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The US tax code heavily punishes companies that hold cash in a variety of ways. The motive is to subsidize banks by requiring companies to rely on short term de

The US tax code heavily punishes companies that hold cash in a variety of ways. The motive is to subsidize banks by requiring companies to rely on short term debt for operations. It's the biggest and most lucrative of subsidies for the banking industry and laundering such subsidies is how many bankers get rich. For instance, Mitt Romney made his money that way. (The main tax code subsidies here are the business interest loophole and the accumulated earnings tax) Usually a big company holds almost no liquid assets and hands profits out to bondholders and shareholders or invests actively to grow, even in unrelated businesses. That's to avoid tax penalties. Apple, Google, Microsoft, and the like are holding masses of cash outside the USA. Gridlock in Washington and a stagnant and irrational corporate tax code make it very hard to bring cash home to invest for American companies. Therefore you find tech companies with few overseas expenses exporting services and accumulating cash they can't bring home. (The main tax issue here is the non-territorial tax system in the USA. All other developed countries have a territorial system.) Other countries can see this is a problem that kills jobs and wages at home so they don't do it. Obama has tried to fix it and Trump's main tax proposal is aimed at it, but both parties in Congress block change. Republicans don't want to hand Obama a victory and would rather hand out goodies to donors with loopholes than simplify taxes and Democrats just want to punish profitable multinationals even if it kills jobs. And Wall Street is very mercurial with credit for tech companies, especially growing ones, so they can't rely on the banking subsidies. The result is that tech giants are the only companies with a reason to accumulate cash so they overwhelmingly are the only ones that do so. In summary, this is a government regulatory policy that creates cash rich tech companies. It's a result of bad decisions on Capitol Hill, not on Wall Street or Sand Hill Road. It is not a stock valuation or corporate strategy issue.

johnchristopher 10y ago
Is 'tax penalties' the official name ?
- WildUtah 10y ago
  No. I used it to mean paying high and unnecessary tax assessments.
mdorazio 10y ago
I'm trying to figure out where to start with this comment. 1) What is "business interest loophole"? Do you mean carried interest, which really only applies to investment partnerships and not corporations? 2) The purpose of the Accumulated Earnings Tax is right in the IRS description of it - "The purpose of the accumulated earnings tax is to prevent a corporation from accumulating its earnings and profits beyond the reasonable needs of the business for the purpose of avoiding income taxes on its stockholders." It is generally in society's best interest for companies to reinvest their money in the economy and citizens rather than hoarding it, hence the tax. Or do you disagree with that? 3) I have yet to see anyone take the "we should let corporations bring back their money tax-free" argument beyond just saying that it would somehow magically create jobs. Can you provide a rational breakdown of how this is supposed to work? Apple brings back $200B to the US and then... what? Hires people it doesn't need? Builds factories that won't be profitable? If a company thinks it can make more money by investing in on-shore resources, then it will invest. Instead they're hoarding cash because they don't have anything good to spend it on. The only argument I can see is that ROI for on-shore use of funds has to be higher than the repatriation tax rate to justify bringing the money back, but so what? That just means that we're in an economic situation where no one thinks they can get a 35% ROI on hiring more people or spending more on R&D at the scale of multiple billions per year.
- WildUtah 10y ago
  1. The business interest loophole is the loophole allowing the expensing of amounts referred to as "Business Interest Expense" in IRS Publication 535. See also Form 1120, line 18. 2. That is a silly motive. It does not hold up to elementary economic scrutiny. That tax is a minor driver compared to the business interest loophole, but is one part of why non-tech companies don't accumulate cash. The fact to be explained in op is why big tech companies hold cash and the various other big business industries in the USA do not. 3. Cash in the hands of principally American companies can be spent on business operations in America. Either a big company can invest it itself or it can distribute cash to stockholders who then invest it in other businesses. Cash locked up overseas will eventually have to be penalized with double taxation so that it can be distributed to stockholders or it will be invested overseas. When it's spent overseas, it will be invested in workers and factories and supplies overseas. US companies and workers could, in theory, bid for those overseas contracts. But overseas suppliers and workers will have big advantages. If the money came home, those jobs and supplier contracts would give advantages to American businesses and workers.
morgante 10y ago
> The US tax code heavily punishes companies that hold cash in a variety of ways. It would be nice if you provided an example. What, exactly, is a tax penalty which applies to holding cash?
- kazinator 10y ago
  I would guess: in a "corporate wellfare" state, the lack of some tax break is regarded as a penalty. I.e. if there exists is a portfolio of available instruments, with tax breaks attached, into which the cash could be poured, and you don't do that, then you're penalized.
- WildUtah 10y ago
  Right there in the next paragraph it says: the business interest loophole and the accumulated earnings tax.
cylinder 10y ago
If these companies had such pressing investment needs in the US they'd borrow against that cash at 2% and do it. Those two points are not sinking their investment plans. They do not have unfunded investment needs. Why should they bring the money here tax free? In fact why shouldn't they pay taxes on foreign profits?
- HappyTypist 10y ago
  Let's flip the question. Why SHOULD a company pay taxes on foreign countries? Why shouldn't the foreign country get to collect the tax because the economic activity is completely part of their nation? The US is the only developed nation that has this ridiculous tax system.
  - dragonwriter 10y ago
    Corporations are creatures of government which either should not be created at all, or which should serve the public interest. Companies that are not corporations may be another matter...
  - spoonie 10y ago
    Arguably it was largely workers performing R&D inside of the US which resulted in the creation of these products. So there is at least a bunch of income, payroll, property taxs, etc. paid already inside of the US. Now, if the company were to move all of their R&D to Bermuda & Ireland like they moved their IP, we could argue that they deserve to pay the ~0% corporate income tax on their overseas profits.
    - AnthonyMouse 10y ago
      > Now, if the company were to move all of their R&D to Bermuda & Ireland like they moved their IP, we could argue that they deserve to pay the ~0% corporate income tax on their overseas profits. This is actually the thing that politically prevents such taxes from being collected. You have these companies that spend e.g. ten billion dollars on R&D that produces a hundred billion dollars in profits. Right now the ten billion dollars they spend on R&D gets taxed in various ways (payroll/sales/property taxes) in the place they do the R&D, which is very good for that place. What happens if you then demand that on top of that, 35% of the hundred billion be paid to the same place? You just made it actually profitable for them to go to California, find some engineers, and pay them five times the previous market rate plus their relocation costs to move to Ireland and set up shop there.
galtwho 10y ago
>> Apple, Google, Microsoft, and the like are holding masses of cash outside the USA. a large part of this cash is from the tax not paid in countries in Europe, Asia, Australia. America was always going to get a hand on this money and that seems to be the reason there has been no movement in international tax negotiations. An American Cash repatriation holiday is way overdue now.. Tax that should have been paid to other countries will get paid in US.

johnchristopher 10y ago

Is 'tax penalties' the official name ?

WildUtah 10y ago
No. I used it to mean paying high and unnecessary tax assessments.

mdorazio 10y ago

I'm trying to figure out where to start with this comment. 1) What is "business interest loophole"? Do you mean carried interest, which really only applies to investment partnerships and not corporations? 2) The purpose of the Accumulated Earnings Tax is right in the IRS description of it - "The purpose of the accumulated earnings tax is to prevent a corporation from accumulating its earnings and profits beyond the reasonable needs of the business for the purpose of avoiding income taxes on its stockholders." It is generally in society's best interest for companies to reinvest their money in the economy and citizens rather than hoarding it, hence the tax. Or do you disagree with that? 3) I have yet to see anyone take the "we should let corporations bring back their money tax-free" argument beyond just saying that it would somehow magically create jobs. Can you provide a rational breakdown of how this is supposed to work? Apple brings back $200B to the US and then... what? Hires people it doesn't need? Builds factories that won't be profitable? If a company thinks it can make more money by investing in on-shore resources, then it will invest. Instead they're hoarding cash because they don't have anything good to spend it on. The only argument I can see is that ROI for on-shore use of funds has to be higher than the repatriation tax rate to justify bringing the money back, but so what? That just means that we're in an economic situation where no one thinks they can get a 35% ROI on hiring more people or spending more on R&D at the scale of multiple billions per year.

WildUtah 10y ago
1. The business interest loophole is the loophole allowing the expensing of amounts referred to as "Business Interest Expense" in IRS Publication 535. See also Form 1120, line 18. 2. That is a silly motive. It does not hold up to elementary economic scrutiny. That tax is a minor driver compared to the business interest loophole, but is one part of why non-tech companies don't accumulate cash. The fact to be explained in op is why big tech companies hold cash and the various other big business industries in the USA do not. 3. Cash in the hands of principally American companies can be spent on business operations in America. Either a big company can invest it itself or it can distribute cash to stockholders who then invest it in other businesses. Cash locked up overseas will eventually have to be penalized with double taxation so that it can be distributed to stockholders or it will be invested overseas. When it's spent overseas, it will be invested in workers and factories and supplies overseas. US companies and workers could, in theory, bid for those overseas contracts. But overseas suppliers and workers will have big advantages. If the money came home, those jobs and supplier contracts would give advantages to American businesses and workers.

morgante 10y ago

> The US tax code heavily punishes companies that hold cash in a variety of ways. It would be nice if you provided an example. What, exactly, is a tax penalty which applies to holding cash?

kazinator 10y ago
I would guess: in a "corporate wellfare" state, the lack of some tax break is regarded as a penalty. I.e. if there exists is a portfolio of available instruments, with tax breaks attached, into which the cash could be poured, and you don't do that, then you're penalized.
WildUtah 10y ago
Right there in the next paragraph it says: the business interest loophole and the accumulated earnings tax.

cylinder 10y ago

If these companies had such pressing investment needs in the US they'd borrow against that cash at 2% and do it. Those two points are not sinking their investment plans. They do not have unfunded investment needs. Why should they bring the money here tax free? In fact why shouldn't they pay taxes on foreign profits?

HappyTypist 10y ago
Let's flip the question. Why SHOULD a company pay taxes on foreign countries? Why shouldn't the foreign country get to collect the tax because the economic activity is completely part of their nation? The US is the only developed nation that has this ridiculous tax system.
- dragonwriter 10y ago
  Corporations are creatures of government which either should not be created at all, or which should serve the public interest. Companies that are not corporations may be another matter...
- spoonie 10y ago
  Arguably it was largely workers performing R&D inside of the US which resulted in the creation of these products. So there is at least a bunch of income, payroll, property taxs, etc. paid already inside of the US. Now, if the company were to move all of their R&D to Bermuda & Ireland like they moved their IP, we could argue that they deserve to pay the ~0% corporate income tax on their overseas profits.
  - AnthonyMouse 10y ago
    > Now, if the company were to move all of their R&D to Bermuda & Ireland like they moved their IP, we could argue that they deserve to pay the ~0% corporate income tax on their overseas profits. This is actually the thing that politically prevents such taxes from being collected. You have these companies that spend e.g. ten billion dollars on R&D that produces a hundred billion dollars in profits. Right now the ten billion dollars they spend on R&D gets taxed in various ways (payroll/sales/property taxes) in the place they do the R&D, which is very good for that place. What happens if you then demand that on top of that, 35% of the hundred billion be paid to the same place? You just made it actually profitable for them to go to California, find some engineers, and pay them five times the previous market rate plus their relocation costs to move to Ireland and set up shop there.

galtwho 10y ago

>> Apple, Google, Microsoft, and the like are holding masses of cash outside the USA. a large part of this cash is from the tax not paid in countries in Europe, Asia, Australia. America was always going to get a hand on this money and that seems to be the reason there has been no movement in international tax negotiations. An American Cash repatriation holiday is way overdue now.. Tax that should have been paid to other countries will get paid in US.