Income inequality is a hot political topic and a report showing that a small number of U.S. companies hold most of the wealth could stir up more talk about ways to change tax policy.
The majority of corporate cash is amassed in the coffers of 18 U.S. firms — they held 36 percent of all wealth last year, a jump from 27 percent in 2009 with the gap expected to widen further, according to a report from Standard & Poor’s, a New York-based credit rater.
{mosads}That means that out of a record $1.53 trillion in cash and short-term investments held by U.S. corporations the wealthiest 18 held about $535 billion.
“In our view, current U.S. corporate tax policy and accommodating credit market conditions have been primarily responsible for this growing wealth gap,” the report said.
Furthermore, the wealthiest top 20 percent held 89 percent of total cash, leaving only 11 percent for the bottom 80 percent of firms.
The top 1 percent are mostly investment-grade businesses — Microsoft, Google, Cisco, Apple, Oracle, Ford, Coca-Cola and Boeing — and are concentrated in technology and healthcare industries.
On the individual front, where most of the conversation has occurred, a separate S&P report on Tuesday showed that the gap between the nation’s richest and the poorest is weighing on the economic recovery.
The corporate analysis shows that the top 1 percent gets about 55 percent of its revenues offshore, and that more than half of the cash flow is generated overseas, as well.
That cash is rarely brought onshore because of the U.S.’s 35 percent tax rate, which would be on top of the taxes paid in the country in which the revenue was generated.
“As a result, overseas cash continues to accumulate untouched,” the report said.
“It’s undoubtedly going to increase.”
Instead, firms are “synthetically” repatriating the cash through cheap debt to make up the gap between the domestic sources and uses of cash, which may be as high as $100 billion for the top 1 percent.
“We believe the availability of cheap debt has been a key driver for the record cash balances for not just the top 1 percent, but for U.S. corporates overall,” the report said.
“Further, without access to the accommodating credit markets, the top 1 percent would likely not have provided the returns that shareholders have become accustomed to in recent years,” the report said.
“Or at the very least, the cash balances would be a lot lower after repatriation taxes and shareholder returns.”
Despite taking on more debt, the firms are in better financial shape than they were five years ago, the report said.
“Without a clear path to corporate tax reform, we expect the wealth inequality to widen over the near term,” the report said.
All told, 83 percent of the cash held by the 1 percent is made overseas, an increase from 79 percent in 2012.
With the U.S. facing a loss of more than $80 billion this fiscal year from a delay in bringing back corporate profits, President Obama said this week he wants to discourage U.S. firms from buying foreign competitors to change their address and cut their tax bill through a corporate “inversion.”
Still, Obama and Treasury Secretary Jack Lew acknowledge that Congress must act to ensure the practice is stopped.
“With no near-term shift in tax policy or a tax holiday in sight, we expect the top 1 percent to continue increasing their share of the overall cash pie through overseas cash growth and domestic borrowings,” the report said.