From my professor's lecture slides:

•In a perfect capital market, firms have few reasons to preserve cash since external financing can always be obtained at a fair price

•In the presence of imperfections:
~Firms may maintain excess cash as a precaution against the possibility of future negative shocks or liquidity constraints
~Example: Recent financial crisis
–Commercial paper markets dried up, lenders were worried about counterparties defaulting
–Many firms were not able to access credit markets

•What is a liquidity shock?
•With a large liquidity shock, the borrower may not be able to obtain funds (at least not at reasonable rates)
•What are some benefits and costs of liquidity?

•Benefit: Avoid Issuance Cost
~Don’t have to access external capital markets
~Avoid transaction and asymmetric information costs
–In times of need, asymmetric information problem is probably more severe

•Benefit: Ability to invest even when external markets are too costly
~If earnings are not likely to be enough to fund future positive-NPV investment opportunities, the firm might accumulate a large cash balance
~Allows firms to seize opportunities when their competition is capital constrained

•Benefit: Avoid Financial Distress Costs
~If firm’s operations do not generate sufficient cash flow to service debt, liquidity reduces likelihood of incurring financial distress costs

•Cost: Agency Cost (this should look familiar)
~Free Cash Flow problem
–Executive perks, over-paying for acquisitions, etc.
~Paying out cash and issuing debt can decrease the FCF problem

•Cost: Taxes and Cash Retention
~Corporate taxes make it costly for a firm to retain excess cash
~Cash=Negative Debt (mostly)
–Firms earn interest on cash equivalents
–This is like a negative interest tax shield
~Double taxation on firm’s cash:
–Corporate tax and capital gains tax on interest earned
–Firm pays tax on the interest earned that is added to the value of the firm, which is taxed again when investors receive payouts.

There you go. This isn't a fucking a socialist professor, but a business school professor that fucking uses Atlas Shrugged references in almost every exam/sample problem. If corporations expect taxes to increase, then they will leverage, since it's more costly to hold on to cash (and it's more valuable to hold debt, to take advantage of tax shields).

I believe there are moral and economic arguments for the Buffett tax. The fact is that increased taxation on investment has not been shown to significantly decrease investment and the idea that low taxes on investment spurs the economy doesn't have a whole lot of proof behind it. At the same time it's morally repugnant.

1) So, you can't get a loan because of the situations I mentioned, thereofre you can't get a loan, and the problem is you can't get a loan.   Companies would be willing to invest a bit if they had any idea what to expect next year.

Nevermind the Voelkler rule which by law is going to force way more cash reserves.

2)  Well first, your central arguement is that governments need to spend to create growth, yet you are argueing growth isn't occuring because of uncertainty in the face of government spending.  Your arguement here completely defeats your overlying premise above.

3) Economic theories, much like scientific theories eventually have to fall to the wayside when in contradicts the observable facts.  In general there is a HUGE gap between educational economists and practical economists.  Educational economists tend to ask the "wrong" questions.

So, companies are going to invest more, because on increased taxes on investments, and increased taxes on things in no way related to money supply?

Pay attention to what taxes are being proposed being raised.  In this case, it's taxes on investments.  That and then increased taxes that have nothing to do with corporate tax rates... but instead rely completely on the size of your workforce.

Here's something to keep in mind.

Economics is not a hard science.   It's not physics, or geometry, or biology.

Economics is a social science.

As such, you need to focus on specific choices, and why decisions are made, and the culture of the people making the descisions.  The economy is people, not numbers and silly absolute statements that don't pay attention to situations or the reality of what's going on.

1) Wha-wha-what? You repeated the same thing three times.

You can get a loan, just not for as much as you want and for low rates, nor quickly.

Companies will be willing to invest if there were investment opportunities. But in order to have such an opportunity you need to have DEMAND. Otherwise, it's a negative NPV investment.

As for cash reserves, I'm not really knowledgeable on the legislation, but isn't it mainly targeted towards banks?

2) Regardless of what we believe the effects of government spending is, my point is that firms are not spending because of the uncertainty behind consumer demand and the global economy (e.g. what if the EU collapses). I have no idea what you think I was saying, but whatever you have in your head is wrong.

3) Okay, so you're essentially taking a nihilist argument then. Nothing's right. Well, except for what you think.

I mean, common fucking sense. Why would you hold money if you're going to get taxed more? So the government can grab more of it?

1) The Voelkler rule is targeted at banks, it is, which is why banks aren't lending out as much as they would be... however in general banks report actually not fufilling as many loans as they'd like.

Keep in mind though... we are mostly talking about companies that don't even really need loans.  They're sitting on cash reservse.

2)  Except the economy has slowly improved despite europe pretty much being hopeless this entire time.  After a while europeon risk is just priced in to operating procedures and people say "It's now or never."  Except they haven't because there is other risk that can't be quantified.

3)  The point was, companies aren't doing anything with their money.  Saying economic theory says they won't doesn't mean a whole lot when they are. 

It's like argueing that biological theory says a bear won't eat a person so you should relax, when the guy next to you is having his leg eaten by a bear.

You seem to be ignoring the fact that the taxations being proposed are of two kinds....

A) An alternative minium tax targeted at investments.  Make a certain amount of money in investments and now you have to pay the same rate as a middle class family would if they had that cash on hand.  Oh, also there is the whole risk factor of your investments bombing.

B) A tax based on the number of employees you have.  Meaning the tax, will be based on how many employees you have/how much their healthcare will cost (complete unknown after this law healthcare goes into effect.)

Also in general 57% of companies cash are in overseas accounts that are free from US Taxation.   You can hold money there tax free, and just bring it back whenever and pay a one time repatriation fee... guess your professor hasn't gotten to that yet.

Forcing a higher taxation rate on idle money could kick that around. I would argue for regulations that reward companies for growth and punish companies for providing executives with excessive pay-rises or simply sitting on huge warchests for so long. If the carrot of economic growth through spending because of companies' petty political concerns cannot be used, then the stick must be employed: spend the money well or i'll just take it from you and spend it how i want.

Yeah, i agree with that.  I mean i keep thinking back to  Howard Hughes.  Just because idle money was more expensive then cash on hand.  Of course it's something you'd want an expiring timer on though.

The big problem though is that 57% of corporate idle funds are in overseas bank accounts immune to current tax laws.  Further tax increases may end up instead just increasing that number.  So instead we probably need to find a way to tax all idle funds regardless of the country they are currently in.