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Is Hillary Clinton Really Going to Cut Capital Gains Taxes for the Rich?
Following through on her economic speech last week, Hillary Clinton is going to propose changing capital gains tax rates to deal with corporate “short-termism.” The Wall Street Journal has the details:
Hillary Clinton will propose a revamp of capital-gains taxes that would hit some short-term investors with higher rates, part of a package of measures designed to prod companies to put more emphasis on long-term growth, a campaign official said. … At the center is Mrs. Clinton’s proposal to change capital-gains tax rates, the details of which are being finalized. The Democratic presidential candidate’s plan would create a sliding scale with at least three new rates that change depending on how long an investment is held, the official said.
Investments held for less than a year would continue to be taxed at regular income-tax rates, which can top out at 39.6% or more for the highest earners. For those held just a little longer—likely two or three years—the current capital-gains tax rate of 23.8% for top earners would rise. The Clinton rate, which hasn’t been finalized, would be higher than the 28% President Barack Obama proposed earlier this year for the highest earners. The Clinton campaign hasn’t ruled out taxing such investments at the regular income-tax rate. The plan would include additional rates tied to the length that an investment is held, with the lowest rates for investments held the longest.
That last sentence is key. As I’ve written, the sliding scale idea on cap gains rates is an intriguing way — though not the only way — to nudge corporate incentives (or reduce disincentives) toward more long-term investment and market-creating or empowering innovation. And by sharply reducing the double-tax on long-term investment, it also pushes the income tax code toward being more of a consumption tax. But key to these ideas is dramatically rewarding long-term investment (or reducing the tax-code driven penalty, depending on your perspective). Here is BlackRock’s Laurence Fink:
But what if we made three years rather than one the holding period necessary to qualify for capital-gains treatment and at the same time brought down the capital-gains tax for each year an investor held, perhaps reducing it to zero at the end of ten years? And on the other end, what if we taxed capital gains at an even higher rate than for ordinary income if the stock was held for less than six months?
And Harvard’s Clayton Christensen:
Today, tax rates on personal income are progressive — they climb as we make more money. In contrast, there are only two tax rates on investment income. Income from investments that we hold for less than a year is taxed like personal income. But if we hold an investment for one day longer than 365, it is generally taxed at no more than 15 percent. We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.
Although it sounds like Clinton has the tax hike part of the above equation down, will she propose deeply cutting the cap gains rate below current levels for long-term investment, or at all? Of course that would mean a tax cut for some wealthy individuals. Is that possible in a Democratic Party that continues to move left?
Or will she merely try to make long-term investment look more attractive on a relative basis to short-term investment by raising the short-term tax rates and leaving long-term rates alone. (Or maybe a small cut down to the 20% Bill Clinton rate, assuming she doesn’t argue that 20% is the current long-term rate by not counting the 3.8% Obamacare tax.) Then it sort of looks like nothing more than an investment tax hike with a pro-growth, anti-shortermism gloss, though progressives still might not like it because there would still be a cap gains preference in the tax code. Still, this could be an opening for a 2016 GOPer to grab this idea and do it the right way if Clinton doesn’t.
Published in Economics
I have no idea if Hillary will follow through on this, although to find the answer the best way to find the answer would be to look at the length of time she and her major contributors hold their investments (if such data is available).
Perhaps I’m being cynical but I don’t believe Hillary has any agenda except being on top of the pile.
The hidden assumption behind this is that governments are qualified to know just what the right mix of long-term to short-term investment is ‘correct’ in all cases. How do they know whether my company should be investing more in long-term projects?
This also seems to me to be a further bias towards large enterprises, which not coincidentally are the ones who have lobbying muscle and connections to politicians. Entrepreneurs and small business people cannot afford huge decadal investments before receiving a payoff, so they’ll be paying a higher tax. Venture capitalists in silicon valley will be biased away from smaller, speculative ventures with short payoff periods and more towards large grand projects. So more money for Tesla, less for the guys in the small office looking for a 1 year bridge loan from a venture capitalist.
I have a better idea – how about telling governments to stop ‘nudging’ us or otherwise interfering in our lives?
There are several rationals for taxing capital gains at a lower rate than ordinary income (e.g. avoiding double taxation, the uncertainty and risk of loss, etc.). One of those many reasons is inflation, and the idea that we’re really only going to tax people on the true increase in their wealth.
If you bought some asset in 1995 for $1,000, inflation alone would make it worth $1,500 today. If you sell it for $1,800, the value of your investment really only increased by three hundred dollars, but you would be taxed on eight hundred dollars worth of gain.
Now, I would love to see an adjustment for capital gains taxes that taxes on actual gain in value, not on gain in value + inflation, but I doubt that Clinton would even discuss this. She’s also not going to discuss the myriad ways in which making money from capital gains is a lot more uncertain (time wise and gains wise) than earning a paycheck.
Well, if we’re against the Fair Tax because it’s “regressive,” then we’re against cutting the capital gains tax for the same reason, right?
Seems like a lot of barking up the wrong tree. How corporations invest retained earnings and what shareholders do with their shares are two pretty much unrelated things*. The former is interesting and the latter irrelevant. More inclined to Tim Worstall’s view. Would be interesting to know how you think he’s getting wrong.
*absent Carl Icahn et al., totally unrelated.
She will win anyway, conservatives will help http://www.washingtonpost.com/politics/poll-trump-surges-to-big-lead-in-gop-presidential-race/2015/07/20/efd2e0d0-2ef8-11e5-8f36-18d1d501920d_story.html?wpisrc=al_alert-politics