The amount of cash multinational corporations are stashing is at an all time high and economists are wondering why. A recent Federal Reserve research paper examined some of the reasons. A big one is multinationals pay no taxes on profits if they park them offshore. A stash of cash is building and the miser pile is now a mountain.
A large study released early last year showed corporate taxes are at a 60 year low. Multinationals park huge amounts of cash offshore, all to avoid paying taxes on these vast sums if brought to the United States, at least that's the claim. The official corporate nominal tax rate is 35%, but multinational corporations never pay that and they would not pay 35% if they repatriated those offshore held hoards of cash back into the United States.
Federal Reserve economists Sánchez & Yurdagul tell us corporations were sitting on over $5 trillion in cash and short term investments during 2011. The last flow of funds report also shows corporate cash, otherwise known as liquid assets, at an all time high, $1.925 trillion in the 3rd quarter of 2013.
Some try to claim these companies are hoarding cash due to outstanding debt. Others even try to blame the money supply. While the Sánchez & Yurdagul paper does not come out and say the O word, outsourcing, as the cause of the great corporate misery cash pile, they do present a most interesting graph from their research results. It seems cash hoarding is directly correlated to how much research and development a multinational corporation is engaged in. Their below graph shows this R&D to cash hoard correlation and their research results are astonishing:
In two sub-indexes within the S&P 500 corresponding to two R&D-intensive sectors, cash holdings increased at a high yearly rate between 1995 and 2011: by 15 percent for the pharmaceutical sector and by 11 percent for the information technology sector. In the former sector, some firms had an annual increase as high as 26 percent. Within the latter sector, the top firms had increases between 16 and 22 percent in cash holdings in the same interval.
We suspect a much stronger correlation to the above cash mountain R&D graph, outsourcing. This is key, for much of research and development that was done inside the United States has been offshore outsourced by multinational corporations. These companies offshore outsource extensively. Additionally companies which make building products recently ramped up their offshore manufacturing. What the Fed researchers label R&D focused companies, are actually the very multinational corporations who have lead the charge to offshore outsource American jobs. Notice how I.T., technology and pharmaceuticals are at the top of the cash hoarding list in the above graph. All of these sectors have notoriously shipped jobs overseas in droves.
The most recent BEA data on multinational corporations gives more evidence offshore outsourcing of R&D is the cash hoarding culprit. In 2011, multinationals once again increased their employees outside the United States while not hiring inside the United States. They increased U.S. headcount by only 0.1% while increasing their staff abroad by 4.4%.
The below graph shows 2011 isn't an anomaly. U.S. multinational corporations have been moving jobs offshore and creating jobs offshore for quite some time.
U.S. multinationals managed to reduce their United States employees by 0.9% in just a single year. In 2011 only 66.3% of their total staff was located inside the United States. In 1989, that figure was 79%. The below graph shows how U.S. corporations are expanding their hiring abroad while flatlining the U.S.
Meanwhile foreign companies operating in the United States are employing more people here. They increased their U.S. employment by 3.3% in 2011. The increased hiring by foreign companies is literally dismissed due to new U.S. acquisitions in the BEA report. The thing is, U.S. multinationals acquire new companies and thus new staff all of the time and the results are often unfortunate, mass downsizing and firings.
Apologists will argue that U.S. multinationals are simply hiring where their sales are and abroad is where expansion is happening. They point to the percentage change in sales made abroad vs. in the United States as shown in the below graph. In 2011 sales in foreign lands increased 15.8% whereas U.S.sales increased 9.4%.
The first thing to notice is how sales dramatically increased while America had an employment crisis and eroding wages. The real kicker is the next graph. The majority of sales are still in the United States. In 2011, these multinationals had sales in America worth $10.7 trillion while their foreign country sales were almost half that, $5.9 trillion. This means these companies are obviously offshore outsourcing for sales ratios are not proportionate to their disappearing U.S. staff. Foreign companies' sales on the other hand, statewide increased 11.9% in 2011, 6.9% in 2010. In other words, on the whole foreign companies are hiring more proportionately to their U.S. sales inside the country.
Another telling sign workers are being labor arbitraged by U.S. multinationals is capital expenditures. U.S. multinationals have more capital expenditures domestically than abroad. In 2011 capital expenditures state-side were $514.5 billion whereas foreign capital spending was $192.0 billion. The thing is, one can buy equipment, fleets of automobiles in the United States, turn around to lease and ship them to their foreign affiliates abroad. Again some of this buy here, lease there, license elsewhere, is for profit shifting. Multnationals obtain tax write offs in high tax nations, and use land-lease international manipulations, again, all to avoid taxes. Foreign companies operating in the United States on the other hand, increased their U.S. capital expenditures by 12.3% in 2011.
Economist Bruce Bartlett also shows how companies force sales in tax havens, all to avoid hiring American workers and pay U.S. taxes, which reinforces the statistics outlined above.
The major role of R.&D. in large cash holdings may reflect the greater opportunities for tax avoidance among businesses that can easily transfer intangible property abroad without having to move production operations or jobs to other countries. It is a simple matter for companies holding patents, copyrights or trademarks to transfer them to foreign subsidiaries and realize the profits accruing to them in lower-taxed jurisdictions.
I had an experience with this phenomenon just recently. I needed a copy of Microsoft Word for a new computer and went to www.microsoft.com to buy it. But when I tried to pay for it, my credit card was rejected. When I checked with my credit-card company I was told that the charge appeared suspicious because it went to a company based in Luxembourg – a well-known tax haven.
This technique is used by many technology-based companies. For example, The Wall Street Journal reported on Feb. 7 that the patent for the hepatitis C medication produced by California-based Gilead Sciences is domiciled in Ireland, another common tax haven. The home company thus pays royalties to its Irish subsidiary on sales of the drug in the United States, transferring profits from the United States to Ireland.
Progressive Democrats periodically bring up corporate cash parked offshore as the great tax dodge technique and strategy. They call it the outsourcing loophole and from the statistics above we can clearly see why. The establishment GOP and many lobbyists spin tax repatriation as a job creation policy. That of course is not true, a tax holiday will simply allow these cash hoarding offshore outsourcing multinationals to pay no tax and distribute the holdings to shareholders. The Fed paper also acknowledged corporate tax rates have little to do with offshore parked cash and bringing it back onshore:
The role of taxes is challenged in a recent working paper by economists Lee Pinkowitz, René Stulz and Rohan Williamson. They compared firms with headquarters in different countries. After controlling for characteristics of the firms (sector, size, etc.), they showed that U.S. firms were holding more assets in the form of cash than were foreign firms. Then, they focused on the characteristics of other countries that may potentially lead to such differences. They concluded that differences in the way that countries tax foreign income do not alter the cash-holding behavior of the firms.
The thing so astounding is America to this day has an employment crisis. Yet giving U.S. multinationals a tax holiday for using money parked offshore to hire U.S. citizens just never seems to come up as a common sense policy. Imagine the economic boost trillions of dollars would give to the real economy if these funds were tied directly to U.S. citizen employment. If one could create not just zero taxes on funds repatriated for this purpose, but a tax rebate for retaining and training U.S. citizens long term, it would set the U.S. economy on fire. Yet doing something for America's middle class and highly educated work force never seems to come up as a solution. Even mentioning the fact corporations have a responsibility to provide meaningful employment to the citizens of the nation they reside is somehow taboo. Isn't that odd with such damning statistics U.S. multinationals are economically hollowing out the nation? Why would any political persuasion object to tax breaks, rebates and cash repatriation in order to bring this nation back to full employment and a humming economy pronto? It is almost as if our own government and powers be hate Americans, for at all costs they will not give us a common sense and practical break.