their mealy-mouthed sock puppets to convince us they hold all the trump cards. But they are, in fact, not nearly as strong as they want us to believe. If we get active, and know what we're really doing, we can take back control of our nation from the 1%.

This country has a lot of problems, and nearly all of them stem from corporate greed. Privatizing prisons, Citizens United, out-of-control "defense" spending - you name it, chances are Wall Street is behind it, cruelly and shamelessly bleeding the poor (i.e., middle class) whiter than fresh tofu. We MUST unite, we MUST get active, we MUST fight back - and we must be dedicated and in it for the long haul.
 

Vivian B (173)
Friday March 21, 2014, 4:53 pm
Its time to get yourself and all your family registered to vote NOW! Make sure they have a ride to the polls and get out and VOTE.
That is the only chance we have to turn this country around and make it to where people can be proud of their loves! Not sorry to tell anyone that we are the U.S.!
GET OUT AND VOTE! You have no excuse, otherwise!
 

Kathleen R (138)
Friday March 21, 2014, 6:41 pm
noted & read
 

Susanne R (237)
Saturday March 22, 2014, 12:50 am
So how's that "trickle down theory" working?
 

Nancy M (197)
Saturday March 22, 2014, 8:27 am
Great comment Freya. I know that I now see Corporate or profit in totally different terms than I used to. Some things should not be profit generating- prison, schools, private defense contractors (mercenaries), etc.
 

Kit B (276)
Saturday March 22, 2014, 8:33 am

Thanks to all for really interesting comments. As many have said, including myself we can not wait for government to act, we must be the action. Those who cause the problem must be kicked to curb and replaced by people in elected office that actually care more about this country than making money at the expense of our future. Nancy, I absolutely agree we can now clearly see the gross negligence in having our government functions turned into a for profit enterprise. I would also argue that health care should not be a for profit enterprise, when life or death hangs in the balance should only the wealthy have the right of choice?

 

Nancy M (197)
Saturday March 22, 2014, 8:35 am
Agree on healthcare too. Though I would much rather see doctors who make life or death decisions at some risk to themselves making the money than an insurance CEO who probably failed Intro Bio and Chem.
 

Kit B (276)
Saturday March 22, 2014, 8:54 am

Isn't that the truth. One sees a patient and the needs of that patient and the other sees nothing more than a profit line. In countries with universal health care doctors are still very well paid.
 

Nancy M (197)
Saturday March 22, 2014, 8:55 am


and the nurses who are really at the front line, and all the people drawing blood, literally. etc. etc.
 

Kit B (276)
Saturday March 22, 2014, 9:10 am

Yes, each person including the janitors in a hospital or doctor's office should be paid enough to care about keeping the place clean. When people are intentionally poorly paid that will be reflected in their work. That, I think is human nature.
 

. (0)
Saturday March 22, 2014, 9:53 am
Noted & posted
 

Lois Jordan (63)
Sunday March 23, 2014, 6:13 pm
Once again, thanks for the facts, Kit. Many excellent comments. I can only add that I was extremely suspicious when I heard repeatedly on the news a few years ago (it was probably during Bush) that regular people were hoarding their money and not spending it. I was shocked then, and wondered what the comment was all about. Now I know that in fact, the hoarding was going on in the corporate boardroom.....trying to make it all the fault of "the takers." Nothing like disinformation.....
 

Craig Pittman (52)
Thursday March 27, 2014, 4:36 am
When regulations and oversight were relaxed/set aside, Corporations were given a green light to do pretty much what they want. The money that isn't socked away overseas is used to in Washington to create even better legislation to serve their interests. Several comments here indicate we need to become engaged in the process to change the power structure. I couldn't agree more. Thanks for the story Kit.
 

Angela J (61)
Friday March 28, 2014, 9:44 pm
Thank you.
 
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