We all know that Apple is sitting on vast amounts of cash: we all also know that US corporations in general are cash rich at present. This is something of an economic problem as, of course, we would rather see this money being put to work. Either invested by the companies themselves in new activities or passed back to investors so that they can do so.

US non-financial corporate cash holdings rose to $1.24 trillion at the end of 2011, reflecting the strength of companies’ operations in emerging markets and the negative tax consequences of repatriating cash to the US, according to a new report from Moody’s Investors Service. Apple Inc., Microsoft, Cisco, Google and Pfizer held the largest amounts of cash, says the report.

Those five cash kings have $276 billion, or 22% of the total non-financial corporate cash balances, up from $207 billion, which represented 17% of the total in 2010, says Moody’s. The top 50 holders of cash account for $749 billion, up 13% from $665 billion in 2010.

Investors like getting money from their investments so why don’t the companies just hand it back? Well, there’s this pesky part of the tax code:

Moody’s estimates nearly $700 billion, or 57% of the corporate cash total, is held overseas. This amount reflects the strength of most emerging-market economies over the last few years, the negative tax consequences of repatriating cash to the US and the disproportionate use of cash for US dividends, share buybacks and acquisitions. Without permanent reform that lowers the tax on overseas profits, Moody’s expects the absolute and proportionate amount of cash held overseas will continue to rise.

Profits that are earned overseas do not pay US tax unless they are actually brought back into the US. They pay taxes overseas, sure (at what can be alarmingly low rates with a bit of planning) but the US has one of the highest corporate income tax rates in the world so already taxed profits that are brought back to the US will usually pay more tax again.

Eric Savitz has a take on what this means at Apple for example. Given that tax point, it would actually make sense for Apple to leave the large part of its cash hoard offshore, borrow money within the US and then pay a dividend from that borrowed money.

As another example, Google has a large net cash position but it also has borrowings in the US: much of the cash is again offshore.

There are two economic effects of this taxation anomaly. The first is minor. It’s simply an accounting identity that if households and corporations are net savers then the government must be a net borrower (adjusting for foreign issues). This point is often made in fact, that the Federal deficit is just the mirror image of everyone else saving so much. While the accounting identity is true the usual explanation overstates the case: some 60% of the corporate cash, that corporate savings, is offshore and is thus not having that effect on the US deficit. But that’s a minor point.

The second is more important. We’d rather like the returns on investments made by Americans to be returned to those Americans. This enables them to either consume or reinvest those returns as they wish. Further, there’s a good argument (certainly one that I subscribe to) that we would rather any reinvestment be done by those individual investors, rather than within already large and profitable companies.

This is because, with a few obvious exceptions (Apple being, in the past few years, one of them), the truly innovative and thus economy driving investment is done into new companies, not the continued development of extant ones.

So we’ve ended up, through two quirks of the tax code, rather where we would prefer not to be. One is the US double taxation of dividends meaning that US companies tend to distribute a lower portion of their earnings than in many other countries. The second is this tax exemption for profits made offshore that stay offshore. This again reduces the distribution to investors of the profits being made in their name. If it is also true, as I aver, that we’d like to see that money cycled back into new companies, new investments, then these two parts of the tax code are inhibiting that desirable process.

As to the solutions, well, for dividends it’s pretty simple: just do what pretty much every other country does. Either tax them at the company level or tax them in the hands of recipients, but don’t do both. On the offshore profits point either tax such profits when they’re made (ie, remove the exemption) as the UK used to do or just state that well, they’re profits being made outside the US so why should the US tax them at all (the system the UK is moving towards)?

I would note that I don’t expect any of those ideas to ever come to fruition, sadly.