"Hillary Adds Capital Gains Complexity With Tax Rise, 6-Year Wait," is the headline that Bloomberg hangs over its news article about Secretary Clinton's speech in Manhattan today. The negativity is justified by the details:
For Americans in the top tax bracket, assets held for less than two years would be taxed at the top ordinary-income tax rate of 43.4 percent, according to the campaign.
The rate would drop to 39.8 percent after two years, 35.8 percent after three years, 31.8 percent after four years and 27.8 percent after five years. Taxpayers would have to hold onto assets for at least six years to get the 23.8 percent rate, which would remain the lowest available.
Clinton wants to push capital gains taxes higher than the 28 percent proposed earlier this year by President Barack Obama -- and higher than the 20 percent maximum Clinton advocated in her 2008 campaign for president.
This proposal is pathetic. If Mrs. Clinton wants to encourage long-term thinking, she could keep the current short-term rate where it is and cut the rate for longer-term holdings. Instead, she's proposing a tax increase for everything except holdings that are kept at least six years.
The Bloomberg article does a decent job of describing the "lock-in" problem encouraged by such high rates:
higher tax rates discourage selling. This would be especially so in Clinton's proposed system, which dangles a lower rate for those who hold on longer.
"You're locked into BlackBerry, when all of a sudden there's Apple," said Mark Bloomfield, president of the American Council on Capital Formation, a Washington group that advocates lower investment taxes. "That's sort of the biggest problem with it."
Useful context for the issue is available in a classic New York Sun editorial from 2008, "Charles Gibson's Finest Hour." The key point is that these tax increases aren't about raising revenue for the federal government, they are about something else — controlling behavior, punishing success, providing an opportunity for moral preening by Senator Clinton and certain of her supporters, protecting entrenched corporate managements from activist investors.
I'm generally sympathetic to the idea that there's too much short-term focus in American business and even open to the idea (though not entirely convinced) that government action might be able to help tilt things in more of a long-term direction. But this tax increase proposal is not a serious solution. I'm actually kind of surprised that Mrs. Clinton put it forward in this form. Not because I am under any illusions that she is any kind of free-market type, but because given her history in 2008 of opposing increased capital gains taxes and given her husband's successful experience in cutting capital gains taxes and given that she has some donor base that pays these taxes, I thought she'd be a little more sophisticated. As it is, she leaves herself open to attacks by Republicans that she's proposing an 82% tax increase on gains in the one-year to two-year window.
And remember, this is what she says she is going to do while she's running for office. Bill Clinton ran in 1992 on a middle class tax cut and wound up raising income tax rates once he got into office. So it's quite possible that if Hillary Clinton gets elected, she'd be even more of a tax-raiser as President Clinton than she is as Candidate Clinton. It's not encouraging at all.