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Are Large Companies Immune to the Fiscal Cliff?

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

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

28 Comments

  • At my job, my conservative boss is in the “the sky is falling” and thinks that making everyone feel insecure about our jobs is reasonable punishment for not voting sharing his political views. Really, I have never heard so much boo-hooing about taxes going up in my life. I dont like it either, but we all need to find a way to adapt and life will go on.
    Holly@ClubThrifty recently posted…The Amazing Power of DebtMy Profile

    • John says:

      That’s a shame Holly. Having differing views on who you voted for should not be used to make employees feel insecure. I would agree about the complaining about taxes going up. We’ve been able to enjoy lower taxes for sometime, and we simply need to face the facts. I don’t like it, but I know I like to use the things that our tax money pays for.

      • Don’t worry- we are all business as usual here. Plus, since we live such a frugal lifestyle and have a large cash cushion of savings, we would be fine if one of us were laid off. Actually, it might be a blessing in disguise and finally give one of us the full time hours to devote to our blog.

        Truthfully, I am not “stuck” here and anybody who thinks that we are has their head up their ass. That is the power of living a frugal lifestyle. I almost have F%*&K you money.
        Holly@ClubThrifty recently posted…The Amazing Power of DebtMy Profile

    • Argh, Holly, I have to apologize on behalf of my dad and his company – they are one of those “you’re all doomed!” employers and if I have to hear about it again, I’m going to go crazy. He personally blames me (and my politics) for it all…

      That said, I’m totally frustrated at the cost of our election for – what, a return to the status quo? That money could have been far, far better invested somewhere (anywhere!) else.
      Elizabeth @ Broke Professionals recently posted…Beneficiary Foul-UpsMy Profile

      • John says:

        I totally am with you on the frustration level Elizabeth. They spent hundreds of millions of dollars on this election to send back largely the same group of people who couldn’t get anything done in the first place. That money could’ve done a many good things as opposed to fill our airwaves & mailboxes with negative ads.

  • I think the main thing that large companies have going for them is that they are better prepared to deal with the variance in tax policy. They have lots of resources at their disposal that allow them to react very efficiently to new policy, as well as forecast out the most likely policy scenarios. I wouldn’t say immune, but they definitely are much better off than individuals or small businesses.
    DC @ Young Adult Money recently posted…Choosing organizations to donate to: What do you factor in?My Profile

  • justin@thefrugalpath says:

    A great deal of companies hold cash outside of the U.S. Many countries require a corporation to have cash and assets in the country in order to sell their product there. I saw a special on this a while back. It was discussing how since the U.S. has some of the least corporate friendly tax rates, corporations just keep the money out of the U.S. and avoid taxes on it.
    I can see the corporations point. I mean, if you’re multinational, you can put the money to better use outside of the U.S. and pay less on it then go for it. They didn’t make their money here, they made it in that country. If our tax rates were more friendly towards corporations they’d be more likely to bring it back home.
    justin@thefrugalpath recently posted…The Saver’s Tax Credit 2012My Profile

    • John says:

      I would agree Justin, to a certain extent they do need to keep some of their money in other countries to abide by those laws. I do know though that some, like Apple, are doing it largely to avoid being taxed. I get that, but it can be a tough pill to swallow when you see that they have $100 billion in cash.

      I also agree that our tax policy is not very favorable towards firms bringing that cash back stateside. I would be interested though to see how many would actually put it to use here if that were changed though.

  • Savvy Scot says:

    I also don’t see an issue with what big companies are doing.. who could blame them. Buying back equity is definitely a wise move IMO.
    I think that the media have grown the fiscal hurdle into a fiscal mountain which has become a fiscal cliff. Totally blown out of proportion… Ridiculous
    Savvy Scot recently posted…Banking is no Different in Dubai!My Profile

    • John says:

      I would agree that the media has played a HUGE role in this. But, then again, when do they not? I do think though that there is a balance between a company doing buybacks and using it to hire more people. But, then we’d also need a better tax system to incent that.

  • Jason says:

    I also don’t have issue with what large companies are doing and I believe the media simply pushes what sells papers and gets traffic, so of course they’re going to try to make people as scared as possible. We survived before the tax cuts and we’ll be fine once they’re eliminated. Sure, there may be some changes for people, but we’ll manage.
    Jason recently posted…Recipe: Bacon and Egg MuffinsMy Profile

    • John says:

      I totally agree Jason. The media, largely, does what is in their best interest in order to get traffic. I also agree on the taxes. Sure, it might sting for a while, but we will be fine in the long run.

  • Money Beagle says:

    It astounds me that we elect these people that then turn around and not do their job to the point where it affects our personal finances, the global economy, stress, media coverage, and everything else. Again, all because they won’t do their job.
    Money Beagle recently posted…Camping Misadventures 2012 The Final Chapter And WrapupMy Profile

  • John excellent post. Your point about the large amounts of cash being held by many large companies is a key one. I don’t know how real the Fiscal Cliff is and what the true consequences of “going off of it” are. I do know that if large companies feel that the best use of this extra cash is in their own reserves vs. investing this is a real problem. I don’t blame the companies as their top goal is and should be maximizing shareholder wealth. Blame for the Fiscal Cliff lies squarely on the shoulders of the do nothing politicians in Washington of both parties. The election’s over, let’s work together for the common good of our country, please.
    Roger @ The Chicago Financial Planner recently posted…Should You Buy Financial Services From Tommy Lee Jones?My Profile

    • John says:

      Thanks Roger. I totally agree that companies are going to do what is in their best interests and maximize that wealth. I also don’t know how real this supposed Cliff is. I think a lot of it is media hype. I would love to see the politicians work together for what’s best, but I fear we may be asking for too much. :(

  • Interesting post. I haven’t seen much evidence of this in Canada. At least not yet.
    Miss T @ Prairie Eco-Thrifter recently posted…4 Tips For The Beginning Dividend InvestorMy Profile

  • Mandy @MoneyMasterMom says:

    I don`t mind what big companies are doing. If I had the resources I would do it too. We area little more shielded from the falling sky in Canada, but if your sky falls, you can be sure, it`ll give us a headache too.
    Mandy @MoneyMasterMom recently posted…Be Bad for the EconomyMy Profile

  • Are you worried about the Fiscal Cliff? I’m not so sure its going to go down. I’m keeping my hopes high for the next six weeks.
    My Money Design recently posted…Black Friday Shopping Tips – Preparing to Get the Best Deals!My Profile

    • John says:

      No, I am not worried about the Fiscal Cliff. I think 90+% has been blown out of proportion by the media (because they NEVER do that). If (and that’s a big if) anything happens, I tend to think it’ll be short term in nature and I am holding out hope that something will happen at the 11th hour.

  • I have to admit I haven’t a clue what this means, if anything for me. I’ve been too f’n busy just trying to make it! :)
    Budget & the Beach recently posted…Yoga SnobsMy Profile

  • If I had 100 billion dollars and could avoid paying taxes, I would put it somewhere else as well. Until the climate is more business friendly here, I don’t see this changing. “Control what you can and don’t worry about the rest” is a great life motto.
    Kim@Eyesonthedollar recently posted…Being Thankful and a $100 Giveaway!My Profile

    • John says:

      I totally agree on the motto Kim, one we all need to follow better. Great point on the business climate here as well, it could stand to improve.

  • Veronica @ Pelican on Money says:

    Isn’t it funny how we have a cat and mouse game going on between corporations and governments? One wants to tax the other, while the other wants to evade as much of that tax as possible, yet provide just enough money to buy the vote to influence the same government. A big loop of nonsense. Why are we so grateful for Apple who hold their holdings overseas to evade taxes? Makes me wonder which politician is filling his pockets. Sure, the fiscal cliff when it comes will set us back some jobs, dividends what have you, but the big companies will survive because at the end of the day all it takes is shifting some more assets overseas to offset taxes. Maybe I’m just paranoid? :/
    Veronica @ Pelican on Money recently posted…Waking Up Early Black Friday? No Thanks.My Profile

    • John says:

      Great point Veronica! I could not agree more on the “big loop of nonsense”. They can blame each other, but both are looking out only for their own self interests and not for the interests of the country. I have no problem with a company making a good profit and returning some of that to investors, but a there’s a line as well in which they should be returning some of that to the country they’re in, but sadly (due to various reasons) they don’t do that.

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