Bring That Cash Hoard Back Home to US

Thursday, 24 Feb 2011 07:58 AM

By Jacob Wolinsky

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There has been a lot of talk lately of the nearly $2 trillion that corporations in America are holding on their balance sheet. Many commentators, government officials and even economists are trying to figure out how to get that cash into the economy.

MSNBC's Chris Matthews went so far as to speculate that corporations are conspiring to withhold the cash needed to create jobs in order to elect Mitt Romney as president in 2012.

There are two factors why that cash cannot so easily be used to invest and create jobs.

In The Wall Street Journal, Alan Reynolds, a senior fellow at the Cato Institute, wrote an interesting op-ed that explains a basic reason why there is so much cash on companies’ balance sheets.

There are two sides to every balance sheet and the other side is liabilities, which every company in the world has.

While cash and total assets have risen since 2007, debt has risen at a far greater pace. So while companies have more cash, they also have much more debt.

Then there is the second reason why corporations are not releasing cash: most of that cash is parked overseas and subject to lower corporate tax rates.

Since, America has the second-highest corporate tax rate in the world, after Japan, many companies have kept their foreign earnings in other countries. If the companies would want to use the cash to make acquisitions in America, or pay dividends, they would be subject to a far higher tax rate.

There is an estimated $1 trillion of cash, owned by U.S. companies, which is held in foreign countries.

This problem will only get worse in the future. More than 50 percent of the S&P 500 companies’ revenue comes from outside the U.S., and this trend is expected to continue in 2011 as emerging markets buy more U.S. goods. Therefore, this “cash pile” will keep growing unless this problem is addressed.

One of the reasons companies have so much debt is because the current tax code allows it to be used to reduce taxes. This exemption should be taken away to encourage companies to not take on too much debt.

This increase in revenue for the U.S. government by removing the tax exemption can be used to offset other decreases in revenue if the U.S. lowers the corporate tax rate.

This will solve the twofold problem. It will make companies “really” have more wealth, and it will encourage companies to use that money in the U.S. to pay down debt, invest, and hire more people.

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