Tuesday, May 21, 2002

Alan Cox gets it backwards I have great respect for Alan Cox, but he is precisely wrong to say Microsoft's cash hoard means its avoiding taxes. He argues
If Microsoft paid typical US dividends they would have under 20% of their current slush fund. (under because at 80% dividends the investors not the corporation got the benefit of reinvestment of most of the interest)
If they choose to sit on that $40 billion they should be paying tax on it because I really doubt they can demonstrate its neccessary for operational overheads. In which case 39% of it belongs to the US people. Which on a quick back of the envelope calculation is a bit over $50 per US citizen
As a matter of fact, Microsoft does pay taxes on retained earnings, just like any other company. It's true the cash would be taxed again if distributed as dividends, but that helps neither investors nor Microsoft, which is why fewer and fewer companies issue dividends any more. In fact, if Microsoft wanted to avoid taxes, they would take on stacks of debt and buy back huge swathes of their own shares. Debt is tax advantaged, so reduces corporate taxes, and buying back shares returns cash to investors via (untaxed) appreciation.

Microsoft keeping around stacks of cash means it's paying more tax than it has to. Microsoft refuses to take on debt and buy back shares because that would reveal it has no more good investment ideas.

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