Mike & Co. —
HRC added some key planks to her tax plan on Monday. Her proposals increase federal revenues by $400-500 billion over ten years without increasing taxes for anyone earning less than $250,000 a year. A third of the new revenue would come from a “fair share surcharge” levied on earnings exceeding $5 million taxed at the same rate, whether capital gains or payroll earnings, unlike any other income tax.
Certain planks in this plan operate as an important adjunct to financial regulatory policy. Instead of restoring Glass-Steagall, HRC focuses on the risky activities, not on the corporate form, of financial firms. This innovative use of taxpolicy illustrates the chief difference between Clinton and Sanders in reining in the banks and ending taxpayer-funded bank bailouts. It is a powerful rejoinder to rhetoric demanding “break up the banks,” which could easily come up in tonight’s debate.
Below is a top-down review of HRC major previously announced as well as new tax proposals and a look at how they she uses tax policy to achieve financial policy goals.
The Clinton tax proposals aim to correct the inequities and inefficiencies that distort the tax Code. Thanks to loopholes used by the wealthiest Americans, they pay an effective tax rate of 17 percent in taxes instead of the more than 30 percent prescribed by the Code.
Increasing tax revenue is also part of HRC’s greater economic plan to boost investment in the middle class and reducing income inequality exacerbated by loopholes that HRC intends to close. HRC would pay for plans to boost early-childhood education and paid parental leave by levying taxes on top earners. She would exempt families making below $250,000—about 96% of tax filers—from any tax increases. Clinton also provides a tax break to companies that pay employees profit-sharing bonuses.
Previously announced revenue raisers:
- Carried interest— Since she was in the Senate, HRC has supported closing the carried interest loophole that allows hedge fund, private equity, and other Wall Street money managers to avoid paying ordinary income rates on their earnings. With the top 25 hedge fund managers making more than every kindergarten teacher in the country combined, there is absolutely no reason for this tax loophole. Estimated ten-year revenue: $200 billion.
- Risk Fee — A risk fee to be assessed against banks and other regulated financial institutions with more than $50 billion in assets. This fee’s size will reflect the institution’s leverage and the volatility or risk involved in its financial activities. The campaign says that the fee will not affect insured deposits or traditional banking services. No revenue estimate.
- High-Frequency Trading Tax — HRC plans to charge fees against companies which participate in high-frequency trading. Through use of computer algorithms and ultra high-speed internet connections to make arbitrage transactions on huge chunks of stocks in rapid transactions, a company which earns perhaps only $0.01 profit per stock may make billions of dollars per year due to the volume of trades they make. No revenue estimate.
- Tax Cuts for College Students — HRC’s New College Compact aims to make college tuition more affordable by extending a $2,500 tax cut to families who have children in college. This “cut” is actually the permanent extension of the American Opportunity Tax Credit program, which provides $2,500 per college student, including $1,000 which is refundable to lower-income families. The AOTC is set to expire in 2017, after which “up to 11 million American families trying to pay for college could see tax increases.”
- Credits for Apprenticeship Programs — One of HRC’s plans from early in her campaign, a $1,500 tax credit for each apprentice that a business hires and trains, with undisclosed incentives for young apprentices. Policies encouraging apprentice programs have long enjoyed bipartisan support, but the major stumbling block has been securing business support.
Revenue neutral proposals:
- “Build America” Bonds — HRC plans to reauthorize the “Build America Bonds” program, first established by President Obama but since expired. This is a part of her $27 billion infrastructure investment plan, which includes establishing a national infrastructure bank; the plan will be funded through a mix of federal money and the tax-exempt bond program. HRC has said that the rate of these bonds would be set to make them revenue neutral.
Profit-Sharing Tax Incentives — This plan takes the form of a two-year tax credit to businesses which create profit-sharing plans with their employees. The tax credit is equal to 15 per of the profits the business shares, with shared profits eligible for the credit capped at 10% above the employee’s current wage. The tax credit will be phased out for higher-income workers, only available to companies which share their profits widely, and will have a maximum cap set to prevent very large corporations from taking advantage of the program. Revenue cost: $20 billion over the ten-year budget window and will be fully paid for through the closure of tax loopholes.
New proposals this week
On Monday, HRC proposed new measures to prevent high-income taxpayers from misclassifying income as capital gains or avoiding paying tax on some income at all.
- Buffett Rule-plus — HRC announced a proposal to strengthen the Buffett Rule by broadening the base of income subject to the rule, ensuring that those making more than $1 million per year pay at least an effective tax rate of 30 percent.
- “Fair Share Surcharge” — HRC rolled out a new 4 percent surtax on income over $5 million a year. To the Buffett Rule, which phases in a 30 percent effective rate on millionaires, HRC would add the surtax, which she dubs a “fair share surcharge.” Two out of every 10,000 taxpayers would pay it, raising $150 billion over ten years v making more than $5 million per year.
- Closing private loopholes— The Bermuda reinsurance loophole and the “Romney loophole” let the most fortunate avoid paying their fair share. As a result of loopholes and the “private tax system” of lawyers and accountants who enable complex strategies to shelter and lower the bill on income for the most fortunate, some of the wealthiest taxpayers continue to pay low effective rates on their income.
HRC builds on proposals from both Democrats like President Obama and Republicans in Congress to close down these two loopholes.
- Bermuda Loophole— High-income money managers have used loopholes related to foreign reinsurance – often located in Bermuda – to avoid paying their fair share.
- Romney Loophole— Per data from the GAO, roughly 1,000 taxpayers have accumulated close to $100 billion dollars in tax-preferred retirement accounts, with balances of more than $10 million per taxpayer. Clinton seeks to encourage robust retirement savings by American families – but that retirement accounts should not be a shelter from taxation for the wealthy. She builds on proposals by President Obama calling for closing down this loophole, limiting the ability of the very wealthiest to game the Code by sheltering large incomes in tax-preferred accounts.
- Estate Tax — HRC also proposes restoring the Estate Tax to 2009 parameters, which would ensure some of the largest, multi-million dollar estates are not exempt from paying their fair share. She will also close complex loopholes, including one wealthy taxpayers use to make their estates appear to be worth less than they are. Then tax would only affect four out of every 1,000 estates after Clinton’s reforms.
Tax Policy as Financial Policy
The problem with systemic risk that gave rise to the Great Recession is not the corporate form of financial entities, but their behavior. Breaking up banks merely shifts risks to other firms whereas HRC’s proposals reduce risk by taxing reckless market behavior in order to deter it. HRC proposes including taxing capital gains and taxing high-volume, high-frequency trading orders, driven by computer algorithms.
Many of the towering figures involved in rescuing the American economy from the depredations of systemically reckless financial firms endorse the HRC approach, saying there is no evidence the repeal of Glass-Steagall unleashed the financial crisis. The institutions that ran into severe problems in 2008-09 include Bear Stearns, Brothers, Merrill Lynch, AIG, and Fannie Mae and Freddie Mac, none of which would have come under Glass-Steagall’s restrictions.
President Obama has recently said that “there is not evidence that having Glass-Steagall in place would somehow change the dynamic.” Ben Bernanke: “I’m actually a little puzzled by the focus on that particular provision. If you look at the actual, what happened a few years ago in the crisis, that Glass-Steagall was pretty irrelevant to it because you had banks like Wachovia that went bad because they made bad loans, and you had investment banks like Bear Stearns and Lehman that went bad because of their investment banking activities.”
Wachovia, Washington Mutual and Countrywide weren’t suddenly given a license to gamble by Glass-Steagall’s elimination, and their collapse wouldn’t have been prevented had the law remained on the books. The principle cause of the crisis was not overlarge banks as much as overleveraged banks that made risky bets. And their interconnection and interdependence made that risk systemic. Before the panic of 2008, the financial system had a risk problem, not a size problem. The U.S. response to the crisis, Dodd-Frank, quite sensibly, focused on risk.
Accordingly, the main thrust ofDodd-Frank has been the Basel 3 regulations designed to limit leverage and force banks to hold more capital. Giants like AIG and Goldman Sachs that escaped serious regulation because they weren’t considered commercial banks are now subject to close scrutiny by the Fed and a the FSOC.
And it’s starting to work. That’s why General Electric is selling its finance arm, GE Capital. Financial institutions can’t hide in the shadows anymore. The best evidence came from a GAO analysis of the too-big-to-fail subsidy. GAO ran bond-market data through 42 economic models and found that the too-big-to-fail funding advantage had declined dramatically since the crisis, and in many models, the subsidy had vanished completely.
HRC’s tax policy proposals are unique in the current field insofar as its classical economic approach to tax theory is concerned. Clinton understands that taxes, when used to influence the behavior of actors, are often a more efficient and effective option for policymakers than flat-out prohibition, which can solve more problems than it intends to. The Clinton tax plan includes a risk fee for banks which undertake reckless investment strategies and hold too much debt, and it assesses a fee against high-frequency trading, a form of trading which takes place over fractions of a second and can trigger what is called a “flash crash.”
Under revived Glass-Steagall, regulators would simply demand that banks divest themselves in a certain way less with regard to risk than to size. Conversely, by actively targeting the behavior of banks, HRC hopes to create a mechanism by which banks will police themselves, rather than forcing regulators to expend countless hours and dollars in doing so.