This post was originally published on Forbes Oct 13, 2015
So, as it turns out, the big debate tonight is not exactly between Hillary Clinton and Bernie Sanders. There are three other candidates. Podium order is determined by putting the front-runner Hillary Clinton in the center flanked by those closest to her in the polls - Sanders and Martin O'Malley - and the long shots- Jim Webb and Lincoln Chafee at opposite ends of the line.
That leaves Hillary Clinton. I can't find a comprehensive plan from her, but the bread crumbs she has been dropping indicate that when one comes out it will be a doozy. Something tells me that she won't be able to talk with a straight face about how long and complicated the Code is, although I bet she has people on her team who actually know how long the Code is and wouldn't exaggerate its length by a factor of 30 or so like Jeb Bush did.
For over 80 years, our securities market regulators have had the ability to punish the behavior that Mrs. Clinton wants to address with a new tax statute. Section 9(a)(2) of the Securities Exchange Act of 1934 states that it shall be unlawful for any person to make a series of transactions in a security, manipulating the market by "creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others." This law quite clearly gives the SEC the ability to punish high-frequency traders who engage in "unfair and abusive" trading practices like spoofing.
Secretary Clinton’s proposal would stick to the general principles of the current system, but elongate the decline. Gains with a holding period of one to two years would also be subject to the 39.6 percent statutory rate. Gains of two to three years would be subject to a 36 percent statutory rate, and thereafter the statutory rate would decline by four percentage points per year until reaching the current long-term rate of 20 percent at six years.
The stated reasoning behind Secretary Clinton’s capital gains tax plan, outlined at a speech at NYU’s Stern School of Business, is to reduce incentives for what she calls “quarterly capitalism.” The idea, roughly speaking, is that businesses are too concerned with showing immediate success on their earnings reports in order to please investors, and therefore that they are unwilling to take on projects in which successes are less immediate.
There would be no incentive to wait until the one-year anniversary under the Clinton proposal, so the share of assets held for less than a year would increase. Moreover, the benefit from passing each of the holding period thresholds would be sharply reduced—4 percent of the gain or less compared with 19.6 percent under current law.
Hillary Clinton has just given us an object lesson — presumably unintended — demonstrating why our tax system is such a complex mess. The main reason is this: Politicians of both parties cannot resist the temptation to use the tax code to promote the latest political fad or to please favored constituencies.