Advertisement

Blog

More on Cash Hoarding & the Confidence Crisis

An article in this week's Newsweek resonated with me because of discussions we've had on this site about companies sitting on cash. (See: Cash Hoarders & the Confidence Crisis.) The headline is “Holding Dollars Hostage,” and the article is about global companies holding and investing cash abroad.

The gist of this article is the US tax rate is a crushing 35 percent on corporate income — even on cash that's earned in lower-tax countries. “Being economically rational creatures,” writes the author, Daniel Gross, economics editor at {complink 6518|Yahoo Inc.} Finance, “corporate finance honchos are inclined to keep and invest that cash abroad — unless, of course, Washington were prepared to declare some sort of tax holiday.”

My initial reaction was “good for them” — a 35 percent tax rate is outrageous. Then I read a little further and discovered “for most large companies, the horrific 35 percent federal tax rate is as mythic as the Jabberwock.” As it turns out, with deductions and credits, the effective tax rate on corporate income is closer to 25 percent. If you have a really good accountant, the effective tax rate is less than 10 percent.

Oh.

We hear a lot of businesses arguing high corporate tax rates are an impediment to job creation and that the US isn't business-friendly. Yet it sounds as if the US tax system gives companies more than enough opportunity to offset those taxes with benefits and deductions. Those that are smart enough (or have enough lawyers and lobbyists) are able to work the system.

Case in point: Up here in New England, US Senator John Kerry registered his $7 million yacht in Rhode Island, which has a lower tax rate than Massachusetts (or considers yachts as essential, non-taxable items — I forget which). Under massive pressure, Kerry ended up paying the state of Massachusetts $500,000, what he would have owed had he anchored his yacht off Cape Cod.

Don't get me wrong, I hate taxes as much as the next person and hate how they are spent sometimes even more. Just as Wall Street manipulated the mortgage and debt system, companies manipulate the tax system. Obviously, the system has to change. In the meantime, Gross and others suggest a tax holiday could bring hundreds of billions of dollars back into the US. There's no guarantee that this will be spent on creating jobs, and yes, the US government will take a big chunk of it. But just as there are earmarks in the federal budget for cheerleader museums and shellfish-mating studies (or is it the other way around?), there must be some way of setting aside some of that money for upgrading facilities, creating jobs, or reducing carbon footprints.

What do our global business readers think?

17 comments on “More on Cash Hoarding & the Confidence Crisis

  1. Ariella
    November 5, 2010

    Barbara, you touched on differences between states with respect to taxation.  I understood that many companies were incorporated in Delaware  because it had more lenient laws for the corporations.  I know that New York has offered major tax breaks to companies like Goldman Sachs in an attempt to keep them — and the jobs they offer — in New York.  Nevertheless, Goldman Sachs, like many other financial companies, also set up offices in Jersey City and switched a lot of New York employees over there. Though many of these employees actually lived in New York, they had to file NJ tax returns because their payroll taxes went to that state.  So the tax incentives don't always achieve what the government hopes for.   

  2. Barbara Jorgensen
    November 5, 2010

    Hi Ariella–I wasn't familiar with that situation. There was no corporate benefit to GS but they moved anyway? Did the corporation have to pay both states as well? We have a similar situation here for employees that work in one state and live in another, but I'm not sure what the corporate standards are. I do know that Massachusetts is losing out to NH when new businesses decide to open in New England…

  3. Ariella
    November 5, 2010

    The way I understood it worked was that they got what amounted to millions from New York.  They did retain some offices there, but many people were transferred to Jersey City.  As a result, New York loses out on state income tax paid by these workers because the amount paid in for the state one works in has to be credited by the state one lives in.  I've been preparing both New York and New Jersey state returns for years and years.  When we lived in New Jersey, I had to do it because the workplace was New York.  I remember the downside to that was that in NJ — where property taxes are extremely high — you don't get the full credit for the real estate tax when you put in for the credit for income tax paid to another state. After we moved to New York, though, the workplace shifted to Jersey City.  One of life's little ironies. 

  4. Barbara Jorgensen
    November 5, 2010

    Interesting. Thanks for the feedback!

  5. Ashu001
    November 5, 2010

    Barbara,

    These articles below are extremely relevant to this discussion on Tax

    All the tech companies(who are supposedly sitting on Piles and Piles of Cash) have that cash only because of Tax avoidance.If an ordinary Middle Class american /Entrepreneur were to do any of this-He would be hounded by the IRS before being thrown into Jail.But just because the Great Google and Microsoft do it,Its OKAY???

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

    http://www.businessweek.com/technology/google-tax-cut/google-terminal.html

    http://blog.oup.com/2010/11/bill-gates/

    This is what the US Govt should do about these tax frauds.Tell them if you want to operate here,pay your fair share of Taxes-Not this 2.4% nonsense.Otherwise,We will stop you from operating in America.

    If the Govt refuses to take this issue up more and more ordinary americans are going to stop paying all Taxes and rebel soon.

    Regards

    Ashish.

     

  6. AnalyzeThis
    November 5, 2010

    Ashish, that article about Google was exactly what I was going to post.

    The 35% tax is like the speed limit: maybe that's what it's supposed to be in theory, but that's not how it works in reality.

    The amount of loopholes and ways to reduce your tax burden are so numerous that it would probably be impossible to document them all, and new ways to circumvent the system pop up every year.

    Regardless of your opinions on whether the US is actually “business-friendly” or not, I think it is clear that there are numerous flaws in the system. Yes, attempts have been made to fix some of them in recent years, but when large amounts of money are involved you can be absolutely certain that there are people out there spending all of their time figuring out how to game the system as best they can.

  7. Ashu001
    November 6, 2010

    Dennis,

    I agree entirely with your thinking here,

    The amount of loopholes and ways to reduce your tax burden are so numerous that it would probably be impossible to document them all, and new ways to circumvent the system pop up every year.”

    Ordinary Middle-class people like me and you who have strong opinions on this issue,need to voice it more frequently and aggresively.

    For way too long Politicians in DC have taken our feelings for granted and just taken care of the Super-rich paymasters who are responsible for getting those Politicians there. Its time we stood up for our rights or else we watch this country get run into the ground by Wall Street,Corporate America(the Multinationals) and Public Sector Unions; But the more important question is do you appreciate the gist of my arguments here?

    “If an ordinary Middle Class american /Entrepreneur were to do any of this-He would be hounded by the IRS before being thrown into Jail.But just because the Great Google and Microsoft do it,Its OKAY???”

    This is the biggest issue we face today in America.Do we let Corporations & the Public Sector Unions control and dictate every sphere of our lives or do we take back control which is so decisively ours?

    Regards

    Ashish.


  8. Ashu001
    November 6, 2010

    Dennis,

     

    I don't know about you but I am increasingly questioning the rationale of paying Taxes to a Government which is unaccountable as the US is today.

    In fact I am increasingly questioning the rationale of being a US Citizen.

    If that is'nt an indictment on the State of Affairs in America,I don't know what is.

    Regards

    Ashish.

  9. Hawk
    November 7, 2010

    Barbara, The tax holiday ruse has been used before and it didn't bring a tax windfall to the U.S. Companies simply paid the money out to shareholders in a special dividend payment as Microsoft did when it paid some $30 billion to shareholders when the last special break was given. That's exactly what will happen next otherwise why will companies like Apple be keeping $50 billion plus in cash, short-term and long-term investments? The company and others like it are just waiting for such a tax holiday that will help the rich keep as much of their money as they can and pay as little in taxes.

  10. Anna Young
    November 7, 2010

    A U.S. judge once said nobody should feel compelled to pay more taxes than they can avoid paying. This is the way it is, for individuals as well as businesses. Companies hoard cash because they feel it is in their best interest and we cannot moralize about their decision. It applies as well to people. Nobody in their right senses would say “tax me more” just to feel good.

  11. Ashu001
    November 8, 2010

    Anna,

    There are two kinds of people who are extremely supportive of The Tax me more policy.

    1)Public Sector Unions-To pay for their extremely generous Pensions ,Benefits and Over-Inflated Salaries &

    2) The Super-rich Billionaires/multi-millionaires like Bill Gates and Warren Buffet who have already put more of their income into various Tax Shelters.

    So basically what you are saying is that both these groups of people are not sane!!!

    [I am not saying it ,I am just drawing on the implications of what you said below!!!]

    Regards

    Ashish.

  12. Ashu001
    November 8, 2010

    Hawk,

    I agree entirley with your line of Thinking here.Too many corporations have taken too much undue advantage of US Tax policy for way too long.Its time for them to take the Tax Burden of us ordinary Middle-Class Americans and for them to pay their fair share of Taxes.

    We need to be more assertive and aggressive over this issue.

    Regards

    Ashish.

  13. tioluwa
    November 8, 2010

    Okay, this all soundsso American but the issue is a global issue.

    I would like to draw our mind back to the issue of social responsibility that lingered on this page for a while, and i wonder if there is any difference between the problem of social responsibility and this probably more painful and critical issue?

     

    If you ask me, i'll say the root of the problem is still the same.

    Who doesn't know the purpose of taxes (although the issue of misappropriation exists as well)

    As we noted that Social responsiblity is harder on young companies, so also this one is even harder on small companies.

     

    It's the same old problem in a different dimension.

    The problem spirals up and down all sectors of the economy and all levels of life and business.

  14. Barbara Jorgensen
    November 8, 2010

    Awesome discussion going here! Daniel Gross made another comment in his article that interested me and it's on point to what Ashish said–while this seems like a U.S. problem, it really isn't. Gross writes: “Companies view their taxes as either a form of punishment or a system to be gamed to the max. In reality, taxes are the price of citizenship. Large companies like Google are like members of a country club who are content to reap all the benefits of membership–government support for computer-science research in Google's case–but who go to great lengths to avoid kicking in for landscaping.” U.S. companies that operate in other countries have a resposibility to pay taxes there as well–I'm not sure if they should be double-dipped–but that is also a form a citizenship.

     

  15. Ariella
    November 8, 2010

    Barbara, your last comment made me think of the “Amazon tax” that New York fought for.  One of the advantages internet retailers offer their customers is “no sales tax.”  In fact, some, like Shoebuy.com, prominently display that in a banner on their pages.  However, New York, which actually has a fairly high rate for sales tax and taxes items not taxed in other states, like clothes and shoes, saw this as a major loss of tax revenue from New Yorkers who ordered their clothes, shoes, and other items online and so avoided paying New York sales tax.  So they clamped down and did not allow any internet company to solicit business in New York unless they also collect New York sales tax.

    As a result of the law, some companies actually opted out of appearing to solicit business in New York by dropping New York based affiliates.  Others came up with a legal loophole of having the affiliates take on the responsibility through certifications that let the retailers off the hook as the ones soliciting New York customers.  As a result of all this, Amazon now does collect New York sales tax, as does Shoebuy.com, which still, oddly enough, boasts of no sales tax on its site.  Companies like Boden, based in the UK but with a Pennsylvania US center, as well, dropped New York affiliates.  They only add on sales tax for Pennsylvania residents.  So New York found a way to tap more tax income, and customers find the taxes added on to their total charges.  However, it still is possible for New Yorkers to cross the Hudson, shop in New Jersey, and buy clothes with no sales tax at a bricks-and-mortar store.  

  16. Barbara Jorgensen
    November 9, 2010

    Hi Ariella, I remember that, but at the time it wasn't explained it was well as you did here. nNother good example of how the tax system can be worked both by businesses and state governemnts.

  17. Anand
    March 26, 2011

    Barbara,

     Government can give more tax cuts to  companies that create job. If that job goes away within the first couple of years of creation, tax them more than they would have been taxed in the first place. The income taxes paid by the individual plus the stimulus to the economy the new jobs would create should help the government offset the tax breaks given to the corporations.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.