Hillary Clinton’s Plan to Break Free from The Tyranny of Today’s Earnings Report and Encourage Long-Term Growth
Last week, Hillary Clinton defined in clear terms the central economic challenge of our time: raising incomes for hard-working Americans so they can afford a middle-class life. To address this challenge, she laid out an agenda for strong growth, fair growth, and long-term growth.
Today, Clinton is putting forward ideas to encourage long-term growth and end the tyranny of today's earnings report. Corporate profits are at near-record highs, but they are not showing up in the wages of everyday Americans. That's in part because too many pressures in our economy today are pushing businesses toward short-termism—a focus on the next earnings report or the short-term share price, rather than the sources of long-term growth and lasting value: workers and their skills, R&D, and physical capital.
Focusing the American economy on the long-term will require the public and private sector. Government has a key role to play by creating a framework of rules and incentives that promote long-term investment in America. But so much of this needs to happen outside of Washington – from small businesses on Main Street to the largest corporate boardrooms. Corporate leaders can devote more time to long-term vision and strategy than to quarterly pressures or to short-term investors. Pension funds and other asset managers can help instill a long-term perspective—encouraging the companies they invest in to focus for the long run. If we want durable income growth, that’s how we should orient our entire economy.
Today, Clinton will lay out an agenda to begin to move away from "quarterly capitalism." This agenda starts from the premise that most businesses aspire to do more than boost their quarterly earnings—and a growing number of companies are seeing the benefits of investing in their workers and communities for the long-term. This marks the start of a conversation between the public and private sector, management and labor, and stakeholders throughout the economy. Specifically, Clinton's plan includes:
- Revamping the capital gains tax to reward farsighted investments that create jobs and discourage short-term trading.
- Empowering workers and giving them a stronger voice.
- Addressing the rising influence of so-called activist shareholders when they focus on short-term profits at the expense of future growth – and shedding light on excessive buybacks that could take resources away from long-term investment.
- Reform executive compensation to better-align the interests of executives with long-term value.
- Breaking out of gridlock and short-term thinking in Washington.
Progressive capital gains tax reform to help promote long-term investment, and discourage short-term trading
As part of this agenda, Clinton is putting forward a fundamental reform of the capital gains tax system. Our current system for capital gains taxation is designed to reward "long-term" investments by giving them preferential tax treatment relative to ordinary income. But the tax code defines "long-term" investments as those that are held for as little as just one year.
Hillary Clinton does not believe that four quarters should count as "long-term." She would reform the capital gains tax for those in the top tax bracket – which applies to just the top one percent of income-earners but is where most capital gains are earned1 to encourage patience and foresight that will help align shareholder and business incentives toward the true long-term. This will in turn reward the kind of farsighted investments that drive good jobs and stronger and steadier incomes for everyday Americans. These changes to the tax code alone will not shift investors' focus from short-term to long-term overnight. Many investments are held by non-profit endowments or retirement accounts that are not subject to capital gains rates. But these reforms are an important first step toward combating quarterly capitalism.
In addition to rewarding long-term investment and discouraging short-termism, Clinton’s reforms are progressive—raising the capital gains rate and limiting the overall tax preference for capital gains for the highest earners.
Specifically, Clinton's plan would:
- Encourage long-term investment by raising rates on the top tax bracket to ordinary income levels on short-term gains and graduating rates downward the longer an asset is held. Clinton’s plan would raise capital gains rates for investors in the top capital gains income bracket for shorter-duration gains, while maintaining current preferential rates for long-term investments. This will only affect couples making more than $465,000 per year.
- Reforming the capital gains rate will reward longer-duration investment and begin to limit short-termism. Clinton’s plan would align the tax code toward long-term investments and away from short-term trading. This, in turn, should reward farsighted investors and companies that seek to build up value. Business leaders, labor leaders, and independent experts have suggested versions of a graduated capital gains structure.3 Clinton understands that this reform to the capital gains tax will not fix the problem of short-termism overnight – but these changes are a step in the right direction.
- Clinton's capital gains tax reform is progressive. Clinton's plan to raise shorter-duration capital gains rates to ordinary income for the top bracket is a progressive reform to the tax code. This proposal would have no effect on the tax rate of 99 percent of Americans. Further, according to the Committee for a Responsible Federal Budget, and the Urban-Brookings Tax Policy Center, roughly three-quarters of the benefits of the current capital gains preference go to those earning more than $1 million per year.4
- Promote long-term investments in small businesses and hard-hit communities. At the same time that Clinton is calling for raising shorter-duration capital gains rates, she will reward bringing long-term investments into hard-hit and low-income communities.
- Zero capital gains taxes on small business stock held for the long term. Clinton’s plan would provide for zero capital gains taxes on qualified small business stock held for more than five years. Small businesses create 60 percent of net new jobs in the United States. This will encourage investments in entrepreneurship and pay off in the long-term through jobs and innovation.
- Zero capital gains tax option in hard-hit areas – including manufacturing and coal communities facing the departure of plants and production. To encourage impactful investment in areas that need it most, Clinton’s plan would offer the chance to eliminate capital gains taxes altogether for certain long-term investments in hard-hit communities, from inner-cities to the Rust Belt to coal country to Indian country. This new provision would go hand-in-hand with a permanent, revitalized and expanded New Markets Tax Credit that will increase the amount of credits available to offer to low-income communities, and add new credits for hard-hit communities that have seen jobs and production depart. This expansion of the New Markets Tax Credit will encourage investments to prevent communities from spiraling downward after a major economic shift or plant closing – whether it is in a manufacturing community or a coal community.
- Preventing downward spirals: The reason for broadening eligibility for the expanded New Markets Tax Credit beyond purely low-income communities is that, too often, communities faced with a major job loss event or the departure of production see a "downward spiral" of departing human capital and degrading physical capital left behind.5 This proposal could help prevent downward spirals in communities hit hard by the consequences of trade or climate change, and emphasize long-term, sustainable investment to diversify industries and prevent a flight of human and physical capital after a major job-loss event.
- Encouraging investment and creating jobs in hard-hit communities: The New Markets Tax Credit brought billions of dollars of tax relief and investment to hard-hit communities over the past decade. An evaluation of the effects of the credit by the Urban Institute concluded that "the most prevalent results were provision of advantageous financing, real estate development in low-income areas, additions to local tax bases, and job creation or retention."6
Empowering workers and giving them a stronger voice
Clinton's plan would strengthen the voice of workers to encourage better pay and long-term investment in human capital. Between 1973 and 2014, productivity has risen more than 80 percent, while hourly compensation of a typical worker is up just 10 percent – meaning that workers are not seeing income growth despite producing more.7 Employer-funded job training has fallen by more than one-third in the past two decades, even as the premium on skilled workers has increased in a competitive global economy. Clinton’s agenda for beginning to address short-termism starts with reinvesting in and strengthening workers, and will among other things include:
• Raising the minimum wage and enforcing overtime rules
• Strengthening union collective bargaining rights so workers have a stronger voice
• A $1,500 apprenticeship tax credit for every new worker businesses train and hire
• A new, two-year tax credit for employers that share profits with their workers
Addressing the rising influence of so-called activist shareholders when they focus on short-term profits at the expense of future growth
Clinton will order a full review of regulations on shareholder activism – some of which haven't been updated in decades. Many activist shareholders often have a positive influence and companies, by serving as watchdogs that apply pressure to stay nimble and accountable. But that’s different from the rising influence of “hit and run” activists that in some cases seek short-term gains at the expense of long-term value. Clinton will ensure Washington does its part by reviewing the rules of the road for activism – but action is needed in the private sector as well, with more pension funds joining the long-term value movement. Institutional investors control 70 percent of the shares in the largest 1,000 U.S. companies.8 They have unmatched influence, and therefore an unmatched obligation to guide companies toward strategies and metrics focused on long-term value.
Shedding light on excessive buybacks that could take resources away from long-term investment
Clinton will shed light on excessive buybacks. Potentially as a result of short-term pressure, large public companies now return eight or nine out of every ten dollars they earn directly back to shareholders, either in the form of dividends or stock buybacks.9 Investors and regulators alike need more information about these transactions. Capital markets work best when information is promptly and widely available to all. Other advanced economies – like the United Kingdom and Hong Kong – require companies to disclose stock buybacks within one day. But here in the United States, companies can go an entire quarter without disclosing buybacks. Clinton's plan will increase transparency for buybacks in the U.S.
Reforming executive compensation to better align the interests of executives with the long-term value of their companies.
Reforming executive compensation. The Dodd-Frank financial reform legislation passed in 2010 called for new regulations regarding disclosure of executive compensation. Many rules have yet to be put in place includes a requirement to publish the ratio between CEO pay and the paychecks of everyday employees. Clinton pledged to defend Dodd-Frank from Republican attacks and finally get the promised rules on the books. She would also reform the "performance-based" tax deductions available to top public company executives, which have too often created a perverse incentive for them to seek big payouts that could come from a temporary rise in share price. And she would expand disclosure requirements under Dodd-Frank's "say-on-pay" rule to include an explanation of how executive compensation will promote the long-term health of the company.
Break out of gridlock and short-term thinking in Washington
Clinton will call for ending the era of gridlock and budget brinksmanship that results in short-termism in Washington and holds America back. Clinton will call out budget brinksmanship in Washington – led by Republicans in Congress – that resulted in harmful sequestration cuts to early childhood education and research and uncertainty for the private sector over whether America would default on its debt. She will call for improving and making permanent the Research and Experimentation Tax Credit, to give certainty to the private sector to invest in research, which Congress has extended 16 separate times since 1981. And she will call for ending subsidies for industries that do not need them, while and investing in infrastructure, innovation, education, and clean energy.
Experienced Experts Agree Hillary Clinton is Jumpstarting the Right Conversation
Austan Goolsbee, Robert P. Gwinn Professor of Economics at the University of Chicago, Booth School of Business:
"Hillary Clinton's speech today is the start of an important conversation on how we can get our economy - private-sector businesses, investors and the government – more oriented toward growth. Her plans to reform the capital gains tax system to encourage longer-term investment is designed to give incentives for investors and companies to focus on long-lasting value rather than just near term benefits. This one policy alone will not solve the problem of short-termism but aligning our tax code toward long-term thinking is a worthy and important goal and it is a beginning."
Laura D. Tyson, Director of the Institute for Business & Social Impact at the Haas School of Business, University of California Berkeley:
"Hillary Clinton's speech raised a number of serious questions about how we can foster long term growth and innovation in the U.S. She identified important challenges including investor time-horizons that focus on the near term at the expense of longer-term returns and pressures on management that encourage shortsightedness and discourage long-term thinking for future decades - all of which hold back investment and future productivity. The questions she raised and the solutions she put forward on tax and regulatory reform are helpful first steps to addressing these challenges and fostering long-term investment."
1Urban-Brookings Tax Policy Center. “Number of Tax Units by Tax Bracket under Current Law.” June 23, 2015.
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=4205&DocTypeID=7 ; Urban-Brookings Tax Policy Center. “Capital Gains and Dividends.” Accessed July 2015. http://www.taxpolicycenter.org/briefing-book/key-elements/capital-gains/lower-rate.cfm
2All rates given before 3.8% tax on net investment income from the Affordable Care Act.
3In a 2009 letter organized and released by the Aspen Institute, business and labor leaders, and independent experts, suggested discouraging short-termism through a reform that would “[r]evise capital gains tax provisions or implement an excise tax in ways that are designed to discourage excessive share trading and encourage longer-term share ownership. Capital gains tax rates might be set on a descending scale based on the number of years a security is held.” The Aspen Institute. “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.” September 9, 2009. https://www.aspeninstitute.org/sites/default/files/content/docs/pubs/overcome_short_state0909_0.pdf
4Committee for a Responsible Federal Budget. “The Tax Breakdown: Preferential Rates on Capital Gains.” August 27, 2013. http://crfb.org/blogs/tax-break-down-preferential-rates-capital-gains.
5Gary Pisano and Willy Shih. “Restoring American Competitiveness.” Harvard Business Review. July-August 2009. https://hbr.org/2009/07/restoring-american-competitiveness/ar/1
6Abravanel et al. “New Markets Tax Credit Program Evaluation.” Urban Institute. April 2013. http://www.urban.org/sites/default/files/alfresco/publication-pdfs/412958-New-Markets-Tax-Credit-NMTC-Program-Evaluation.PDF
7Mishel, Lawrence. “Wage Stagnation in Nine Charts.” Economic Policy Institute. July 4, 2015. http://www.epi.org/blog/professor-hubbards-claim-about-wage-and-compensation-stagnation-is-not-true/
8Tonello, Matteo, and Stephan Rahim Rabimov. "The 2010 institutional investment report: trends in asset allocation and portfolio composition." In The Conference Board Research Report. 2010.
9Lazonick, William. "Profits Without Prosperity." Harvard Business Review. September 2014.