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Feel the Bern: Why Hillary Clinton's Proposed Economic Reforms are Not Enough

Updated on July 25, 2015

The Hillary Clinton Capital Gains Tax

The rich can still enjoy their low capital gains tax...they just need to keep their gains running for six years.
The rich can still enjoy their low capital gains tax...they just need to keep their gains running for six years. | Source

Is Hillary Fighting the Income Gap...Or Locking It In?

In the Democratic presidential pre-primaries, Hillary Clinton remains the frontrunner. Of her challengers, only Bernie Sanders has gotten off the ground...but his support has surged far beyond expectations. While many presidential candidates remain vague about their policy proposals, Sanders entered the race with a slew of bold, comprehensive economic and infrastructural reforms ready to go: Universal health care, tuition-free higher education, and spending billions to employ workers to rebuild America's crumbling infrastructure.

Hillary Clinton, though still the frontrunner in the polls, suffered as critics contrasted her silence with Sanders' aggressive push of his specific proposals. The former U.S. Senator (D-NY) and Secretary of State was mocked as too friendly with Wall Street, big banks, and rich investor-donors. Sanders, who publicly repudiated donations from the mega-rich and corporations, contrasted sharply with Clinton's $2,700 per-plate fundraising dinners. For months, Clinton seemed to stuck between a rock and a hard place: She saw Sanders' populism garnering unexpected support, but she still wanted donations and support from those who provoked Sanders' wrath.

Clinton needed to make a move and show that she would be tough on Wall Street and address income inequality and the wealth gap. As if in a game of chess, she has now made that move. According to the Wall Street Journal, Clinton's first major economic reform proposal is to adjust the capital gains tax for the wealthiest investors. Unfortunately for Clinton, the proposal is receiving a muted response.

Currently, wealthy investors pay a flat 20 percent tax rate on capital gains, which are profits from investments like stocks and bonds, real estate, or sale of other assets. Most Americans pay only 15 percent for capital gains, and this low rate is intended to encourage the middle class to invest in the economy. The tax on investment profit is considerably lower than the tax on earned income, which maxes out at 39.6 percent for top earners. As I teach my economics students, it is preferable to make $1,000 in the stock market than $1,000 in a paycheck, which explains why most Fortune 500 CEOs tend to prefer to be compensated with shares of stock rather than bigger paychecks.

Hillary Clinton's proposal is intended to combat what she calls "short-termism." According to Clinton, a major problem with corporate America is that it is focused only on the next quarterly reports, giving CEOs incentives to push higher productivity and lower worker pay in the short term to boost stock prices. The workers struggle, stock prices climb, and the rich cash out. Basically, the argument is that corporate America is underpaying and exhausting workers to squeeze out quick profits. Clinton, therefore, wants to make wealthy investors who are intending to make a quick buck (i.e. hold their investment for one year or less) pay a 39.6 percent capital gains tax, equivalent to what would be considered earned income.

On a graduated scale, the capital gains tax for these wealthy investors would decrease until the sixth year, when it reached the normal 20 percent. For wealthy investors to enjoy their current capital gains tax, therefore, they would have to hold their stock for at least six years. This plan comes on the heels of a recent proposal to increase profit-sharing. Though many details have not been forthcoming, Clinton plans to give tax breaks to businesses that share their profits with employees, with firms enjoying a 15 percent tax deduction of the amount of profit (up to 10 percent of total profit) that they share with their workers.

Unfortunately, these corporate-focused reforms are insufficient to combat America's tremendous income inequality and wealth gap. Unlike Bernie Sanders' proposals, which are comprehensive and offer few loopholes, Clinton's proposals put firms, investors, and CEOs in the driver's seat. While Sanders would unequivocally raise taxes on the wealthiest earners and investors, guaranteeing increased government revenue, Clinton's proposals offer fewer guarantees of success.

For one, will instituting a graduated capital gains tax on the wealthy really affect the amount of money and power they enjoy? Will it really lead to improved conditions for rank-and-file employees of corporations? Sadly, there is little to indicate that anything meaningful will change as a result of rich investors holding corporate stock for six years instead of one. In fact, all that might change is CEOs trying to make employees work harder for longer...or going ahead and deciding to replace employees with capital. "If we've got to hold this stock for six years, might as well take human workers out of the equation," some might say, choosing instead to invest in machinery.

Secondly, Clinton must provide the rest of the details of her profit-sharing proposal. Which businesses will receive this deal? What are the parameters? Does profit-sharing include the value of benefits, such as health insurance, or just cash? Would profit-sharing include capital and infrastructure improvements that are said to help improve employee quality of life? I worry that business owners could purchase new capital intended to boost their bottom line and list it as "profit sharing" because it, allegedly, made employees' lives easier.

The wealthy, who have the time and resources to plan, scheme, and discover loopholes, should not be put in the driver's seat of economic reforms. This is not to criticize the wealthy as greedy - they are simply doing what is natural for all humans: Maximize profit. If I were given a set of parameters, I would seek to maximize profit within them, and I do. By trying to present "win-win" economic reform proposals, Clinton is giving the top 0.1 percent too much power in the conversation. Through their natural advantages and privileges, these wealthy investors, CEOs, and business owners will find a way to minimize the impacts of the reforms.

Bernie Sanders' economic reform plans, on the other hand, will work because they do not offer wiggle room. The rich do not get to sit in the driver's seat and make adjustments. By raising taxes on the wealthy and not offering subsequent tax cuts for "good behavior," the government is guaranteed additional revenue it can use to provide necessary things like universal health care, universal pre-K, universal child care, and tuition-free higher education.


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