May 12, 2015
When famed bank robber Willie Sutton (“Slick Willie”) was asked in 1934 why he robbed banks, he allegedly replied “because that’s where the money is.” We think that Slick Willie would be interested in knowing where the money is today: the balance sheets of U.S. companies.
U.S. companies are flush with cash, according to a report recently issued by Moody’s Investor Services. U.S. companies covered by Moody’s (excluding financials) are sitting on an astonishing $1.73 trillion in cash – a 4% increase over the past year. What is more interesting however, is where this cash resides. Nearly 64% of the cash (approximately $1.1 trillion) is held overseas, up 16% from $950 billion last year. A key reason that this cash is not repatriated back to the U.S. relates to taxes. Many U.S. corporations view the taxes that would be levied on these funds when they are brought back to the U.S. as being too onerous. In the absence of permanent tax reform or a temporary “tax holiday” that would entice these funds to come back under more favorable terms, the cash sits idle.
Near-record low interest rates have resulted in cheap borrowing costs that have kept companies from needing to access this tax-laden foreign cash. Yet with interest rates finally moving higher and extensive corporate borrowing already taking place, one has to wonder if there will finally be pressure on Congress to work in a constructive manner with corporations to begin repatriation. The impact of economic growth to the United States could be tremendous as the $1.1 trillion of cash overseas represents more than 5% of our gross domestic product (“GDP”). The absence of investment in new projects for expansion has been one of the defining elements of this tepid economic recovery. The inflow of funds could be a boon to the industrial and infrastructure sectors, as companies start investing funds back into their businesses. This would also have further reaching implications as greater domestic investment would create more jobs and overall prosperity.