Hillary Clinton is very worried about corporations that focus on their quarterly earnings reports instead of long-term growth. She's so worried about it that she introduced a complex tax proposal that would raise taxes on capital gains held for one to six years. But analysts say the tax plan won't actually fix the problem Clinton is trying to solve.
"Hillary Clinton's Capital Gains Tax Change Misses the Mark," says a New York Times headline from Tuesday.
"Her plan would undermine short-run shareholder goals and long-range economic growth," [emphasis in original] the Wall Street Journal says in an editorial.
"Hillary Clinton's Off-the-Mark Proposal to Encourage More Patient Investors," is the headline from the liberal Tax Policy Center, written by its director, Len Burman.
First, it's unclear that the "quarterly capitalism" Clinton is trying to solve is actually a problem. Her plan aims to hike taxes on those who don't hold capital gains longer than six years. Burman says withdrawing a capital gain might hurt that firm itself, "but the redeployed cash will create jobs elsewhere. Overall, the economy gains because the extracted cash is invested in more productive activities."
Even if it is a problem, Burman says Clinton's plan won't help because the current capital gains tax structure already encourages long-term planning. Investors pay almost double the tax if they hold a capital gain less than one year. After that, the longer they hold the gain, the longer they can postpone paying the tax on the gain. "Investors can ... even avoid it altogether if they hold until death," Burman says.
Furthermore, 60 percent of corporate stock is held by institutions that don't have to pay capital gains taxes, such as pension funds, corporations and nonprofits. "Activist investors are less of a threat than passive ones and even if activist investors were a problem, this proposal is a poorly designed instrument to address it," Burman concludes.
It's possible the Clinton plan could make part of the "problem" even worse, since the tax on capital gains held for under one year would equal the rate paid on gains held for one to two years.
Alan Cole, an economist at the Tax Foundation, agrees the Clinton plan would not affect corporate behavior. He wrote on the Tax Foundation blog that it would actually cause a drop in tax revenue. "The higher rates for some gains would be offset through reduced realizations," Cole says. "Under our calculations, revenue would decline very slightly overall, by about $18 billion a year." That's only a small bite of total federal tax revenue, but it's the same amount we spend on NASA every year.
Clinton's tax proposal shows she has flip-flopped on the capital gains tax, which she previously said shouldn't rise above 20 percent, as I noted on Friday.
Clinton's tax proposal fails on so many levels. It would complicate the tax code and fail to raise revenue — all in an effort to solve a non-existent problem.