Analyzing Hillary Clinton’s capital gains proposal

Is Hillary Clinton’s capital gains proposal an effort to encourage more long-term investment or a thinly veiled attempt to raise more revenue from upper-income taxpayers?

In speeches, Ms. Clinton, currently the front-runner in the race for the 2016 Democratic presidential nomination, says her proposal will encourage a broader view of investing that benefits the average person and the overall economy rather than focusing on quick profits, according to IN reporter Mark Schoeff Jr.

Critics charge that another reason for her proposal is to appease the left wing of the Democratic Party by raising more revenue from wealthy taxpayers, who depend on investment income more than wage income.

Under Ms. Clinton’s plan, investments held for up to two years would be taxed at regular income tax rates — 39.6% or more for top earners. Right now, those rates apply for investments held for less than a year. Her plan would also create a sliding scale for long-term gains, but to qualify for the lowest rate of 23.8%, an investor would have to hold onto their investment for at least six years. Currently, an investor can claim a long-term gain and pay no more than 23.8% after one year.

Encouraging investors and corporations to put more emphasis on long-term growth as opposed to short-term gains is a worthwhile goal. Ms. Clinton may be onto something when she says that Wall Street suffers from “quarterly capitalism,” meaning that public companies will go to almost any length to report quarterly profits.

REVENUE NEUTRAL

Advisers should be willing to support a plan that champions long-term investing at the expense of short-term trading. After all, isn’t that what they preach to their clients?

But to get voters to buy into the plan, it should be revenue neutral. Encouraging investors to change their mind-set is a separate issue from arguing that the rich should be paying more in taxes. Combining the two is confusing at best and duplicitous at worst.

Indeed, if Ms. Clinton really believes that long-term capital gains should be rewarded because they will spur economic growth, she should seek to provide real incentives by lowering rates, not raising them.