Hillary Clinton has unveiled what might be the first truly interesting economic proposal of her presidential campaign. During a speech in New York on Friday, she detailed a plan to hike taxes on income from investments that high-income Americans hold for less than six years. It is part of a broader platform designed to fight what she refers to as “quarterly capitalism”—corporate America’s focus on maintaining short-term profits in order to appease shareholders. “American business needs to break free from the tyranny of today’s earnings report,” Clinton said. Frankly, a few of the ideas she brought up—such as more elaborate disclosure rules regarding executive pay and stronger disclosure rules on stock buybacks—seemed a bit limp. But the tax increase on investors could become a defining issue.
Most obviously, because it’s a tax increase. Republican contenders like Marco Rubio and Rand Paul have argued for eliminating taxes on investment income altogether, a move that would overwhelmingly benefit wealthier households. (New York University economist Edward Wolff calculates that, in 2013, the top 10 percent of U.S. households owned 81.4 percent of all stocks.) Clinton is officially moving in the opposite direction.
Here’s how it would work. Today, when Americans sell stocks or bonds that they have held for less than a year, it’s taxed as normal income. If they hold it for more than a year, they pay the lower long-term capital gains rate, which technically maxes out at 20 percent. (However, high earners also pay an additional 3.8 percent surcharge under Obamacare, so the final number is really 23.8 percent.)
Clinton argues, very reasonably, that it’s silly to consider everything a long-term investment after just a year. Instead, she wants the capital gains rate to decline gradually, so that the longer people hold their stocks, bonds, and mutual funds, the less they pay after cashing them in. For Americans in the top tax bracket, the government would tax investments sold after less than two years like ordinary income. Then, over the next four years, the rate would fall back down toward 20 percent (you have to add the 3.8 percent Obama surcharge onto each of these numbers to get the total tax amount). None of this would affect people outside the highest bracket.
Again, Clinton is couching this change to the tax code as a way to prod investors into thinking long term, rather than push companies to cut investment and pay out dividends to enrich their shareholders at the expense of future growth. It might work. It might not. But, ultimately, it’s a progressive tax increase on investment income, and that should make many progressives happy. Regardless of whether it changes investors’ behavior, it will raise some money from the wealthy, especially given that the average stock is currently held for less than a year.
Inevitably, conservatives will argue that the plan is a job killer. In general, the right maintains that raising taxes on capital gains (or corporate dividends) is wrongheaded, because it will dissuade individuals people from investing in companies and saving, which will in turn cause companies to invest less on their operations. Suffice to say, it’s far from clear that’s true.
If you simply chart the top capital gains rate against economic growth, there isn’t much of an obvious pattern. Given the vast number of factors at play in the economy at a given moment, it’s extremely difficult for economists to design credible studies singling out the effects of the investment taxes, which, as the Congressional Research Service has noted, actually have a very small effect on how much it ultimately costs companies to fund themselves. However, a clever paper by University of California—Berkeley professor Danny Yagan found that the Bush administration’s 2003 dividend tax cut had no effect on corporate investment. Yagan looked at the way companies organized as C-Corporations, which were affected by the changed, reacted compared with those organized as S-Corporations, which were not affected. Long story short: There wasn’t much of a difference.
So here’s the potential upside of Clinton’s plan: It’s a tax increase that will raise a bit of revenue and dampen some of the worst impulses of investors without risking much in the way of growth.
Economic merits aside, parts of Wall Street will obviously hate and oppose this idea. But maybe not all of it. As I wrote earlier this week, some major figures in finance, like BlackRock CEO Larry Fink, have argued that short-termism has become a crisis that threatens to undermine capitalism. It’s possible that other money managers who subscribe to his buy-and-hold approach to investing might get behind Clinton’s idea, if only because it would give them an advantage over competitors with a shorter horizon.
Ultimately, Clinton’s proposal sets us up for a campaign-season debate about how the country should treat the money people earn from investing versus the money people earn from their work. Given the declining share of the nation’s income that’s going to labor, it’s one of the most essential questions we could ask about inequality right now.