Saturday, November 10, 2012

Corporations Are Awash in Cash –So Why Do They Need Tax Cuts?

To Get More Cash, Of Course

To listen to Conservatives is to hear that the reason business is not investing is because taxes on corporations are too high.  See if taxes were lower business would have more funds to invest, and since business invests when more cash is around lowering corporate taxes will stimulate economic growth and business investment.

That’s a great theory, or would be if it were true.  First of all corporations have huge amounts of cash on hand, huge.

Companies have been net suppliers, instead of users, of funds to the rest of the economy since 2008. Firms in the S&P 500 held roughly $900 billion of cash at the end of June, according to Thomson Reuters, down a bit from a year earlier but still 40% up on 2008.

Wow, why do they have so much cash?  Well critics of U. S. tax policy will say laws that hamper repatriation of cash are a problem.  Turns out that is not so.

Business leaders and conservative critics cite that cash mountain as proof that meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment. But that cannot explain why the same phenomenon prevails worldwide. Japanese companies’ liquid assets have soared by around 75% since 2007, to $2.8 trillion, according to ISI Group, a broker. Cash stockpiles have continued to grow in Britain and Canada, too, to the immense frustration of policymakers there. “Dead money” is how Mark Carney, the Bank of Canada’s governor, has described the nearly $300 billion in cash Canadian companies now hold, 25% more than in 2008.

To understand why business will not invest one has to master what Conservatives are unable to do, Econ 101.  For more than 70 years the economics profession, that is the real one not the one sucking up to Republicans, has known that investment is driven by demand.  Increase the demand for goods and services and business will invest.  If the demand for goods and services is lacking business will not invest in higher productivity and capacity regardless of the tax rates.

What this means of course is that stimulative fiscal policy is the key to economic growth.  Yes, exactly the opposite of Conservative economic policy in the U. S. and the austerity being forced upon nations in Europe.

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