Recent tax deal-making has relied on conventional instruments of fiscal
stimulus. Yet, we live in unconventional times, and more novel approaches
suited to the peculiarities of our current economy are required. In
particular, the remarkable cash hoards that American corporations have
amassed have been a saving grace in ensuring that the financial crisis
did not cause further damage to the economy. With traditional monetary
and fiscal policy instruments seemingly exhausted, the mobilization of
that cash hoard can prove critical to reviving the economy.
The historically exceptional cash holdings--estimates of the amount held
by US public corporations easily exceed $1 trillion; several technology
companies alone are sitting on cash balances in excess of $20 billion--
are thought to result from the absence of investment opportunities or
from indecision among corporate executives. Once such indecision becomes
widespread, it can quickly become self-reinforcing. Recent record
corporate profits will only exacerbate this situation. If chief
executives and chief financial officers are goaded into spending that
cash, the economy could benefit from a significant stimulus that, unlike
stimulus measures relating to government spending, would stem from
decentralized actors responding to private information and incentives.
Consider the potential effects of a temporary 2 percent tax on
corporations' "excess" cash holdings. With the returns on their cash
holdings approximating zero, managers would have to explain to their
investors why earning a negative 2 percent return would make sense as
opposed to either investing or disgorging that cash to shareholders.
The definition of "excess cash holdings" will be critical. But such
levels easily could be defined relative to industry benchmarks from
periods that featured more standard corporate savings behavior.
Alternatively, a measure of accumulated nondistributed earnings could
also serve as the basis for the tax. Accumulated earnings taxes have been
used in the past, although sparingly, with particular reference to
individuals who incorporate for business purposes.
Implementing such a tax would require measures to prevent some unintended
consequences. A large fraction of corporations' excess cash--as much as
two-thirds, according to some estimates--is held outside of the United
States to avoid the "repatriation taxes" that occur under the US system
of worldwide taxation. Simply put, multinational firms currently have an
incentive to keep money abroad.
A temporary holiday of the repatriation tax coupled with the tax on
excess cash holdings could help ensure that the disgorged cash would be
used productively in the United States. A previous repatriation tax
holiday in 2004 induced the return of more than $300 billion to this
country, and commentators across the political spectrum, including Andy
Stern, formerly of the Service Employees International Union, have
already begun to call for another repatriation tax holiday.
Coupling these policies provides a carrot and stick for managers to begin
to repatriate cash and use it productively at home. The combined revenue
effects is likely to be relatively small, given how little revenue is
currently collected on unrepatriated earnings and how sensitive
corporations are likely to be to facing a negative rate of return on
their cash holdings. But the goal would be more to trigger behavior that
feeds that economy rather than raising revenue for the government.
Ideally, firms would invest their excess cash funds in new projects in
the United States. President Obama's proposal to allow for immediate
expensing of investments could help ensure that firms were tilted toward
spending that excess cash on new projects within the United States. A
reduction in the corporate tax rate that would bring the US rate in line
with worldwide norms would also help enormously in directing these cash
hoards toward investment. But even cash disgorged through dividends,
share repurchases or mergers would have a potentially stimulative effect
compared with corporations banking the funds.
It is tempting to pin hopes of an economic recovery on a centralized
effort or another significant program by the Federal Reserve. But a
remarkably large pool of unmobilized capital is sitting within our firms
and managers appear frozen in their decision-making. A gentle nudge to
break this coordination failure--through the combination of the fiscal
carrot and stick described above--could shake managers out of their
indecision and provide a privately-directed, revenue-neutral stimulus
that could eclipse the effects of any potential stimulus that could
emerge from Washington today.
This article originally appeared in The Washington Post on December 10,
Typical Orwellian solution from the ivory towers of academia. The
very idea of government (or universities, for that matter) determining
what constitutes "excess cash holdings" in order to tax that money is
nothing short of imbecilic. To begin with, these august entities anointed
with this power are, by their own abysmal records, arguably the worst
choices for making any judgment as to prudent fiscal policy. Add to that
the glaring conflict of interest inherent in the fact that government
(and the universities who rely on money distributed from government
seizures) would directly benefit from these "repatriation taxes", and any
sensible person can recognize the true motives of such a transparently
abusive scheme or pity the staggering naiveté of its proponents who might
actually see any productive - or even benign - outcomes from its
Desai's recommendation of a 2% tax on corporations' "excess" cash
is a classic example of government overreach. Does Mr. Desai really think
that: 1) corporations are asleep at the switch, not looking for
investment opportunities; and 2) companies will make dumb investment
decisions to avoid a 2% tax?
The liberal prescription is consistent: If we get enough smart
people together in Washington and give them vast authority to regulate,
tax and spend, they can solve any problem facing the nation.
Here's another approach: Reduce the size and cost of government at
all levels in the U.S., lower the tax and regulatory impediments to doing
business in this country, and watch companies invest, make money and
Freestone Partners, LLC
Now this is innovative thinking.
Respectfully, I think your premise is incorrect. Government is
playing a larger part in the problem. Businesses need certainty,
especially around taxation. The current Bush-level tax rates for
individuals, which LLCs members (small business owners) are taxed, is
temporarily extended for 2 more years. It is difficult to make capital
decisions when tax rates are uncertain.
Additionally, there is considerable uncertainty around carbon
taxation, health care implementation, and other potential government
mandates that are preferred by the Obama administration and the
Instead of new taxes, the government needs to control is grotesque
levels of spending.
Aside reducing spending and creating a streamlined, efficient, and
transparent tax regime, the government needs to reduce its role in
commerce. In short, get out of the way.
Finally, I would recommend reading Ludwig von Mises's book, "Human
Action." Mises is right, Keynes is wrong.
FDR tried this during the great depression. It was a miserable
Professor Desai has provided an innovative approach. I would go
further. In a tax reform package, why not simply adopt residency-based
taxation for U.S. corportions while simultaneously eliminating any
potential tax liabity on repatriaton of cash from past earnings abroad,
lower U.S. corporate tax rates while eliminating all of the special
credits to specific industries. This is in fact what the Bowles-Simpson
commission has recommended. Coupled with a temporary, and I emphasize
temporary, 2% tax on excessive cash reserves may provide a real jump-
start to the economy.
American Citizens Abroad
While the suggestions made by Prof Desai are indeed novel, it may
tantamount to taxing corporate earnings twice, since taxes would already
have been paid when the cash (we presume that the cash balance has arisen
out of the operating earnings ) accrued to the company . This may be
challenged in the courts of law. As a way out, Government may think of a
deferred tax credit to companies who are subjected to such cash holding
Sr General Manager F &A
Haldia Petrochemicals Ltd
Repatriation of cash from overseas with no tax consequences - great
idea. There should be no barriers to the free flow of capital to
As to taxing so called "excess cash" it would be self defeating
following the professor's reasoning. Less cash in the banks, less cash to
lend, resulting in, higher interest rates putting a drag on bank
financing and increasing interest costs to corporations.
Judson Smith and Associates
Mihir offers a very innovative solution and I agree that companies
today struggle with doing something with the money they have accumulated.
I also agree that the only way to spur this economy is to either 1) have
the Government spend it or 2) have the private industry spend it. Right
now, the first is being done but, as the voters showed in November, it
will not continue.
However, I do question the efficacy of taxing money which is
essentially sitting in the bank. Therefore, I have an alternative:
The Government should combine two efforts. First, give the
repatriation holiday. That makes a lot of sense. However, rather than tax
money on the balance sheets of companies, the Government should offer a
two year "holiday" on dividend taxation. If money was not taxed when paid
as dividends two things would happen:
1) The shareholders would DEMAND payment or reinvestment. They
would never let it just sit there. Since there is no cost to paying it
out, if the company did not reinvest they would be forced, by
shareholders, to pay it out. This would have the effect of increasing
wealth, increasing money in circulation and the demand side would kick
2) It would stop the crazy attempt to artificially inflate stock
prices by companies buying back their own stock with my money (my being
the investor). It would allow me, the investor, to decide what to do with
the excess cash.
Finally, for the few rude people who feel a need to insult people
on the internet I can tell you, having taken Mihir's classes, he is one
of the smartest people in the world. I am sure he would make most look
"sick" in a true debate on anything financial. He is a fantastic finance
professor, teacher and thought leader.
HBS GMP class of '08