Why Hillary Clinton’s Tax Plan to Soak Investors Won’t Work

The Fiscal Times ^ | July 29, 2015 | Rob Garver

[expat_panama]

Democratic presidential frontrunner Hillary Clinton last week released a proposal to overhaul the capital gains tax, which is paid on profits from the sale of investments. The detailed plan was designed to counter the pursuit of short-term gain at the expense of long-run investment – what Clinton called “quarterly capitalism” – by making it more expensive to sell stock in public companies that has been held for less than two years.

The problem, according to Len Burman, the director of the Urban-Brookings Tax Policy Center, is that it won’t work.

“The proposal suffers several defects,” Burman wrote in an analysis published Tuesday. “First, the campaign’s diagnosis of the problem -- that ‘activist investors’ strip cash away that firms would otherwise direct to investment (and more jobs) -- is not a compelling rationale for policy intervention. Second, even if it were, it’s not at all clear that Clinton’s tax-based prescription would cure the problem. Only half of assets sold are held for more than a year and less than half of corporate stock is held by taxable investors.”

Under current law, investments sold after one year are taxed as regular income, with the addition of a 3.8 percent investment income surtax, meaning that the top effective rate for a high-income investor would be 43.4 percent (the top statutory tax rate of 39.6 percent plus the surtax). After the one-year mark, the top effective rate on capital gains drops dramatically because it is no longer treated as regular income. Those profits are subject to a 20 percent capital gains tax, regardless of the investor’s income tax bracket, though the surtax remains.

Clinton’s plan would extend the window in which capital gains are treated as regular income to two years and would only lower the statutory rate incrementally. To pay the rate on the sale of an investment currently held for a year and a day, an investor would need to hold the investment for six years.

Burman, a former Congressional Budget Office analyst who served for two years as Deputy Assistant Secretary of the Treasury for Tax Analysis in the Treasury Department during Bill Clinton’s second term, doesn’t believe it will have the effects she wants.

For instance, he argues, when investors pull cash out of a company, they are often doing it for a good reason. “[P]ulling cash out of the company—and paying tax on dividends or capital gains—only makes sense if the company’s marginal investments are underperforming by a substantial margin. The cash drain might hurt workers inside the firm, but the redeployed cash will create jobs elsewhere. Overall, the economy gains because the extracted cash is invested in more productive activities.”

Further, because such a high percentage of investments are held for a year or less under current law, Clinton’s proposal might have the perverse effect of increasing early sales.

“There would be no incentive to wait until the one-year anniversary under the Clinton proposal,” he writes, “so the share of assets held for less than a year would increase. Moreover, the benefit from passing each of the holding period thresholds would be sharply reduced—4 percent of the gain or less compared with 19.6 percent under current law.

“More likely, investors will decide up front that some intermediate-term investments (one to 5 year holding period) no longer make sense.” In the end, Burman disagrees with Clinton’s assumption that activist investors taking money out of companies are the major problem she thinks they are. More troubling, he says, are “passive investors who stand idly by while corporate CEOs pack their boards with cronies who rubber stamp outsized executive compensation and mediocre performance.”

However, he writes, “even if activist investors were a problem, this proposal is a poorly designed instrument to address it.”

[Paladin2]

Index Capital gains for inflation. Use Harvard’s tuition as a major part of the basket of goods.

[sport]

For her purposes it will work. And it will work well.

[SargeK]

The author proceeds from a serious misconception: that the purpose is to raise revenue.

This is about punishment of the wealthy and successful. “Making them pay their fair share”. It throwing red meat to the mob.

[NonValueAdded]

Word

[OttawaFreeper]

Oh my, and a number of years back I read a report about how a survey conducted at a journalism school found that most students there did not understand bond yield tables or were able read stock market pages properly. And these people are cheerleading big time for She Who Must Be Elected, very pathetic indeed.

[SVTCobra03]

Capital gains tax should be abolished, along with taxes on dividends and interest.

[2001convSVT]

“Capital gains tax should be abolished, along with taxes on dividends and interest.”

I agree, the incentive to invest in new products and technologies should be encouraged not reigned in.

[expat_panama]

Happy Friday!   Yesterday's stock volume was too quiet to wake the bull and major indexes closed flat.  Seems precious metals were steady also w/ gold/silver still at $1,362.55/$20.34. 

As for futures traders, they're now seeing metals -0.51% and stock indexes flat again at +0.08%.

Ah yes, today's the day for our beloved umeployment rate!

8:30 AM Nonfarm Payrolls
8:30 AM Nonfarm Private Payrolls
8:30 AM Unemployment Rate
8:30 AM Average Hourly Earnings
8:30 AM Average Workweek
8:30 AM Trade Balance
3:00 PM Consumer Credit

Right.

At least we got news...

Bereft of Ideas, Clinton Turns to O's Big Spending - Edward Morrissey,TFT
How Hillary's Big Ideas Will Bankrupt U.S. - Editorial, Investor's Business
How Dems Can Spin the Jobless Rate In Their Favor - John Crudele, NYP
When It Comes to the Future, There Are No Experts - Matt Ridley, MRO
Investors Still Hot for Texas' Permian Basin - Christopher Helman, Forbes
Fed Tries to Manage Economy wDetermined Ignorance - Jeff Snider,RCM
New Hostility to High Finance Has Ancient Roots - Fred Smith, Forbes
Why Election Year Fed Bashing Sometimes Has Merit - Aaron Klein, RCM

[expat_panama]

...a serious misconception: that the purpose is to raise revenue.   This is about punishment of the wealthy...

Not sure why the press wants to hide this fact, they didn't in '08 and it was ok:

 

 

Barack Obama will raise Capital Gains Taxes...even if it means less tax revenue!!

[Iron Munro]

Hillary doesn’t care if programs like this will work or not.
The function is to fool enough people to get her elected.

She knows the suckers claim to want equality but will settle for something that sounds like the wealthy will be punished.

Hillary knows they are just begging for some more empty promises to believe in. A program like this sounds good during the campaign and will give some of the suckers another reason to vote for her.

After all - they still love Obama even after all the lies and scams, broken promises, the disappearing $900 billion stimulus, the emptiness of Hope N’ Change, the traitorous betrayals, the racism, the out of control spending.....

[1rudeboy]

What do you hope to accomplish?

[Lou L]

Correct me if I'm wrong here, but shares of stock in a company are underwritten and sold by a financier, and then sold off into secondary markets. The company offering the stock gets the money up front--it's not dependent upon the day-to-day buying and selling in those secondary markets; i.e., the stock markets.

If the above is true, there is little impact to companies with stock offerings based on what traders might do in the short term.

[Mr. Douglas]

Bill Whittle exposing the REAL problem with taxing the rich:

Eat the rich: https://www.youtube.com/watch?v=661pi6K-8WQ

[NonLinear]

A bit of age on that article...

[Buckeye McFrog]

Does not matter cause she’s going to do it anyway.

At least 60% of our economically illiterate population will stand-up and cheer.

[Wolfie]

The only “investing” tax change we need is a transaction tax, mere pennies, if that. Cut down on the high speed computer trading that skims off of the system and has nothing to do with actual investing.

[expat_panama]

Index Capital gains for inflation. Use Harvard’s tuition as a major part of the basket of goods.

What do you hope to accomplish?

It confused me too, even leaving it and coming back later didn't help.  Could you pls amplify this Pal?

[Paladin2]

Economic Social and Common Sense Justice.

[Yo-Yo]

Would a surcharge tax on automated computer high frequency trades take some of the volatility out of the market?