Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme

 

shutterstock_287370872The worst sectors of the worst recovery since World War II are business investment in new plants and equipment and new business start-ups. These are the biggest job-creators, and their slump is a key reason for the sub-par labor recovery, with low participation rates and high involuntary part-time workers.

So if investment is the problem, what does Hillary Clinton go out and do? She proposes jacking up the tax on investment. It’s almost inconceivably stupid.

In her latest economic speech, Clinton proposes doubling the capital-gains tax rate on the profit made from asset sales (stocks, bonds, real estate) held a day less than one year up to two years. Right now, if you take a capital gain a day more than one year, you are taxed at a 20 percent rate. Actually, it’s 23.8 percent when you include the health-care surtax. So under Clinton’s brilliant new play, you’d be taxed at 43.4 percent — the top individual cap-gains rate of 39.6 percent plus the 3.8 percent Obamacare surtax.

That means, instead of keeping 80 cents on the additional dollar of profit, you’d only keep 56.6 cents — a 30-percentage-point reduction in the take-home-pay reward for taking an extra dollar’s investment risk.

This will create a tall barrier to investment — what we don’t need. If you tax something more, you get less of it.

Clinton complains about too much “short-termism” in the economy. But her program might well create more of it. That’s because she has a sliding tax-rate scale, whereby assets held two to three years would be taxed at 39.8 percent and assets held three to four years at 35.8 percent. And you don’t get back to the statutory 20 percent cap-gains rate unless you hold an asset for six-plus years.

Who’s going to lock themselves into that? What if new investment opportunities arise? Want to convert your current holding into cash so you can invest in your brother-in-law’s start-up? Maybe it’s the next Facebook. Who knows? The point is, the Clinton plan exacts a huge tax penalty on the movement from old capital to new.

The late Jude Wanniski called this re-oxygenating the economy. Ms. Clinton would snuff that out. Her short-termism fear will lock us into long-term economic stagnation.

By the way, the numbers are actually worse, because capital gains are already taxed as corporate profits. What investors pay is a double tax.

So let’s go back to Hillary’s top cap-gains rate of 43.8 percent. The government takes 35 percent of your profit in corporate taxes, leaving 65 cents to be taxed a second time as capital gains at the new 43.8 percent rate. That results in a take-home profit of 37 cents on the dollar.

Is that enough to reward the risk of investing in the next Uber? Except for Mayor Bill de Blasio, who hates Uber, most people would say no.

But that’s Hillary’s plan.

How powerful is the capital-gains tax? The non-partisan Tax Foundation rates it among the top three economic-growth influences on the economy, along with full cash expensing for new investment in plants and equipment and the corporate tax. And compared with the rest of the world, the U.S. has fallen far behind in terms of this investment-tax-penalty grouping.

This is government tinkering at its worst. The reality is that Hillary Clinton is attempting to punish success and redistribute income.

Did someone say tax the rich? Clinton proposes an income threshold of $484,850 for married couples filing jointly. Oh my gosh! Successful economic activists! Let’s get ’em!

Ironically, history shows that periods of higher capital-gains tax rates produce less revenue as a share of all federal revenue and as a fraction of GDP. Hillary’s not even redistributing efficiently.

And then there’s what some call the “Charles Gibson effect.” Gibson interviewed then-Senator Obama in 2008 for ABC News. Obama said he’d raise the cap-gains tax from 15 to 28 percent. But Gibson reminded Obama that when Bill Clinton and George Bush lowered cap-gains tax rates, revenues actually increased. In other words, the Laffer curve. But Obama said it didn’t matter because he wanted to be “fair.”

It also doesn’t matter to Hillary. She wants to beat Bernie Sanders, or at least cuddle up to the Vermont socialist. What nonsense. Bad economics and bad politics. Voters will understand this.

Goofy ideas like this make me yearn for a 15 percent flat-tax rate on everything. Personal income, corporate profits, capital gains, dividends — everything. But that still leaves me with a double-tax problem for investment and savings. So it’s probably time to blow up the corporate-tax code altogether. That would get us to the 4-percent-plus growth path advocated by some of the Republicans on the campaign trail.

And that would get us some “long-termism” economic growth — just what the country yearns for.

 

Published in Economics
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  1. BastiatJunior Member
    BastiatJunior
    @BastiatJunior

    Stupid?  Yes.  Inconceivably stupid?  No.  It’s quite conceivably stupid.

    • #1
  2. Ricochet Member
    Ricochet
    @OldBathos

    The damage to capital formation and employment is a feature not a bug. A twofer: It would reduce the wealth gap and the economic harm and job loss creates a premise for more “help” from government.

    • #2
  3. Mickerbob Inactive
    Mickerbob
    @Mickerbob

    The equality factor is the key and the important thing is we will never get there….

    • #3
  4. Z in MT Member
    Z in MT
    @ZinMT

    This might be a stupid question, Do corporations pay capital gain taxes?

    • #4
  5. Chris Member
    Chris
    @Chris

    Remember, turning $1,000 into $100,000 in the cattle futures market in the 70s suggested to her it’s “too easy” to make money in the markets.

    If nothing else, she’s come a long way from deducting donated underwear on their taxes.  Years of multi-hundred thousand dollar speaking fees going into a tax free foundation will do that, I suppose.  Wonder when she proposes paying 40% tax on that?  Probably at the same time she announces her accountants have already sent Treasury a check for “theoretical back taxes” on all those prior speeches.

    • #5
  6. The Reticulator Member
    The Reticulator
    @TheReticulator

    Back around the time of Bill Clinton’s coronation, he was proposing a lot of short-term tax incentives for businesses.  If Hillary doesn’t want the govt to incentivize short-term business thinking, how come she didn’t speak out at the time?

    • #6
  7. Ricochet Member
    Ricochet
    @IWalton

    Z in MT:This might be a stupid question, Do corporations pay capital gain taxes?

    No, neither do they pay corporate profits taxes.  Owners,  consumers, workers pay these taxes, depending on elasticities, competition in various markets etc.,  but corporations, don’t pay taxes.  Corporate managers in contrast can benefit from high corporate profits taxes because their salaries and bonuses are deductible costs and the higher the tax the less it bothers owners and the added complexity creates opportunities for interesting games often going by the name distortions. A serious problem with the Clinton tax is also that it makes it all just a little bit more complicated, which is always good for some kind of deal, even if it’s just good for tax lawyers.  The best corporate tax is zero but short term capital gains are income as are corporate profits  of the holder of record.   Long term capital gains have been mostly inflation for the last half century, so they’re almost all simple theft of capital.  The tax code is an abomination, almost as bad as the regulatory code.

    • #7
  8. The Reticulator Member
    The Reticulator
    @TheReticulator

    I almost forgot to ask, “What taxes is she proposing to cut to pay for this increase?”

    Even when there are other reasons to oppose a tax proposal we should never forget to ask about this part.

    • #8
  9. user_138562 Moderator
    user_138562
    @RandyWeivoda

    Larry Kudlow:

    And then there’s what some call the “Charles Gibson effect.” Gibson interviewed then-Senator Obama in 2008 for ABC News. Obama said he’d raise the cap-gains tax from 15 to 28 percent. But Gibson reminded Obama that when Bill Clinton and George Bush lowered cap-gains tax rates, revenues actually increased. In other words, the Laffer curve. But Obama said it didn’t matter because he wanted to be “fair.”

    I remember seeing that interview.  It’s bad enough when someone wants to confiscate wealth to redistribute it to others.  Obama and friends are satisfied to just see the wealth destroyed.  The people that voted for that will have zero problem with Hillary’s bad ideas.

    This fairness fetish is ridiculous.  It’s unfair that some people get cancer and others do not.  Rather than working to cure cancer, let’s poison healthy people so that they have cancer, too, and things will be fair.

    • #9
  10. Jim Kearney Member
    Jim Kearney
    @JimKearney

    This is an important issue for seniors who rely on investment income. Republicans should campaign on abolishing the capital gains tax for every individual tax payer and couple over age 55.

    This 0% tax rate should be optional, so that Warren Buffet and other Democrat high achievers can choose between letting the government redistribute their wealth for them, or doing it themselves.

    • #10
  11. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    Yeah, and those seniors who have been getting near-zero yield on their savings for the past eight years due to the Fed’s artificially-low interest rates. And how about all of the “working” seniors who pay TAXES on their Social Security “benefits”?  I have never understood how the government can tax benefits that they PAY to the beneficiaries in the first place.

    Personally, as a working senior (I’m 66) who has vowed never to take any SS or Medicare benefits, I like the idea of paying no capital gains taxes.  What I’d really like, is to no longer pay FICA taxes while I am working and not drawing benefits.  But the Dems really don’t see the tax code as primarily a way to fund the government.  It’s a way of rewarding their friends and punishing their ostensible enemies.

    The other thing I don’t understand is how the targets of their “leveling” continue to support Democrats!  They are the party of “the rich”, and the rich just roll over and play dead (while paying their tax advisors to find them ways to shelter their income from the onerous tax burden).

    • #11
  12. user_138562 Moderator
    user_138562
    @RandyWeivoda

    RushBabe49:

    But the Dems really don’t see the tax code as primarily a way to fund the government. It’s a way of rewarding their friends and punishing their ostensible enemies.

    We have a Bingo!

    • #12
  13. user_3444 Coolidge
    user_3444
    @JosephStanko

    But it is a fairness issue.  This is what we should push for:

    Larry Kudlow: Goofy ideas like this make me yearn for a 15 percent flat-tax rate on everything. Personal income, corporate profits, capital gains, dividends — everything.

    Instead of raising the capital gains rate to match the income rate, we should lower the income rate to match the capital gains rate.  Flat across the board.

    It simply doesn’t make any sense to say that some blue-collar worker who has to spend every dime he earns to support his family should pay a higher tax rate than a trust-fund kid who can live off of the capital gains and interest payments from his portfolio.  I’m fine with them paying the same rate, I’m not out to “soak the rich,” but arguing that the rich should pay a lower rate on their income strikes me as both immoral and really bad politics.

    • #13
  14. user_3444 Coolidge
    user_3444
    @JosephStanko

    Randy Weivoda: This fairness fetish is ridiculous.  It’s unfair that some people get cancer and others do not.  Rather than working to cure cancer, let’s poison healthy people so that they have cancer, too, and things will be fair.

    You don’t think taxes should be fair?  If Congress decided that anyone whose last name starts with the letter W should pay a 90% income tax rate, you’d just shrug and say “oh well, life’s not fair?”  I bet you’d say “wait, why should I pay more than my neighbor just because of my last name, that’s not fair!

    • #14
  15. The Reticulator Member
    The Reticulator
    @TheReticulator

    Randy Weivoda:

    RushBabe49:

    But the Dems really don’t see the tax code as primarily a way to fund the government. It’s a way of rewarding their friends and punishing their ostensible enemies.

    We have a Bingo!

    You seem to view the Democrats through rose colored glasses.  Take them off and you’ll see that their main motives are a lot more malicious than any of this.

    • #15
  16. user_138562 Moderator
    user_138562
    @RandyWeivoda

    Joseph Stanko:

    Randy Weivoda: This fairness fetish is ridiculous. It’s unfair that some people get cancer and others do not. Rather than working to cure cancer, let’s poison healthy people so that they have cancer, too, and things will be fair.

    You don’t think taxes should be fair? If Congress decided that anyone whose last name starts with the letter W should pay a 90% income tax rate, you’d just shrug and say “oh well, life’s not fair?” I bet you’d say “wait, why should I pay more than my neighbor just because of my last name, that’s not fair!

    The purpose of taxation should be to raise the necessary funds the government needs, while doing the least harm to the economy.  The item we were discussing is that Barack Obama wanted to raise CG tax rates even if it brought in less money, because it would be fair to take investors down a peg, even if it does nothing to help the poor.  Heck, by reducing the incentive to invest, you might be keeping poor people from getting work, if a company has a harder time raising funds to expand their operations.

    And it’s not just trust-fund kids who have investments, by the way.  A lot of blue-collar workers have investments, too.

    • #16
  17. The Reticulator Member
    The Reticulator
    @TheReticulator

    Randy Weivoda: The purpose of taxation should be to raise the necessary funds the government needs, while doing the least harm to the economy. The item we were discussing is that Barack Obama wanted to raise CG tax rates even if it brought in less money, because it would be fair to take investors down a peg, even if it does nothing to help the poor. Heck, by reducing the incentive to invest, you might be keeping poor people from getting work, if a company has a harder time raising funds to expand their operations.

    Even one of the founding fathers (George Washington) realized that people and nations are motivated mostly by their own self-interest.  No matter what the purpose of taxation should be, people are going to look after their own self interest.

    And some people will find that their self-interest means taking others down a notch or two, especially if those others have been using all their advantages to get the hot girls or to exert undue influence with government.

    If conservatives don’t take those basic facts of human nature into account, they may as well be like the Bolsheviks who wanted to create a new society and a new man.

    • #17
  18. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    No one knows what the ‘right’ mix of short-term and long-term investment should be.  In an ideal world where the money supply actually meant something and interest rates were free to float with demand,  the interest rate would control how much capital is invested in long term vs short term projects,  and that in turn would be determined by the collective wisdom of all the people interacting in the market.

    When the economy heats up more than it was projected to,  inventory levels fall and demand begins to exceed productive capacity.  People borrow money for short-term investments like inventory purchases and expanding production lines.   That drives up interest rates and puts the brakes on long-term investments.   And in the other case where the economy slows down and inventory builds up and over-production ensues,  people stop investing in short-term investment, freeing up capital and lowering long-term interest rates,  which stimulates long-term investment.

    The problem now is that the Fed fixes the interest rate and pumps money into the economy each month,  and that is helping to destroy the signals the market needs to efficiently allocate capital.  Which means that no one knows whether we are currently investing too much or too little in long-term projects.

    But Democrats love long-term projects.  They love giant monuments to government,  they love shovelling money to unions  who control huge infrastructure projects, and they love to believe that they are capable of creating jobs and planning the economy.  And if they are true Keynesians,  they believe there is a free lunch to be had – that long-term infrastructure investment will create so many jobs through the multiplier effect that the investment will pay for itself, and then some.  Hey,  free roads and schools!   More money to big unions that doesn’t cost anyone a dime!  What’s not to like?

    The problem is that it’s all a fantasy.  They don’t know what should be done,  and their solutions won’t have the benefits they promise.

    • #18
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