Hillary’s Capital ‘Lock In’ She Proposes the Highest Tax Rate Since the Mid-20th Century.
http://www.wsj.com/articles/hillarys-capital-lock-in-1437948796
“Mrs. Clinton’s Wall Street fan club keeps telling itself that she’d provide relief from the anti-growth Obama years. On the growing evidence of her policies, she’d be worse.”
Hillary Clinton’s march to the left continues, hitting a new milestone on Friday when she proposed to nearly double the top tax rate on long-term capital gains to 43.4% from 23.8%—or the highest rate in decades.
Mrs. Clinton says she wants to overthrow “quarterly capitalism,” the supposed tendency of companies to be preoccupied with earnings reports and stock prices at the expense of investment that pays off over time. Yet her plan would undermine short-run shareholder goals and long-range economic growth.
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Under current tax policy, capital income is taxed as ordinary income if an investor has held an asset for less than a year. But after 365 days the top rate of 20% on long-term gains applies, plus the 3.8% ObamaCare surtax on so-called unearned income. The one-year cutoff for short-term gains became part of U.S. tax law under FDR.
Mrs. Clinton now wants to apply the normal top income tax rate of 39.6% plus the 3.8% surtax to investments that are sold in less than two years. This 82.3% increase in the top rate is unprecedented.
ENLARGE The nearby chart shows the recent five-decade history of the top long-term capital gains rate, which was 25% for decades until it began to climb in 1968 into the Carter years. The Steiger Amendment of 1978 dropped the rate to 28% from 40%, and it fell to 20% in 1981. The rate bounced back to 28% in 1987 as part of the Reagan tax reform that also cut the top income-tax rate to 28%.
In 1997 Bill Clinton the New Democrat agreed to a 20% rate, not least based on economic literature suggesting the lower rate would yield more tax revenue. It did. George W. Bush’s 2003 tax cut shaved five percentage points, which President Obama repealed in 2012 for couples earning more than $484,851 a year ($413,201 for individuals). Keep in mind that this is a double tax on capital because corporate profits are already taxed once at the 35% corporate rate.
Mrs. Clinton would raise the rate above what it was in the 1970s and even during the New Deal. She wants to create a sliding scale of higher tax rates that gradually decline depending on how long investors wait to realize a capital gain. For two years the rate would rise to 43.4%, falling to 39.8% for year three and 35.8% in year four. Investments would have to be held for more than six years to qualify for the 23.8% rate (20% plus the 3.8-percentage-point Obama surcharge).
Mrs. Clinton invokes “everyday Americans” to justify the plan, but if she were honest she would say she wants to cut their incomes. Higher taxes mean a lower return on capital, which reduces the capital stock available to invest in technology, factories, equipment, buildings, etc. More costly capital means less to invest to raise labor productivity, which means slower economic growth and income gains.
A high and sliding tax-rate scale also harms the efficient allocation of capital by expanding what economists call the “lock-in effect.” If owners of capital must wait years to pay a lower tax rate, many will decline to realize their gains solely for tax purposes. This artificially reduces the mobility of capital.
Economic growth is enhanced when capital is able to efficiently find its highest return. “Buy and hold” often works well for individual investors in specific stocks. But no economic theory says one- or two-year investments are worse than 10-year, and sometimes they’re better.
Consider a Facebook investor sitting on a capital gain. Under current law he might sell some of his gain and use the proceeds to fund a new venture. For the overall economy, it makes sense if that Facebook investor can sell the shares to someone who wants to hold them, while cashing out himself to invest in the new venture.
But if he has to hold that Facebook stock for years or pay a higher tax rate, that money may stay locked into those Facebook shares. So there is less Facebook stock available to “everyday Americans” who want to buy into a growth company, and the new venture might never be funded.
The dividends and corporate share buybacks that Mrs. Clinton also assails serve the same larger economic purpose. If a mature business can’t find a suitable investment for its cash, then it makes sense to return those dollars to shareholders to invest elsewhere. Think of the many years Microsoft refused to pay a dividend while spending its cash on ideas that failed.
Locking in capital will harm entrepreneurship and risk-taking, preventing the economy from exploiting the best growth opportunities. As for short-termism, Mrs. Clinton assumes that millions of investors and corporate managers are irrationally passing up lucrative lasting returns for a temporary profits high. Who is the economic clairvoyant who told her that?
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In Mrs. Clinton’s famous 2008 debate on ABC with Mr. Obama, he promised to raise investment taxes in the name of “fairness” even if capital gains rates higher than 15% raised less revenue. But she averred that “I wouldn’t raise it above the 20% if I raised it at all.”
Yet now she is blowing past Mr. Obama on the left to borrow the sliding-scale idea that goes back to that lost economic decade known as the New Deal. A 1934 law allowed people to exclude from taxes a rising share of capital gains based on how long an investment was held. The sliding scale was eventually dropped because of the widely recognized damage from the lock-in effect.
Mrs. Clinton’s Wall Street fan club keeps telling itself that she’d provide relief from the anti-growth Obama years. On the growing evidence of her policies, she’d be worse.
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