Hillary Clinton wants to rein in short-termism on Wall Street: the tendency of corporate executives to focus on quarterly earnings and the stock price rather than capital investments that yield long-term growth.
Toward that end, she proposed a downward sliding scale of capital gains tax rates, starting with 39.6 percent (43.4 percent including the healthcare surtax) for investments held less than two years and declining to 20 percent, the current long-term capital gains rate, in year six. Clinton clearly missed the memo on the need for tax simplification.
On what basis will the government determine the appropriate holding period for an asset to promote long-term growth? What if an investment is underperforming expectations and a more promising opportunity comes along? Clinton's tax scheme creates a trap, not an opportunity, for investors at a time when companies have been reluctant to invest.
The biggest problem with Hillary's war on short-termism, however, isn't its arbitrary nature or the bollixed notion that raising taxes on investment will encourage more of it. Rather, it's the focus on the private sector when the worst offenders are members of the political class.
In her July 24 speech at New York University where she unveiled her long-term growth initiatives, Clinton did make a passing reference to "budget brinkmanship" in Congress and the preference for "kicking the can down the road" with temporary fixes. But unlike her specific solutions for Wall Street, including an effort to tie executive compensation to performance, she offered no such pay-for-performance standard for members of Congress; no penalty for the failure to pass a budget; no forced overtime to prevent a government shutdown. Members of Congress enjoy short workweeks, extended vacations and generous pensions. Clinton might want to consider a plan to penalize short-termism in Washington and incentivize lawmakers to act in the nation's long-run interest.
And what is Grandma Hillary proposing to ensure that the nation's social safety net will be intact by the time her infant granddaughter Charlotte retires? Every year in their annual report, the Trustees of the Social Security and Medicare Trust Funds warn of the programs' structural imbalances and urge action to narrow the gap between expenditures (benefits) and revenues (taxes). The baby boomers are retiring. They are living longer. And they are dependent on fewer workers paying into the system to support a rapidly growing number of retirees.
Social Security has been running an annual cash flow deficit - outlays exceeding non-interest tax revenue - since 2010. Starting in 2019, the Treasury will have to redeem assets in order to pay beneficiaries. By 2034, Al Gore's "lockbox" will be empty. Social Security's Disability Insurance Trust Fund requires immediate action or benefits will have to be cut by the end of 2016, according to the Trustees.
Medicare has a bit more breathing room but is confronting bigger cost increases. The current 2-percent economic growth environment only increases the challenge. Clinton has outlined a comprehensive clean energy and climate agenda, including the installation of half a billion solar panels in her first term. So far, she has proposed nothing to put Social Security and Medicare on a sustainable course.
Nor has Clinton offered a solution to deal with the mounting debt. In 2014, publicly-held debt was equal to 74 percent of GDP. The only other time the debt-to-GDP ratio exceeded 70 percent was in the immediate aftermath of World War II. The window for action is closing, the Congressional Budget Office said in its 2015 Long-Term Budget Outlook, offering increasingly draconian options - big spending cuts and big tax increases - for the future.
Clinton's long-term-growth agenda via higher tax rates on capital gains is consistent with her presidential campaign's move to the Left. Yet it is not without contradictions. Clinton wants to "eliminate capital gains taxes altogether for certain long-term growth investments in small businesses, including innovative start-ups," in order to "unlock the potential of the family business" or the "start-up that's on the verge of making it big."
To recap: The elimination of capital gains taxes is good for certain long-term growth investments while the imposition of high capital gains taxes promotes other long-term investments. How does she know which works for which group?
Clinton might want to review the experience of her husband's second term as president when it comes to capital gains taxes. The federal budget was in surplus from 1998 through 2001. It was the first time the government posted a back-to-back surplus since the 1950s. And it wasn't part of the forecast.
Congress slashed the top capital gains tax rate to 20 percent from 28 percent in 1997. Capital gains tax revenue soared from about 7 percent of individual tax receipts in the first half of the 1990s to about 12 percent in 2000, according to CBO. The jump in tax realizations accounted for "about 30 percent of the growth in income tax receipts in excess of GDP growth" from 1994 to 1999," CBO said.
CBO attributed the revenue increase largely "to the stock market boom of the 1990s." We will never know for sure because in economics, there is no scientific proof, no Q.E.D. at the end of an equation.
What is clear is the reduction in the capital gains tax rate unleashed huge dot-com profits, producing a windfall for the Treasury. Such an outcome would be a down payment on Charlotte's future.
Caroline Baum is a contributor to e21. You can follow her on Twitter here.
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