The FT has reported this morning that:
The pile of unspent corporate cash that has built up since the start of the financial crisis is being held by an increasingly concentrated pool of companies that will be crucial to hopes of a pick-up in business investment to stimulate the world economy.
About a third of the world's biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.
The paper goes on to note that there is demand that these companies (Apple is the biggest culprit, but it is not alone) should engage in capital expenditure. I agree that if they did this would be good for the economy, but the FT whether by choice or because of institutionalised blindness does not ask questions about which this phenomena is occurring, what it means and how it should be addressed if that capital expenditure fails to materialise.
So first of all, why is it occurring? There are three real reasons. The first is that the tax system encourages it. In the US in particular, but in other states too, the tax system encourages profits to be recorded and retained in tax havens. The UK has, for example, specifically passed legislation that encourages the location of multinational corporation treasury functions in tax havens by offering an exceptionally low tax rate on cash earnings accumulated in such places.
Secondly, the system of corporate incentives that we have - which rewards share price growth through massive executive share option schemes that do not take into consideration the causation of that price increase or the impact tax abuse has upon it - encourages this offshore tax accumulation. The City and Wall St have created systems that reward directors for doing nothing.
Third, they do nothing because they have no clue what to do with their cash. Much of this cash is accumulated not because of technical innovation but because of monopoly power. Vast arrays of patents ensure that these monopoly rights are ring-fenced and then reinforced to exclude market entrants into sectors like computing. Competition fails in that case. Rent seeking profits rise. We all lose out because there is then no need to innovate or undertake capital spending because no one can actually compete with the market leaders anyway. And economic stagnation follows. So in core market leading directors have no reason to spend their cash on, or incentive to do so in their core markets.
And, fourthly, because we are now used to stagnation in innovation, which is now mainly incremental and in many ways less life changing than in their time the car, the hoover and the washing machine were, we are kept happy by tiny changes in the products we buy masked as if they were innovations behind a mass of marketing guff. Candidly, business simply cannot find real need for its cash to meet because the people they are targeting to but their products - those already well off - have remarkably few material needs they have not already met. They may be short on life satisfaction, security and community, but those are all things like love that money cannot buy.
So, that's why cash is accumulating. What to do about it? The obvious answer is that we need a progressive income tax. As profits increase so should the corporate tax rate. The IMF has warned of growing inequality around the world. This cash fuels it. There is a need to tax it to reduce that inequality.
The problem is, of course, that at present the cash is hidden away from tax. The answer is the one that I, the Tax Justice Network and others have promoted, which is unitary taxation. This taxes global corporations as if they are single entities, so wherever their cash is located it will be within the scope of a tax charge.
Second, we may need to consider specific taxes on excess cash holdings. One of the reasons for tax is to correct market failings. It is a market failing that a corporation can accumulate too much cash because of monopoly power. An excess tax charge would correct this. The time for it has obviously arrived.
Third, tax haven abuse needs to be tackled, of course, but so does the shift in corporate tax systems towards territorial taxation need to be addressed. The UK is positively encouraging this trend towards offshoring cash unproductively under George Osborne. That is absurd.
And we need to change and regulate share option schemes, not least because these are almost all an exercise in falsehood because they pretend that a company director of a large corporation is an entrepreneur taking risk when most if not all are in fact corporate placemen already very well paid before any such bonus is awarded. The pretence that these people take risk is an expensively constructed and convenient abuse of the idea of entrepreneurial behaviour that undermines the status of those who do actually innovate in our economy - most of whom are a very long way removed from the large companies hat are accumulating this cash.
This cash is, then, a clear indication of a deep failing within the neoliberal capitalist system that is almost wholly self-destructive in its impact. Marxists are probably amused by that. But the people who should be really worried are those who think that we need markets in a mixed economy because what this cash pile really indicates is the failure of the private sector - and with it any possibility of a thriving mixed economy. That's the real challenge. And that is a very good reason why action is needed on this issue right across political divides within the mainstream parties of the UK and elsewhere.
The FT may be blinkered. The leading corporations may be intellectually bankrupt. But there is a need for politicians who believe in the power of the model that delivered post war prosperity to act now.
But will they? Or will money buy them off? That's the real question, and the one the Marxists are probably waiting to answer.
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There is a front page piece on this: “Concentrated $2.8tn cash pile puts global recovery in hands of the few”. This is followed at the bottom of the front page by:
http://www.ft.com/cms/s/0/f5d7511e-82e2-11e3-8119-00144feab7de.html?siteedition=uk#axzz2r80iWFBt
Pimco [“one of the world’s best known institutional investors”] … has $2tr of assets under management”.
This adds something to the picture, doesn’t it?
Most analysts will actually penalise companies with huge cash piles in terms of market valuation and as such, one can argue that the share incentive plans of the people incentivised by these will be affected.
There is no multiple on cash. I have serious issues as an investor with Apple holding cash and you can see today, one of the worst examples of corporate greed, Carl Icahn, going after Apple for exactly this reason.
http://www.marketwatch.com/story/icahn-apple-doing-disservice-to-investors-2014-01-22
Shareholders will force companies to release cash, either as dividend or stock buy-back, if the cash has no good reason to be held by the company.
As long as people like our beloved Richard are buying iPads, on which the margins are humongous, Apple has indeed no reason to have any cash!
Whilst Google has investment opportunities like Nest or other paradigm changing opportunities, Google has good reasons to hold onto cash.
I am not arguing that all of Richard’s points are wrong, but it is not a black and white story either! Is there too much cash on companies’ balance sheets? Probably. Is it all purely tax driven. Certainly not!!!
I think we should be far more discerning about how different companies deal with these issues. Some are far more nefarious than others and it is NOT just about how much corporate tax they do or do not pay.
If one could elevate the debate from a leftist “all corporates are bad” to one where one objectively analyses who does what, one would have a far more accurate argument to involve the politicians in imposing changes.
A few examples:
– Starbucks: Clearly this company competes against domestic players on a corporate tax basis, as they are sucking the profits out through royalties. These royalties for a now very old name should be subject to a sunset clause!
– Amazon would never pay corporate tax anyway, as the company is hardly profitable, at least under most regimes where amortisation of investments is deductible. Do we want to change that completely? That might be a little too drastic. Amazon, in my eyes is the most nefarious of all the players, as they are using a nasty price advantage through the wrong VAT rules applying to B-to-C business in Europe, where VAT is charged at the seller’s side if sold to consumers. This in effect means that Amazon only charges 15% of VAT on something its ships from its UK warehouses to UK consumers. This is an unfair advantage. They are using this unfair advantage and replace added value jobs on the high street by shelf workers on minimum wage…
– Google gets systematically thrown in the same basket as the 2 above names, but commits very little mischief, if only that it applies existing rules on it financial structure, hereby maximising corporate value for the UK pension funds investing in them! Google, whether one wants to recognise it or not generates most of its value through non-stop improvement in their technology and one can allocate the value to that massive braintank in California. They can actually very well justify extracting most of the value out of the UK, however much they are selling the product. The value has to be rewarded and most is not in the UK. Let the Americans deal with how they want to tax Mountain View’s profits.
In short, let’s get after those who distort markets first.
1) Amazon
2) Starbucks
x) Google
You are ignoring the liability side of the corporate balance sheet. Yes it is true that there is $2.8 trillion in cash piles. But there has also been massive debt issuance by the corporate sector over the past few years, because interest rates have been at historical lows and the tax system allows interest on debt as a business expense. So I suspect that the debts in the corporate sector probably balance out the cash pile. So in many respects the cash pile is simply an illusion.
The other side is retained earnings, not debt
I made that clear in my piece
Generally I agree. It’s likely just my bias as an application developer, and I don’t know it’s particularly significant to the piece, but I’m not sure mention of patent monopolies in your cause three is that significant.
In software, Patents are a big issue, but they generally seem to be used by filthy “troll” companies to extract cash from innocents.
I’ve not really seen them be used by big players, much except against each other. Among the big players, patents take on the form of a nuclear arsenal. They hold a patent portfolio to prevent another large player attacking them with its portfolio. If they go in to battle, neither can win, as both will be infringing the other in incomprehensibly complex ways that neither actually want to resolve.
I think its a different story in other areas. For example, a friend mentioned that patents in gene sequencing have meant that there has really only been one large player for a number of years, and that they seem to be maximising profit by releasing new technology as it suits them, rather than as they are driven to, to remain competitive. This obviously slows down the rate of research in to genetics as the research relies on the sequencing technology they’re restricting. It is likely, directly slowing down the availability of cures. In this specific case, entirely new approaches are coming on line that won’t be effected by the patents, so that’s good.
Specifically, with Apple, I’m not really sure why they even have share holders. They don’t seem to need them! Who knows who Apple’s existence in fact serves (well, other than me, sitting here on my MacBook). I agree that it indicates a very great failure that they’re just holding capital without any apparent clue about what to do with it.
Gosh, very of topic, sorry.
You have struck a rich vein that political economists are only just beginning to explore – which us why have shareholders at all?
They do, after all, serve little purpose in many cases and obstruct management in achieving its objective of enriching itself