Are Large Companies Immune to the Fiscal Cliff?
Unless you’ve lived under a rock the last few weeks you’ve certainly been inundated with talks of something called the Fiscal Cliff (cue Twilight Zone music now). The personal finance blogosphere has been teeming with articles about it. Heck, I even wrote a post about it a few weeks ago. Part of the reason behind all the hubbub is the media is trying to turn us all into the proverbial Chicken Little and make us believe the sky is going to fall on January 1. While this may happen, I really don’t expect it to. My wife and I were just discussing the other night how the Fiscal Cliff might affect us in terms of our taxes and possible cuts. That conversation got me thinking about what the Fiscal Cliff means for the large corporations that make up the heart of the stock market. Does the Fiscal Cliff affect them? You bet it does, but in a very unique way.
What Have Large Companies Done Prior to the Fiscal Cliff?
As a disclaimer, I want to point out that I am not a tax attorney, so I am not aware of all the inner workings of foreign tax law. That said, many large companies have made it a practice to hold loads of their cash in foreign countries as a way to get around U.S. tax laws. Whether it be right or wrong in your eyes, they’ve been doing it for a while and in high frequency before the presidential election last week. Taking a look at what some of the largest companies have in terms of cold hard cash, the amount can be staggering. Apple, for example has nearly $100 billion in just cash. Chevron has roughly $17 billion in cash and Google has roughly $9 billion in cash. Now I don’t know how much of that stash is in offshore accounts, but suffice it to say it’s probably a lot. They’ve been waiting out to see what the results of the presidential election were and what’s going to happen with the Fiscal Cliff. Now that they see that it’s going to be more of the same in terms of politicians, they have a decision to make about what to do with some of their cash.
What Are the Politicians Doing About This and the Fiscal Cliff?
In a word, the politicians are doing nothing. They’re doing what they do best – posturing. To go off on a tangent for a minute…we sent back largely the same group of people (after spending billions of dollars in campaigning) that were in Washington prior to the election and expect them to do something differently than they were weeks ago. By definition, that’s insanity, but I digress. They are claiming to be talking, or at least setting meetings so that is a start I guess. Unfortunately, I think it’s going to end up in a game of chicken to see who flinches first. That’s enough about the politics side of it as that is not my goal in this post.
What Does This Mean For You and Me?
Now that we know that many larger companies have been holding large amounts of cash on the sidelines and waiting to see what is going to happen with the Fiscal Cliff, we need to know how this will affect us. Unfortunately, no easy answer to that question exists. However, there are a number of things that will likely happen. First, companies will probably be less likely to pay out the cash as dividends. This is because they pay taxes on those dividends that they pay out, plus we do as individuals. This is where the term “double taxation” comes from. It is also likely that they will not spend the money on hiring more people. That would result in more taxes and increased payroll and benefits expenses. I expect large companies to engage in additional share repurchases as the Fiscal Cliff approaches. Share repurchasing allows companies to buy back their shares and obtain greater equity in their companies. They’ll pay out cash to whoever wants to sell back their shares. This possibly helps them by buying shares at a lower price and the stockholder gets the cash now.
To offer my opinion, I think the Fiscal Cliff is real in that it’s possible. But, I think it’s a term the media has latched on to and run with and results in scaring those who’re not informed about it. Unless you’re secretly a billionaire and have the dough to have an attorney and a highly paid tax attorney, you’ll probably be in the same boat as the rest of us commoners and just have to deal with the ongoing effects of a down economy and dearth of jobs. That said, I think the best thing to do is be watchful but not fearful. Control what you can and don’t worry about the rest. Easier said than done, I know, but true nonetheless.
What’s your take on the Fiscal Cliff? Is it maddening to you that large corporations can get buy their way out of much of it, or are you indifferent?
Photo courtesy of: Colin Brough