Hillary Clinton is promoting a tax reform plan that will not achieve her objectives.
Clinton would like to increase long term business investment, since it would stimulate innovation, productivity and economic growth for the masses. A laudable goal, indeed; however, the remedy she prescribes will not cure this patient.
Clinton correctly states that corporate stock repurchases and dividend payments have benefited the corporate boardrooms, C-suite executives and shareholder class at the expense of the working class, since it lowered the level of retained earnings for investment in labor, plant and equipment for many years.
Stock repurchases and dividend payments have equaled, on average, 85 percent of earnings since 1998, excluding two years of recession in 2001 and 2008. In 2014, this figure was about $914 billion, or roughly 95 percent of earnings, with about $565 billion in buybacks and $349 billion in dividends, according to Bloomberg and S&P Dow Jones Indices.
Since March 2009, repurchases total nearly $2 trillion, a prime catalyst for the 191 percent increase in the S&P 500 Index in 5½ years, while stocks with the most repurchases saw a 300 percent return, according to Forbes. During the past two years, sales growth rose 2.6 percent each quarter for these firms, while per-share-earnings more than doubled to a whopping 6.1 percent, according to Bloomberg.
The share of cash flow allocated to buybacks rose to more than 30 percent, nearly double what it was in 2002, while the share for capital spending declined, from more than 50 percent to roughly 40 percent during the same time period, according to Barclays. Low levels of investment have resulted in the highest average age of fixed assets since 1956, reaching 22 years in 2013, according to the U.S. Commerce Department.
Carl Icahn believes the major proponents of quarterly-capitalism are the corporate board members and the chief executive officers, who promote the stock to enhance the value of their equity option plans.
Clinton proposes an increase in the capital gains rate on the wealthiest 0.5 percent to solve the problem.
She envisions doubling the rate to 40 percent for the first two years, and scaling it back gradually to 20 percent over the next four. Currently, the top 40 percent rate applies to assets held less than a year and reverts to 20 percent afterward. These figures exclude the 3.8 percent healthcare surcharge on net investment income.
Recently, BlackRock CEO Larry Fink proposed something similar: a 40 percent rate that applies to the first 3 years, then gradually falls to zero over the next seven.
In an interview several years ago, Larry Fink, whose firm manages $4.7 trillion, suggested he let the country down, since the financial industry became much too large over the previous three decades and the return on capital relative to labor was excessive. Bill Gross, the former founder of Pacific Investment Management Company and a current portfolio manager at Janus Capital, has expressed a similar view and expects these yields to plummet 50 percent.
The problem with Clinton’s proposal is four-fold:
* Approximately two-thirds of stock trading is conducted on behalf of tax-exempt organizations, such as pension funds and 401(k) plans, which are completely immune from any tax implications and already trade with a long-term view.
* Her proposal does not encourage 99.5 percent of the population to engage in a long-term investment perspective.
* Modifying the capital gains rate will not incentivize the corporate board and C-suite executives to focus on the long-term instead of seeking short-term profits to promote the stock price of their firm.
* Financial trading is based primarily on short-term arbitrage opportunities and speculation that do not promote long-term direct investment in labor and capital.
The key to increasing long-term capital investment is to make it more attractive for businesses to do so.
My tax proposal would achieve this objective by permitting an income tax deduction for all capital expenditures in the year they are made. Currently, these expenses are deducted over the entire life of an asset, which can range between two and fifty years.
In addition, my tax plan will replace all federal taxes with a low tax rate on consumption and savings that would balance the budget at current spending levels; save scores of billions of dollars each year in tax compliance expenditures; increase investment, employment and income; and maintain strong purchasing power.
Clinton’s capital gains scheme will not achieve these objectives.
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