Corporate Cash Hoard Slowly Shrinking

Since mid-2009 the most favored product from nearly every company has been its stock. When corporations began to return to profitability, US consumers maintained their frugality, reducing demand, and cooling off any thoughts that companies might have of expanding. Companies started to loosen up a little in the middle of 2010, spending some cash on increased dividends, mergers & acquisitions, and share buybacks.

That pile of cash underneath the S&P 500 companies amounted to $2.46 trillion dollars at the end of the third calendar quarter of 2010. The cash total at the end of the fourth quarter was a mere $2.4 trillion, according to Bloomberg.

The Bloomberg report notes that capital spending rose $22.3 billion in the fourth quarter, the biggest quarter-to-quarter rise since 2004, reaching $142.8 billion, the highest level in two years.

Reductions in unemployment, though relatively small, seem to bear out the belief that the US economy is rebounding. Consumer demand is slowly picking up, too. Now, if the housing market weren’t still so anemic, we all might actually be feeling a whole lot better.

The coming fight over the federal budget could derail some of the recent amity we’ve seen between Republicans and Democrats. The Democratic president’s proposed budget includes a rise in tax rates for the highest earners beginning in 2013, and that is not going to sit well with congressional Republicans. Still, the president could have been even more aggressive on taxes.

Here’s an option that no one is considering: why not raise marginal tax rates both for high-earners and for corporations, and capital gains tax rates? Before you howl in pain and disgust, consider what companies and individuals might do with their money in order to prevent it from being taxed away?

They’d spend it of course, and they’d spend it on capital improvements rather than returning it to shareholders through stock buybacks and dividends because the money would only be taxed away at that point too. And if capital improvements come, can employment be far behind? And if employment rises, can home building be far behind that?

Every proposal for the federal budget is aimed at cutting spending. By the time US political parties agree on a way forward, they’ll have some current data to look at from the UK, where the budget slashing has already begun, and so has an increase in the country’s value-added tax. If the UK approach appears to be working, look for more cuts in US government spending. If the UK approach is weighing on GDP growth and threatening a double-dip recession in the country, look for either more calls for another round of quantitative easing or some serious talk about tax increases.

Paul Ausick