Clinton tax plan is as bad as it sounds

Last week, Hillary Clinton announced a proposal to dramatically increase capital gains taxes if she wins the Presidential election. From what I can tell, virtually everyone has criticized it. Is it really that bad?

Any tax or regulation which inhibits the free flow of capital to its highest and best use is generally not in anyone’s best interests, even Washington’s. As such, Clinton’s plan should be dead on arrival on Capitol Hill if she ends up winning the Presidency.

In fact, her proposal is so over the top it makes me wonder whether her economic advisors actually want her to win. Even the folks and bloggers at the New York Times have derided it.

Ostensibly, or at least publicly, she wants investors and corporations to think longer-term, as opposed to living and dying by quarterly earnings reports. There is some merit to the logic here, as I would also like for companies to focus on executing their business model, as opposed to doing whatever it takes to meet some arbitrary profit estimate.

At this point, I could go down the path of arguing how increases in capital gains tax rates normally result in lower capital gains tax receipts, but you can read that elsewhere. You can also read how the markets would react, wiping out vast amounts of market capitalization, in any number of other articles.

So, I won’t bore you with the pro-business and market friendly stuff. However, I will tell you I find these types of grand pronouncements from political types very frustrating. Either they don’t know the way the financial markets and the economy really work or they don’t care. I am not sure which is worse.

Take the Dodd-Frank legislation Washington enacted to regulate the banking industry after the 2008 financial crisis. A couple of weeks ago, I wrote on how the Volcker Rule could have unintended consequences, and it could. However, I don’t have to do mental gymnastics to get to the meat of the matter.

Do you think home ownership is important? I do, because over time it creates wealth. Would it surprise you to know home ownership rates are currently the lowest they have been since the 1st Quarter of 1967? So, for all the all the machinations we have done in the mortgage markets and the banking industry, fewer Americans own their own home as a percent of the population than at any time since I have been alive? Really?

Why is this? Ask anyone in the mortgage industry, and they will be happy to tell Title XIV of Dodd-Frank has been, shall we say, ironic. If not the actual rules, then the uncertainty surrounding them has produced unwanted results. While the regulations are intended to protect homebuyers, and particularly naïve new homebuyers, from unsavory lending practices, the numbers suggest they are shielding the target audience from mortgages in general.

According to the Census Bureau, the homeownership rate for people under 35 was 40.2 percent at the end of the 2nd Quarter in 2000. In 2015, it was 34.8 percent. At the end of June 2010, the month prior to the implementation of Dodd-Frank, the homeownership rate for this age group was 39. percent, this after the financial crisis was over. Coincidence? Perhaps, but maybe someone in Washington should look into the cause. They might not like the answer.

In the end, grand politically popular pronouncements might work for the media, but the private markets generally have the last say in the matter.

— John Norris is a Managing Director, and the Head of Wealth Management at Oakworth Capital Bank in Birmingham. He can be reached at john.norris@oakworthcapital.com