The Conceptual Flaw in the Hillary Clinton Tax Plan

 

Hillary Clinton’s proposal to increase capital gains taxes on short-term investments in order to incentivize key corporate officers to invest in the long haul has been the subject of widespread debate in recent weeks. As I note in my new column for Defining Ideas from the Hoover Institution, however, the shortcomings of the former Secretary of State’s proposal run deeper than debate over the cap gains rate suggests:

Start with this question: Is the proper object of taxation income or consumption? Right now, we tax income, but as a matter of principle that decision is highly suspect, because of the extra taxation it places on personal savings, savings that become the capital investments Clinton wants. Any capital gains tax, either long-term or short-term, exerts a lock-in effect on investors that makes them reluctant to sell their current investments to buy new ones.

An investor who pays a 20 percent capital gains tax to the government has less money to invest in a new project relative to an old one. Thus, he may well be reluctant to make that shift even if the new investment promises a higher rate of return than the old investment. The numbers may not add up given that he is working off a smaller investment base. A decision that reduced the capital gains to a zero rate would, after transactions costs, leave the same amount of money to invest in the new project, which makes it easier for capital to move to its higher value use. In the alternative, the zero tax rate could be extended only to those capital gains that are reinvested in other similar ventures within, say, a 30-day period.

Note that the dangers of lock-in explain why the Clinton proposal is upside down. First, the Clinton proposal is likely to reducetax revenue as it lowers the rate of investment and postpones the turnover among investments. This second consequence is very serious because a sensible investment strategy depends on skilled investors cashing out of mature investments that are now lower risk in order to reinvest in new high risk ventures that can benefit from their expertise.

You can read the argument in full here.

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  1. Could be Anyone Member
    Could be Anyone
    @CouldBeAnyone

    Does anyone really expect Hillary Clinton to, for some weird reason, actually advocate for intelligent economic policies though? I mean she is essentially political ambition made manifest in the flesh and will do anything to win the nomination and the election which will mean she will first run left and make claims to support crazy left wing economic policies then try to run far enough to the center to not lose the left wing of her party.

    Besides that the Democratic Party (which like any political party isn’t inherently evil or bad in any sense) is currently dominated by the progressive left to the point of supporting any government intervention under any pretext of supporting its standardization efforts (under the guise of “leveling the playing field”) on most things in American Society.

    • #1
  2. Ricochet Member
    Ricochet
    @IWalton

    Well, if we can lock it in long enough we get revenue on inflation, that must be worth something Actually we should treat all capital gains as income whether long or short term, but indexed, and all corporate profits as income of the holder of record so all the tax questions boil down to how much burden does income carry and how much consumption. The stockholders decision is hold or sell and the CEO’s decision is will stockholders punish me for too many retained earning and too high salary now that it’s their money. Is it flat or progressive? I like New Zealand’s vat. but I’d lower the rate, link them and make them flat. Cain had it mostly right but 10 10 has a ring.

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  3. The Reticulator Member
    The Reticulator
    @TheReticulator

    John Penfold: Well, if we can lock it in long enough we get revenue on inflation, that must be worth something Actually we should treat all capital gains as income whether long or short term, but indexed, and all corporate profits as income of the holder of record so all the tax questions boil down to how much burden does income carry and how much consumption. The stockholders decision is hold or sell and the CEO’s decision is will stockholders punish me for too many retained earning and too high salary now that it’s their money. Is it flat or progressive? I like New Zealand’s vat. but I’d lower the rate, link them and make them flat. Cain had it mostly right but 10 10 has a ring.

    As someone who loathes the idea of a VAT almost as much as nationalized health care, I’m curious as to what you like about New Zealand’s.

    • #3

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