In the survival-of-the-fittest environment of blogging economists, a revealing story unfolded. What began as a practical lesson in corporate finance, ended up highlighting the hypocrisy of a key Obama cheerleader who is all for higher taxes, as long as others are the ones paying.
Greg Mankiw, a Harvard professor, had a post which explored why the Google company would raise cash through the issuance of corporate debt when they are sitting on $37 billion [or a thousand million] in cash. Mankiw guessed that Google was playing the yield curves — between short-term and long-term interest rates — but questioned the strategy.
The Marginal Revolution blog then jumped in and created a discussion by repeating the Mankiw post. In the discussion, a reader brought the academics in from the clouds by noting:
A large portion of Google’s cash is tied up in its Irish, Cayman, and other offshore subsidiaries, where Google would be subject to a 35% US tax if they repatriated that cash back to the US or used it to acquire US property. Thus, it is cheaper for Google to pay 0-4% to borrow new cash to use in the US, in order to defer that 35% US tax on the offshore cash indefinitely (or until Congress passes a tax break for repatriating offshore cash).
At which point Mankiw was practically forced to update his blog with that perspective and then added the following clarification from another reader:
[Google] doesn’t have the same issue with overseas cash that many of its large-cap technology peers do. Of Google’s $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco’s cash is sitting outside of the country.
Did you catch that? All of Microsoft’s cash [about $40 billion] is kept offshore to avoid U.S. taxes. So now we know that when Bill Gates advocates higher taxes, he means for regular folk. No wonder he gets along so well with Warren Buffet. You will not be surprised to learn that much money is spent ensuring the current scenario continues. Since 2008, the Tech crowd support of Obama has been portrayed as a generational bonding. Now you know that ‘it’s not personal Sonny, it’s strictly business.’
Also interesting to note that you would have to plow through Google’s 83 page 10-K to arrive at Note 15 to the financial statements which would yield the following information about monies kept offshore to avoid U.S. taxes:
We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2010 because we intend to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2010, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $17.5 billion.
Good reference material: