Recently Hillary proposed to increase taxes on capital gains by increasing the period to qualify for long term capital gains. Reactions were predictable. Larry Kudlow called it, “Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme.” Matthew Yglesias at Vox writes:
As my colleague Jon Allen has written, Hillary Clinton is a fairly unimpressive public speaker on the stump, but she’s an extremely skilled consensus builder and savvy candidate. The quarterly capitalism thesis is an example of that.
He also says this reveals a deeply wonky side of Hillary. Both Larry and Matt are off base. It is not inconceivably stupid, rather it is just standard leftist dogma with the advantage, from their point of view, of making the tax code more complicated.
It is not wonky. A wonky idea could be that we suffer from a shortage of children to support our economy. To solve that shortage we change the tax code to encourage children. Hillary has put “Quarterly Capitalism” in the same speech with her proposal to increase taxes on capital gains but there seems to be little reasons to believe that there is a connection.
Sidebar: As we started writing, searching for a transcript of Hillary’s speech was fruitless. Therefore, this works entirely from secondary sources. Why is the speech not up somewhere? End sidebar.
Matt must be an amazingly successful investor because he is able to evaluate information much more effectively than the market. First, Amazon:
For example, on the afternoon of July 23 Amazon released an earnings report that performed well above the consensus expectations of Wall Street analysts. That caused its shares to skyrocket in value — up 18 percent — within a matter of hours. And yet while the report was certainly good news for Amazon, it — like most quarterly earnings reports — didn’t really tell us much of anything about the most profound issues facing Amazon (or any other company) in the long run.
The foolish market that research has shown to be an unbiased evaluator of information must have overreacted while Matt held his composure and saw that profound issues were not addressed. Then he is on to Verizon and Google:
[Google] plows the profits from its web search into a shockingly wide range of ventures…. By contrast, Verizon does not really do exciting things. It does invest money in its infrastructure. But it does so relatively cautiously, rolling out new fiber-optic lines at a measured pace. It could build fiber faster, but doing so would be expensive. Instead Verizon prefers to spend about $8 billion a year on paying dividends to its shareholders, with billions on top of that spent on buying Verizon stock.
He argues that Google, which isn’t private, is like a private company because of its ownership and therefore tends to invest more like private companies do. He concludes we need more investment so [it appears a causation miracle happens here] we need to tax investors more heavily unless they hold on to the stock for six years. The two are not well linked.
There are two main problems with Matt’s assertions. First, there is no evidence that transfers to stockholders reduce investments. They change who invests but no how much is invested because the rich stockholders (the only ones targeted by Hillary) won’t consume much. The transfers allow investors to consider new opportunities. The money will still get invested. It is possible that the investors might choose more wisely than either Google or Verizon. Not all investment is equal.
Second, Hillary is the candidate of the status quo and her proposal reflects this. As an example, it will become a more economically challenging decision to get out of Verizon and into Uber because the tax rate is higher unless you hold the investment for six years. Again, the proposal will often work against investment where we need it.
It seems as if Hillary has a theme to help lend some limited credence to what she wants to do. What might she do if she really wanted to accomplish the goals of increasing investment and curbing Quarterly Capitalism? Investment is easy. She could eliminate the corporate tax or just make capital expenditures fully deductible. Curbing QC is harder. She could remove the restrictions on cash payments to corporate officers (a relic from Bill’s time in office) to reduce the use of stock options. Limiting the stock options is a challenge since leadership is in short supply. If the government puts substantial restrictions on corporations’ ability to offer stock options then we can create larger problems than we are trying to solve. She has hinted that she will attack the ability of corporations to deduct stock options as compensation expense.