Untaxing-III (Laffer Curve) ch 13:     CFOs Hoard Cash

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There are two culpable parties to this corporate tax mess. Aside from the ill-advised tax policy makers, there are the public company CFOs for not paying 100% of $857.142 billion (the 2008 total of US public company profits) as dividends to their shareholders. Let’s be extremely cognizant and respectful as to what the math and forensic accounting is saying:

  • A tax of $197.1 billion suppresses a $6.57 trillion increase in shareholder equity value;
  • A tax of $300 billion suppresses $10 trillion increase in shareholder equity value; and
  • The failure of CFOs to return $857.142 billion as dividends is suppressing a $11.43 trillion increase in shareholder equity value ($11.43 trillion = $28.57 trillion minus $17.14 trillion).

A New York Times article (dated August 16, 2011) titled “Tax Policy Change Would Bring Cash Piles Abroad Back Home” cites $1.375 trillion kept outside the US by “519 American multinational corporations.” If this amount is divided by 10 years and escrowed for dividends when the dividend yield rate is 3%, a $4.583 trillion increase in market value would be instantly produced!

Let’s be clear. The CFOs’ failure to return $857.142 billion in profits is a suppression-tax on public company market values, causing the market value to be $17.14 trillion instead of $28.57 trillion. When we add the realistic assumption of escrowing repatriated cash for 10 years as dividends causing a $4.583 trillion increase in market value, this amount added to the $28.57 trillion makes a whopping $33.15 trillion added to the US GDP!

Instead of $33.15 trillion added to the US GDP, we have $17.14 trillion. The difference of $16.01 trillion is very significant.

This means that the public company CFOs’ policies are over 2 times ($16.01 trillion divided by $6.57 trillion) more dangerous to the public companies and America’s social good than the government’s $300 billion tax on corporate profits!

No one is better equipped than CEOs and CFOs to give the statistical facts to challenged politicians that a $0 tax on corporate profits presents $33.15 trillion in market values subjected to a 35% capital gains tax. But they don’t because they are risk averse.

Because it lacks a clear definition of and appreciation for Risk as a necessary component of true capitalism and innovation, the USA stands as a misguided example to the emerging world due to its tax and regulatory policies that are antithetical to capitalism and democracy. It is no wonder that some of the USA’s most productive engines are moving to foreign shores where capitalism is favorably treated (Fleeing to Foreign Shores New York Times June 7, 2011).

Go to (part III) chapter 14: Taxes and CFO Actions Suppress The GDP