Many companies are sitting on a lot of cash and not using it, why not tax that cash and force them to use it or lose it?
It is often said that tax increases cost jobs because that money is no longer available to a company, but if the government only taxes profits then wouldn't reinvesting that money be preferable depending on the rate?
Similarly I have heard it said that many companies are sitting on a lot of cash and not doing anything with it because of fear of a bad economy. Wouldn't the best way to jump start a recovery be to attempt a tax structure that would discourage holding cash and not using it?
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Financial Management 101:
Company's usually don't sit on cash unless the investment environment is really bad (or during a period of deflation, which seldom, if ever, occurs under modern centralized banking).
A manager's job is to maximize the ROI (return on investment) of the company's assets (technically, they want to maximize the ROE [return on equity] to shareholders, but this requires efficient leveraging as well as maximizing ROI... so don't worry about that too much, leveraging has little bearing in this discussion.)
Cash is essentially a non-interest bearing asset, so it's ROI is zero (cash equivalents have a negligible yield, but once you put inflation into the picture, it doesn't really matter). You actually get a negative real return in an inflationary environment, so you really don't want to be sitting on cash under normal conditions.
Managers use cash for 3 different activities: operating cash flows (i.e. cash register money and money for inventories, etc.), investment cash flows (buying competitors, equipment, opening up new markets), or financing cash flows (retiring debt). Good managers will put the cash to use in whatever is going to get them the best return.
For many companies, in this current macro environment, there are not a lot of good investment opportunities: low interest rates, weak demand, high market volatility and uncertainty about popular risk models that were used in the 2000's all contribute to this. A lot of companies would rather retire debt (which has the same essential return as the interest rate on the debt you are retiring) or just sit on the cash until the investment waters are less choppy. What happens is that managers use risk-adjusted rates of return to determine when an investment is worth it or not (return/risk). Low interest rates (aka the return) divided by high risk (aka the aforementioned bad macro conditions) make for low returns on possible investment projects.
If you start taxing wealth in the way you are describing, it would compel managers to make bad or wasteful investment decisions, because you are creating a negative hurdle rate (which is the rate of return required for an investment activity to be worth it for the company, and which is usually equal to real marginal financing costs). This would make the economy worse, not better, because a whole lot of capital would be allocated inefficiently. If you set the "wealth tax" at 3%, I would rather put my money in an investment that yields -2% than hold onto my cash, and investing in that kind of vehicle is just stupid, for me and the economy in general.
What really needs to happen is for the macro environment to stabilize... and that leads us into the current debate over which action or lack of action is best for achieving this aim.
themandotcom 2 points · Sep 2011
spot on. basically firms are negative on their outlook on the longterm economic situation in america & abroad -> they don't invest -> increase unemployment ->firms become negative on the longterm economic situation.
Knorssman 1 points · Sep 2011
i was about to post a similar idea, well done!!
i think that the market can make decisions about the economy better than obama can
one trend to keep in mind is that the cost for the consumer to have Lasik eye surgery and cosmetic surgery have been going down over time (not regulated by government) however, life saving operations which are coming closer to being monopolized by the government are going up in costs.....
rendel [OP] 1 points · Sep 2011
Wouldn't that suggest that some firms aren't investing in perhaps more risky or low return investments not because they are a bad idea but because they are in a recessionary mindset?
There is no way to know that your return would be negative in many investments. You could forecast a range for the return. Alternatively if all companies are at the same time implementing investments they were holding off on that were previously cash then wouldn't that stimulate demand and therefore increase the return on all those investments? It's sort of like putting a stick in bike spoke of the vicious cycle.
Pendergrass 2 points · Sep 2011
In finance, risk and return are practically the same thing. Risk is a perception, return is the price set by the market for the aggregate level of risk perception. This is why "riskier" borrowers have to pay a larger rate of interest on borrowed funds. The things that go into a risk calculation are numerous and dependent on the type of activity we are talking about, but suffice it to say, the backbone of finance for at least the last 400 years has been the idea that return should be aligned with risk.
A "recessionary mindset" is one where everything looks like a bad idea, because businesses are not generating cash flows from operations. I am not exactly sure what you mean, because a "more risky" asset and a "low return asset" are generally opposites, but if you are trying to say that managers are accepting subnormal or suboptimal returns because of the current suboptimal macro conditions, yes, that is happening.
That is exactly what firms do. I am not sure how versed you are in statistics, but part of the problem is determining the correct mean return and also the correct distribution of other possible returns. A normal distribution doesn't cut it. The problem is that in a normal distribution, 99.9% of everything that might happen is only slightly more than 3 standard deviations away from normal, and the downside is as big as the upside. Most investment centers used modified normal distributions, but they were almost all too narrow, and failed to properly measure the likelihood of long-tail, "black swan"-type events, especially those on the downside.
That is an very elementary hypothesis that sadly seems to have been adopted by many of our elected officials. It is wrong, however, and is a gross oversimplification of the economy that only considers aggregate demand. Once capital structure is brought into the model, your hypothesis depends on the capital foundation of the macroeconomy being "normal", and the lack of demand being completely psychological... essentially this type of situation would be a justification for "Keynesian stimulus".
Unfortunately, capital foundations are not normal. Business, households, and even the government are all over-leveraged, which essentially means the foundation is shaky because there is too much debt and not enough equity to finance operations. This means that the returns to retiring debt are higher than normal, and in this case, higher than the returns on investment activity. Until business and household debt gets paid down, or until the Fed inflates its way to higher interest rates, the incentives to invest won't be there, because investment will not the most efficient use of cash flows.