A rollout of economic policies continues
Hillary Clinton on Friday proposed a significant hike on capital gains taxes for some investors, a plan favored both by progressive economists and some Wall Street investors.
The proposal is intended to combat short-term investing, which Clinton argued diverts capital away from important business expenditures.
“American companies need to break free from the tyranny of quarterly earning reports so they can do what they do best,” Clinton said speaking at New York University in Lower Manhattan on Friday. “Real value comes from long term growth, not short term profits.”
Clinton’s capital gains plan calls for a sliding scale of taxes on investments, with some short-term investments taxed at higher rates than they are now.
Currently, top earners pay a tax rate of 39.6% on investments held for less than a year, a rate that matches those earners’ income taxes. After holding those investments for a year, the rate for top earners drops to 24%.
But under Clinton’s plan, the tax rate for top earners on capital gains would remain at 39.6% in the second year, and then drop at a staggered rate over six years to their current levels. It would amount to nearly doubling capital gains tax rates in the second year.
“The current definition of a long-term holding period—just one year—is woefully inadequate,” Clinton said, calling on companies to abandon what she has called “quarterly capitalism” in favor of more farsighted investments in research and development, talent and physical capital.
A six-year sliding scale, Clinton said, would “provide real incentives for long-term investments.”
Clinton’s plan for a tax hike is aligned with some voices on Wall Street and financial institutions. Larry Fink, the CEO of BlackRock, the largest asset manager in the world, called earlier this year for a plan similar to Clinton’s. In a March letter to the executives of the 500 largest companies in the United States, Fink recommended holding the capital gains tax rate at income tax rates for three years—39.6% for the highest earners—and eventually dropping over a period of 10 years.
“We believe that U.S. tax policy, as it stands, incentivizes short-term behavior,” Fink said, using language similar to Clinton’s speech on Friday. “We believe that government leaders around the world—with a concerted push from both investors and companies—must act to address public policy that fosters long-term behavior.”
A number of other major business figures have openly lamented so-called economic short-termism, including Dominic Barton, managing director of McKinsey & Co., Paul Polman, CEO of Unilever and others.
Economists, particularly those on the left, have also criticized the relatively low rate of capital gains tax, arguing it acts an income subsidy for the wealthiest Americans.
The Joint Committee on Taxation, a nonpartisan Congressional committee, found that low rates on capital gains taxes will deliver in 2015 an effective subsidy of $120.3 billion to investors, most of them wealthy: a separate report by the Congressional Budget Office found that 68% of the benefit of low rates on capital gains and dividends go to the top 1% of earners.
Clinton’s plan, some economists say, would reduce inequality in the tax code and create incentives for shareholders to hold longer-term investments.
Clinton’s proposal “is a way to target an inefficient tax subsidy—a tax subsidy that subsidizes growing inequality—in a way that encourages more long-term planning by investors,” said Harry Stein, director of fiscal policy at the Center for American Progress. “I view this as a piece of a larger agenda to encourage more of a long term outlook.”
Clinton’s plan is meant in part to slow activist investors, who tend to buy large amounts of company stock and call for higher dividends, share buybacks and other strategies to boost share prices. Some executives complain that makes it more difficult for companies to invest in long-term employees or facilities, stunting long-term growth.
Republicans have been quick to criticize the plan, pointing out that Clinton said during the 2008 campaign that she would not raise capital gains taxes above 20%, “if I raised it at all.” They argue that capital gains taxes harm economic growth by preventing investment.
“Sadly, Hillary is not wise enough to have learned the simple lesson from those decades: reducing the capital gains tax is part of any pro-growth agenda,” said Grover Norquist, president of the conservative Americans for Tax Reform.
Leonard Burman, the director of the nonpartisan Urban-Brookings Tax Policy Center and the top tax economist during the last two years of President Bill Clinton’s administration, said he doubted the plan would significantly change investor behavior.
“I’m sympathetic with her objective, but I don’t think her proposal is going to solve it,” Burman said. He added that the plan might actually encourage some shareholders to pull investments out of a company earlier than they would otherwise: under the new plan, investors who could sell shares after six months gain no tax benefits by waiting until after a year, and little benefit for waiting more than two.
Clinton has laid out a number of specific proposals so far in her campaign intended to spur growth, including providing tax credits to businesses that hire apprentices, tax incentives to encourage corporate profit-sharing, as well as broader proposals like raising the minimum wage and supporting unions. The tax plan is part of Clinton’s slow-drip of proposals designed to boost economic growth and incomes.
It’s unclear if the proposal was enough to satisfy progressives, who are calling for significant overhauls of the tax code. Charles Chamberlain, executive director of the grassroots progressive network Democracy for America, suggested that the speech did not go far enough in targeting income inequality.
“If Secretary Clinton wants to earn the enthusiastic support of grassroots progressives that means standing up, staking out genuinely bold positions on income inequality, and aggressively taking on the powerful, greed-driven institutions that have dominated the Democratic Party and held back the prosperity of the American people for far too long,” said Chamberlain.