Recently, we’ve heard a lot about companies holding excess cash on their balance sheets. Many claim that if these companies invested some of the cash they’re been hoarding, the US economy would get the boost it needs. Ironically, even though American companies currently hold near record amounts of cash, many of them are “cash poor” in the US. This is because a majority of their cash is trapped in foreign countries, mainly in Europe and Asia. The list of companies with cash aboard is extensive and includes some major US companies such as Johnson & Johnson, GE, Whirlpool and Microsoft.
So why can’t they just bring the cash back to the US? This mainly has to do with the fact that these companies would incur a 35 percent tax rate on corporate profits from the cash they bring back. A recent WSJ article mentioned the company Emerson Electric, which holds almost $2 billion in cash abroad, has only been able to bring back $500 million to the US. This meant that the company had to resort to borrowing money in the US for share buybacks, to pay out dividends and even to pay its taxes. This impact is being seen on many American companies that claim they would gladly bring more cash holdings back to the US if the effect of taxes were minimized. They state that being able to move their funds back will definitely boost capital spending in the US and help improve the job market. The Obama administration is proposing a lower tax rate, but a solid plan has yet to be developed.
-Ritika Gawande
Photo Credit: http://tedfreeway.com/2010/10/26/trapped-overseas-billions-could-be-stranded-waiting-to-return/
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