The other day I was on TV opposite Jim Stanford of the Canadian Auto Workers. The topic: corporate tax cuts. As usual, Jim was a worthy opponent, although I disagreed pretty sharply with his defence of the idea of increasing corporate taxes just at the point where we are going to be looking to the private sector to take up the slack created by the expiring stimulus plan.
But one part of Jim's argument particularly caught my attention. It was that companies were irresponsibly sitting on mountains of cash, and in fact were not investing what they had, so the argument that they should continue to see their taxes fall on the grounds that they would create jobs with the money was a fallacy.
But this argument is wrong on several counts. Apparently Jim believes that if he went to the office of some big corporate Chief Financial Officer and said, "Show me your cash balance", he would be ushered into the executive nap room where the mattress on the comfy bed would be lovingly and reverentially lifted to reveal….a Christmas-size warm wooly sock stuffed with million dollar bills.
But that's not how it works. Companies don't leave cash in socks under the bed. If they don't pay it out in dividends, increased wages, or investment, they have to do something to earn a return on it. With today's low interest rates, those returns may not be high, but that money is still important. What is more important, however, is to remember that while waiting to decide what to do with the cash, they hand it over to other people to use. Financial institutions take that cash, lend it to others, and pay the companies that lent it a return. At a time when the financial sector, the lubricant of the commercial world, is recovering from a near-death experience, such cash is a boon. It is not sitting in a sock anywhere. As a famous economist once observed, saving is spending – they are not mutually exclusive activities. Saving is letting someone else use (spend) your money until you need it.
The other incorrect implication of Jim's argument was that the companies were somehow inexplicably sitting gleefully on piles of cash and doing absolutely nothing with it…for no observable reason.
Nothing could be further from the truth. Companies get criticized for holding on to too much cash (Apple is a recent example), and they have other things they could do with it, such as distribute it to shareholders as dividends, share buy-backs, and so forth. In fact those moves are popular with investors. But companies are not doing so. Why not? As one analyst wrote recently:
"…cash-rich companies sit pretty during these times. They don't have to borrow capital and can earn from short-term investments of the cash in their hoard. "The benefit they earn on the treasury income won't be substantial. But cash becomes handy now because they can fund their growth without resorting to high-cost debt".
In other words, if companies are holding on to cash it is because they are preparing themselves for major investments that they might have borrowed to finance in the past. Self-financing is cheaper right now, and financial institutions are still skittish about lending.
The fact that companies are not yet investing their cash piles, in Canada or elsewhere, is because there is still too much uncertainty. In Canada uncertainty includes market access to the US in the wake of Buy America and the rise of protectionist sentiment, our neighbour's weak economic recovery (driven in part by their irresponsible fiscal policy and the uncertainty it is creating), poor border infrastructure, the high dollar, volatile resource prices…and the uncertainty around the tax climate created in part by the recent controversy about corporate taxes.
Companies have to invest for the long term, in conditions of uncertainty, and hope that they can make a decent return by doing so. One thing we have got right in Canada in recent years has been to assure companies thinking of investing here that they face an environment of falling taxes and a commitment to remain competitive in this regard among industrialized countries.
The argument that because companies are sitting on cash we should tax it away to invest in social programmes is to punish those companies for acting responsibly in the face of the recession and the damaged financial system, as they prepare to do what we want them to do: invest in Canada's future productive capacity. As I said on the television, there is no good time for bad tax policy.
Brian Lee Crowley
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