Posted on 08/05/2016 4:50:05 AM PDT by 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.”
That's the line we hear all the time from the left, that Wall Street's a casino that has nothing to do w/ companies that hire workers so we need to jail the day-traders. It's a crock.
In the first place if stock traders didn't buy shares from underwriters then the underwriters couldn't set up an IPO in the first place.
Next, after a corp's gone public it has to pay attention every minute to their share's prices not only to understand the value of their employee's stock options but also for when the CFO decides between a buy-back or whether to issue new shares.
One other thing to keep in mind is that most corps never sell their shares on public exchanges, and not all of those that do start out w/ an underwriter. Etrade for example, raised funds for their IPO by selling $10K blocks to their own customers --an investment that (iirc) doubled in a few months. A lot of other corps just go and sell direct on the open markets w/ a dutch auction.
This is one of my hot-buttons (you probably didn't notice because of how well I keep it under control) so I need to take a break and breath into a paper bag for a while...
Your misconceptions are probably held by many, if not most, leftists. What you describe is a very old fashion static model of a Corporation just getting started. In today's world, Corporations use their own stock in a multitude of ways.
Almost all non-Private Corporations retain 'issued' stock on their balance sheets. They do this for many of reasons and the amount of shares may vary over time. If the Directors and Executive think the stock value is too low, the Corporation will buy the stock to support its price. They may sell stock to raise cash at a different time. They can reward employees with ESOPs (Employee Stock Ownership Plans) and ISOs (Incentive Stock Options). They hold and buy stock when they think an adversary is attacking their ownership.
You beat me by that much ... Leftist static thinking about Taxes and Investing come from very bad education, so bad it almost has to be deliberate!
In the model I described, it would also permit companies to participate in the secondary market and control their share price through the purchase of their own shares.
Please, if I'm wrong, tell me where...
Corporations "just getting started" aren't selling shares publicly, through an underwriter. If they're looking for investors, it's done privately.
Winston S. Churchill — ‘I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up..
A lot of folks believe that, and my experience is that them that do have never personally owned shares. Government intervention in to sudden financial price swings is kind of like the way they tried calling out the police and fire hoses during a run on a bank just ended up w/ a major rtot throughout the entire financial district.
Government control of market prices does not work. Governments coin/regulate money and punish fraud/crime and let buyers and sellers earn a living.
Pennies per share or per ticket?
No you haven't and that's good because it means on this forum we're able to have our ideas attacked vigorously and see whether they're robust or they're flimsy. We're together on how we understand an IPO works and we diverge w/ the idea that share prices have "little impact to companies with stock offerings based on what traders might do in the short term."
Sorry BUT I only said that the static model was a favorite of leftists. Your point that once a Corporation sells its shares, it is no longer influenced by someone else's holding requirements is valid only in describing that static model. To more fully answer against HilLIARy, one must consider the dynamic model and why it becomes worse for both Corporation and Stock Purchaser with her plan.
For a Corporation, anything that infringes upon its LEGAL and legitimate ability to market its stock is a regulatory burden and an overhead cost. For the Stock Purchaser, HilLIARy's proposal further differentiates Traders from Investors and has the serious potential to alter investment strategies of the latter. Thus it would appear to swing more to the Trading sector and to me, that would increase potential volatility in pricing. Corporations would have the added concerns of such volatility in their use of their owned stock.
Consequently, I think that HilLIARy's concept of this change reducing volatility is all wet!
That wording reminds me of how goofy extreme leftists like to say that someone else's money is "mere" when they want to tax it. Leftists also like to inflate the importance of their own buying and selling while they look down their noses on other people's trades --saying that it only "skims off of the system and has nothing to do with actual investing."
Most folks are not familiar w/ the need for using computers in the financial markets, but it's a really bad idea to make something illegal just because we don't understand it.
Maybe, tho there are a lot of goofy leftists who are very well educated. My take is that it's more of a willful move to reject reality.
Perhaps I should elaborate a little further on my thesis.
Hillary's plan is touted as a way to preserve a fledgling company's capital by creating disincentives for traders. I disagreed with that, saying that the underwriting of the company's shares is where the initial capital originates, and that buying and selling of those shares on secondary markets doesn't impact that initial capital offered by the underwriter.
Once public shares are issued, the company does have to protect its financial position, but I consider that part of its ongoing fiduciary management and a separate matter. Poison pills are often used to prevent external manipulation of a stock price, and to a larger extent, manipulation of the company itself.
All of that is really beyond the scope of my intent, nor do I think Hillary's proposal cares one way or another. She's using this proposed tax as a guise to protect companies, but I think it's more an excuse for taxing anything that moves, breathes, lives, produces, and there's money in it.
That's the understanding that many share and it fits with the fact that we first see the IPO and afterward we see the shares traded on the open markets. It's clear, obvious and overly simplistic becuase there are other things we don't see because we're not looking.
Let's look at how when an IPO underwriter agrees to raise capital for a startup, the first step is to verify that the posssible IPO will create shares that they're sure they can sell. The underwriter does this by checking with buyers who guarantee that they will buy the shares at a given price --only then is the underwriter willing to proceed.
There's some value to the argument that the secondary trade takes place in substance --if not in form-- before the IPO. Regardless, it's the nature and certainty of the secondary trade that makes possible the existence of the IPO.
sure it wont work, but that isn’t going to stop her.
I’m going to assume that she has at least an inkling of this definition and is referring to PE and VC firm ownership and the investment gains on that private stock.
If she was really serious about it she would propose raising the carried interest taxes that hedge fund owners are taxed at. But they all donate massive amounts of money to her campaign so that’s not going to happen.
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