How Do We Force Cash Hoarders to Invest? Tax Them
The supply-side economists of the 1980s famously emphasized how government policies (especially taxes) affect incentives. They argued that taxes act as disincentives to work, saving, and investment. Conservative think tanks like the Heritage Foundation repeat this, like a mantra, to the present day. The argument is basically that tax policy, by discouraging desirable economic activities, misaligns private incentives from the common good. In practice, of course, it has been used mainly to justify tax cuts for corporations and high-income individuals.
Today, it’s clear that incentives are badly misaligned, but not because of excessive taxation. Corporations are making record profits while investment remains at historic lows. Nonfinancial corporations are stockpiling enormous sums of cash—totaling almost $1.5 trillion at the end of last year, according to Moody’s. Apple alone has nearly $150 billion in cash reserves.
The investment shortfall is at the core of the sluggish “recovery” and chronically high unemployment.
There’s an obvious response—a tax on this idle cash that would light a fire under corporations to spend it now. If focused on expanded production and new investment, such spending would help close the still-enormous gap between the economy’s current production and its potential. And it could help boost employment, which has hardly grown (relative to the working-age population) during our current sluggish recovery.
Mihir Desai, a professor at Harvard Business School, proposed a tax on “excess cash reserves” in a 2010 Washington Post op-ed and alluded to it again in congressional testimony the following year. Recently, the Financial Times’ Martin Wolf called for a “punitive tax on retained earnings” to spur investment. (He wrote this about Japan, but has suggested this policy more generally.) Overall, however, this idea has, so far, not made much of an impact on public debates.
Desai views a cash-reserves tax as a solution to a “coordination problem.” This means a situation in which individuals act rationally (from their own vantage point), yet their decisions add up to an “irrational” (undesirable) overall outcome. Low investment in a depressed economy is a classic example: No single company can affect overall demand in the U.S. economy very much. As long as demand is weak, then, it makes no sense for any one company to expand its current production or future capacity. Therefore, low investment creates a vicious circle of low demand, low output, and high unemployment. A cash-reserves tax would increase the cost of not investing. By spurring new spending, it would create the demand needed to justify the new investment.
Despite record profits and rampant corporate tax avoidance, public debate has focused largely on yet more tax cuts for big corporations. In part, this is because big business speaks with a giant megaphone. In recent congressional testimony, Apple CEO Tim Cook blamed U.S. corporate taxes for Apple’s huge offshore cash hoards. Economists, commentators, and politicians have echoed calls for a repatriation “tax holiday.” This shows how thoroughly the bias in favor of corporate tax cuts has permeated the political mainstream.
To work right, a cash-reserves tax should come along with other changes to the corporate tax code. By itself, the tax would not necessarily distinguish between spending on new investment and cash disbursements to shareholders. From the standpoint of total demand, however, inducing companies to “disgorge” profits to shareholders—in the form or dividends or stock buybacks—would probably not help much. Corporate stock is overwhelmingly owned by wealthy individuals, who would surely save a large portion of the windfall. It would make sense, then, to impose a cash-disbursements tax high enough to prevent corporate cash stockpiles from just going into shareholders’ bank accounts.
Meanwhile, the loophole in the tax code that allows corporations to exploit offshore tax havens also need to be addressed. The answer, though, is not to suspend the “repatriation” tax, but to close the loophole and tax corporate profits on a global basis.
The cash-reserves tax, if done right, would be an elegantly double-edged policy. If corporations still won’t spend their cash hoards, the tax would boost government revenue—which could be used to address human needs, build infrastructure, etc. (If corporations won’t invest, the government will.) On the other hand, the companies could avoid the tax by spending the idle cash, increasing output and employment.
For years, we’ve been told that rising corporate profits and growing inequality are necessary incentives for the “job creators” to do their magic. Maybe it’s time to abandon the sanctity of corporate profits and tell the corporations to move it—or lose it.
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