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. (...)
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. (...)
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.
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. (...)
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. (...)
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.
by David Cay Johnston, Aljazeera America | Read more:
Image: Comstock/Thinkstock
