Hillary Clinton wants to increase capital gains on the top 1% income earners. And I am in full agreement with that. But I disagree with the way she wants to do it. She is currently proposing a sliding scale for capital gains tax for the top 1% (joint filers earning approximately more than $450,000) and the scale itself will be based on the number of years a person is invested in an investment. She says that she wants to discourage “short-termism” – where investments like equities are bought and sold within a shorter term (of less than a year) and would instead want to encourage long-term investments (something like a buy and hold strategy that gives more weight to value investing rather than speculative trading; and encourage CEOs and rich folks to invest in a company's long term growth rather than being worried about "quarterly" stock bounces).
Where I disagree with her is on the word “short-termism” itself. And I would prefer the sliding scale she proposes to be based on the amount of realized capital gain itself rather than the time period of investment. In today’s capital markets, we don’t want the government to direct our investment models. Say for example, I invested in a company ‘X’ in January based on my prediction that the company has a very good future potential. Then sometime in July, another great company ‘Y’ went public and from what I see and analyse, my prediction says that ‘Y’ has even higher future potential than ‘X’. So at this point, why would it be wrong for me to move my capital from ‘X’ to ‘Y’? Why should I be punished by the government for a smart decision I made? Why would the government defy and disrupt the very basics of the free market theory which tells us that capital gets allocated efficiently where needed and where there is potential.
In this case, it should be noted that my money is still in the markets. I didn’t take it and run away and my capital is still being deployed at places where I deem fit. How could the government behave like I am doing something sinister and hence I need to be taxed at a higher rate? Now before I write further, I have to note that I won’t be impacted by this capital gains tax proposal – because it is meant only to the top 1% income earners. So in reality, it is possible that this proposal might have a net positive effect, but my opinion is that this proposal is flawed and could have addressed the capital gains tax reform in a much better way.
My proposal would be to get rid of the terms “short-term” and “long-term” altogether. Today’s financial markets are more complex and more globally integrated than the 1990s and as we go into the future, the size, scope, participation and thereby the opportunities itself become wider and more diverse. At this juncture, government encouraging me to stay long on a stock when I see better opportunities elsewhere (at home or abroad) is like a grandmother advising a twenty year old on modern technologies.
If you want to have a sliding scale, then fine, but in that case, my view is that it is better to have a sliding scale on the amount of realized capital gain itself. If the realized capital gains by an individual in less than $100,000 in that tax year, then tax the gains at 15%; if it is between $100,000 to $300,000, then tax at 20%; if it is between $300,000 to $500,000 then tax at 25% and for gains above $500,000, tax at 30%. These numbers are just arbitrary for now, and the relevant experts can work out these numbers, but the sliding scale in my opinion should be something like this – where it is based on the capital gain itself rather than the time period of investment. I don’t want the government to encourage or discourage me on how to invest or where to invest or how long to invest, but instead the government should just tax based on how much I made – with obviously the tax being more lenient to low income earners than to high income earners.
When it comes to labor, I don’t hear Hillary saying that she wants to encourage a worker to stay longer in a company as that would provide benefits to the business and reduce training costs, but instead she seems fine with just taxing the total labor-based income at progressive tax rates. In my opinion, investment income should be treated no differently and no “encouragement” of any sort is needed from the government to stay long or short on any investments.
Now, if Hillary wants to discourage extreme short term trading - like buying and selling in a single day, arbitrage trading across different markets, high frequency speculative trading and such, then that might be better addressed by an extremely small fee (to the order of a few cents to a dollar) on financial transactions rather than through this needlessly bureaucratic tax proposal she has put forward - and that doesn't necessarily reform the capital gains tax structure more broadly and more importantly, in a fair manner.
