Wednesday, July 29, 2015

Hillary's Capital Gains Plan Ignores Reality

In another misguided attempt to solve a problem by raising taxes on the rich, Hillary Clinton is proposing to place heavy penalties on those in the top 39.6% tax bracket for trading less than a year, or even 6 years; claiming that it would stop "very short-term trading" that takes place over "days, hours, or even milliseconds".  So, she's proposing the following tax plan as shown in this chart from CNBC in the hopes that rich people will hang on to their stocks longer:

To the uniformed and those ignorant of stock market investing and its the associated taxes, punishing the rich in the first two years and, then, provide a declining tax penalty in years 3 through 6 will actually accelerate short-term trading.

Under the current tax law, if you sell a stock or other capital asset in less than a year after acquiring it, you pay ordinary income tax on that transaction.  For those in the top bracket, that's 39.6% or just the same as in Hillary's proposal.  Yet, despite this fact, the buying and selling of stocks still does happen at a rate of "days, hours, or even milliseconds".   So, where is the real deterrent in Hillary's plan?  At least under the current law, there is an incentive to hold a stock for more than a year because the capital gains tax drops to 20% for those in all tax brackets in year two.

But, here's the biggest problem.  With no tax advantage in the first two years to hold onto a stock, there's no reason not to sell in the first year; assuming that there are good profits to be taken advantage of.  The same is true for the successive years after year 2.  Her decline in the tax rate each year is less than the rate of increase of inflation. Thus, if a stock increases at a rate that is less than the rate of inflation after two years, the investor is actually losing money; especially, if the sole intent is to take advantage of a slightly lower tax rate.  Therefore, the chances are high that the smart investor will probably sell rather than take the chance of losing money in the future.  At least the 20% tax rate reduces that risk.

Lastly, there are millions of Americans that aren't in the top tax bracket but will be hurt by this stupidity.  These are average people with managed 401K's and mutual funds.  With the higher tax rate, the cost to manage those funds increases while, at the same time, return on that money is reduced.  This from a person who, in 1978, thought it was fine to trade in cattle futures over a period of just 10 months and turn $1000 into $100,000.

This whole thing is another attempt at taxing the rich under the guise of stopping short-term trading.  However, increasing taxes on the rich for stock market trades only means the rich will go elsewhere with their money, such as long-term real estate investments where, after 5 years, only the profits will be taxed at 20%, and with a lot less risk. This will only help to stagnate growth in the stock market; which has, in the last 6 years, provided much income and tax revenues for the federal government.


Hillary Clinton proposes sharp increase in short-term capital gains taxes: 

Hillary Rodham cattle futures controversy:

9 Ways to Invest Without Putting Money Into the Stock Market:

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