Last week, Hillary Clinton opened an important “conversation” about what she calls “quarterly capitalism” or excessive “short-termism.” She noted how the rules have been rigged to pressure executives to focus on the next quarter’s stock return rather than the long-term health of the company. The result, reaching new extremes in recent years, is that large public corporations are using “eight or nine of every 10 dollars they earn” to pay out dividends or purchase stock buybacks. CEOs suggest that they would hold off making significant long-term investments if that meant missing the next quarter’s targeted return.
This “culture of short-term speculation” is “out of balance,” and fixing it, Clinton argues, is vital to “save capitalism for the 21st century.”
In stark contrast with Republicans presidential candidates who want to cut or eliminate capital gains taxes, Clinton calls for reforms that will reward longer-term horizons. She suggests she wants to revive what used to be called stakeholder capitalism, with corporations focused not simply on shareholder return but on insuring that workers, consumers, communities, the country and the globe share in the rewards of long-term growth.
But in what is becoming a signature of the Clinton campaign, the fundamental problem is addressed with underwhelming reforms. To abandon the culture of short-term speculation, Clinton does not call for a financial speculation tax that might slow computer-driven, nanosecond trading programs. She does not endorse taxing the income of investors at the same rate as the salaries of workers. She doesn’t mention breaking up too-big-to-fail financial institutions or reducing the bloated size of our financial community that helps drive risky financial transactions. She doesn't penalize companies for excessive CEO compensation packages.
Instead, she offers five areas for reform – four essentially exhortations and one of substance. This gives her scope for rhetoric that echoes Sen. Elizabeth Warren while offering policies that won’t offend Silicon Valley or Wall Street donors.
The exhortations are all sensible. She wants to limit activist shareholders, particularly big hedge funds and cowboy capitalists, that buy up big shares of companies to demand actions that might boost short-term reforms so they can clean up from the short-term boost in stock prices. So she promises a “full review” of regulations surrounding shareholder activism and the disclosure of more information on stock buybacks.
She wants to curb excessive compensation packages that give CEOs incentives to focus on short-term stock rewards. Thirty years ago, she notes, CEOs used to be paid about 50 times what their typical worker made; now they pocket about 300 times the typical worker, a gap that “doesn’t make sense.” She sensibly wants all to share in the rewards of growth. So she calls on the Securities and Exchange Commission to finally require corporations to report the ratio of CEO to worker pay as required by Dodd-Frank, noting that there is “no excuse for taking five years to get this done.” She calls for defending the Dodd-Frank reforms already in law, for reforms – without specifics – of the tax preferences given to executive stock options, and for “examination” on how to revise current incentives.
Third, she calls for empowering workers to share in the rewards of growth, promising to fight to defend worker rights – in stark contrast with Wisconsin governor Scott Walker and other Republican candidates – and repeats earlier promises to provide a tax credit for apprenticeships and for profit-sharing programs. She endorses the New York State Wage Board call for a $15 minimum wage for fast-food workers in New York, but not for that as a national minimum wage, which should be a “floor.” If the minimum wage had been adjusted for increased productivity over the last 40 years, the minimum wage would be more than $18. Why a $15 minimum wage over a few years isn’t a sensible “floor” isn’t explained.
Fourth, she wants government to focus on the long-term also, ending the “budget brinkmanship” of the last years, and making long-term investments in infrastructure, education, and new energy. She would make permanent the R&D tax credit.
The one substantive new reform she offers is a change in capital gains taxes to provide incentives for long-term investors. Currently, wealthy investors gaining from selling stock that they’ve held for one year or less pay taxes at ordinary income tax rates; after that they pay a preferential rate of about 23.8 percent. For the top bracket – the 0.5 percent who earn more than $465,000 a year and capture most of the capital gains from owning stock or bonds – Clinton would expand the definition of short-term to two years, and then offer a sliding scale of preferential tax rates, declining over six years down to the current rate. She also promises to look at what to do about extreme short-term trading programs and she’d eliminate capital gains taxes completely for investments in small business, in innovative startups and in communities in distress.
This reform has the advantage of marginally increasing taxes on investors, although Clinton sensibly doesn’t describe it either as a source of revenue or as a remedy for extreme inequality. She does suggest that it is a major first step towards curbing quarterly capitalism, the short-term perspective of investors.
But there is less here than meets the eye. Today, most investments are held for less than one year, and are already taxed as normal income. Retirement programs and offshore tax havens offer accountants infinite avenues to shield that income in any case. Expanding from one to two years at normal rates and then adding on the sliding scale isn’t likely to make much of a difference in trading strategies. The complexity of the suggested reform is a full employment program for accountants who can figure out how to game it. And, of course, this is the opening offer – no question the rates would decline if a Clinton White House sought to get it through Congress.
Hillary clearly believes that the federal government can use the tax code to bribe companies and investors to do the right thing. But most tax breaks simply reward companies for doing what they would do anyway. Companies are happy to receive them, and lobby hard to expand them. But investors employ nanosecond trading programs despite current taxes on short-term capital gains.
Government is better off setting clear rules that are simple and bold. Investors should pay the same tax rates as workers do. Multinationals should pay the same tax rates as domestic companies. Taxes on the wealthy should be raised to help pay for the public investments vital to our future. Financial speculation should be taxed. Corporations should pay severe tax penalties if CEO compensation vastly exceeds that of typical workers. Workers should be empowered to organize and bargain collectively.
Government sets the rules for the marketplace. Its signals must be simple, clear and forceful. Complexity benefits corporations and their legions of lobbyists. Clinton has opened a conversation about a very important topic, which is a good thing. But her reforms reflect her straddle between the imperatives of reform and the sensibilities of her donors. America won’t fix the rules that have been rigged to benefit the few without an insurgent candidacy that demands and claims a mandate for bold reform. Technocratic fixes won’t get it done.