Nearly every conservative will tell you that Hillary Clinton’s recently announced plan to raise the capital-gains tax rate for certain investments is a bad idea. Larry Kudlow made that case last week in National Review — classical economics teaches that a low investment tax rate should drive investment; the top U.S. capital-gains rate is already pretty high.
But perhaps a more compelling testament to the serious weakness of her plan — the first major, specific economic proposal of her campaign — is that even liberal commentators think it could hurt the economy without solving the problem it’s aimed to address.
As tax professor and analyst Victor Fleischer writes in the Times: “Shareholders who receive cash from share buybacks typically reinvest in other companies, thus making the overall economic resources more efficient.” That is to say, activist investors’ focus on short-term considerations may hurt firms facing the cash drain, but those funds are reinvested in other, often more lucrative sectors, promoting overall economic growth.
Many, however, argue that this masks the real drawbacks of so-called “short-termism.” Bill Galston of the Brookings Institution, a Democratic columnist for the Wall Street Journal, suggests that capital isn’t being redeployed efficiently. Even though shareholders are receiving record-high levels of cash, share devoted to capital investment is at a record low, he notes. Even some conservatives agree with the diagnosis: “Fixation on quarterly earnings seems to be a real problem to some extent,” Alan Viard, a tax scholar at the American Enterprise Institute, tells National Review.
‘Even if you accept short-termism is a problem, it’s not clear the proposal would help.’
But “even if you accept that short-termism is a problem, it’s not clear [Clinton's] proposal would help,” the TPC report, by former Clinton-administration Treasury official Len Burman, says.
Viard agrees, saying Hillary’s idea “would do very little to solve the problem.” Since Hillary’s plan would replace a system that currently charges a high rate to wealthy investors divesting under a year and a much lower rate for divestments after that, he says, “Investors thinking of selling before a year is up would have much less reason than now to wait until the one-year mark is reached.”
The TPC piece echoes this point, noting that the plan would actually weaken the current system. “There’s a strong tax incentive under current law to hold assets with gains for at least a year because long-term gains are taxed so much less than short-term,” the report says. “There’s a noticeable dip in sales in month 12 and a bump in month 13. There would be no incentive to wait until the one-year anniversary under the Clinton proposal, so the share of assets held for less than a year would increase.”
Another likely effect, the TPC report says, is that “investors will decide up front that some intermediate-term investments (one to 5 year holding period) no longer make sense,” because they’ll be taxed at substantially higher rates than they had been in the past. “That might mean that there’s less participation by activist investors — for good or ill — but also less capital investment for all sorts of purposes, which could translate into a higher cost of capital for businesses and less investment overall,” Burman writes. (Clinton’s proposal would raise the top rate on medium-term investments well above what it was during her husband’s time in office, which saw an investment boom.)
This is, however, assuming that tax policy has a big effect on investment decisions — a thesis many liberals disagree with. The TPC report notes that only 40 percent of corporate stock is subject to the capital-gains tax, and Clinton’s schedule only applies to taxpayers above the $484,850 income threshold for joint filers.
“Pension funds, who might have more power to influence management, would not be affected by the tax change,” says Viard. But the investors who are powerless to disrupt corporate short-termism are the ones subject to Clinton’s onerous tax “reform.” And there are good reasons to think that short-termism, if it’s a problem, won’t be affected much by tax policy at all: “The bigger problem appears to be passive investors who stand idly by while corporate CEOs pack their boards with cronies who rubber stamp outsized executive compensation and mediocre performance,” the TPC piece suggests, a point the Times echoes.
Many conservatives, of course, won’t like the alternatives these left-leaning commentators put forth. But what’s clear is that the first novel plan of Hillary’s campaign comes up short, not delivering benefits commensurate with its costs — according to both sides of the aisle.
— Shubhankar Chhokra is an intern at National Review.