Democratic presidential candidate Hillary Clinton has pledged to enact some of the largest tax increases in modern history if elected in November. According to Mrs. Clinton’s own campaign estimates, she would increase the income tax by $350 billion, implement business tax reform to the tune of $275 billion, and create a “fair share” tax surcharge on the carried interest of capital gains, which would raise taxes by between $400 billion and $500 billion.
To offset these tax increases, Mrs. Clinton plans to spend billions of dollars on public infrastructure investments and says her administration would provide targeted tax breaks to industries and areas that have been economically depressed.
Providing tax reforms that would encourage investors to pump money into America’s inner-cities and economically depressed regions is, in general, a good idea, but Mrs. Clinton’s targeted tax proposal wouldn’t incentivize new investment; it would encourage existing investors and businesses to abandon their current investments, especially in the suburbs, in favor of moving to a designated “hard-hit” community. The result could cause significant damage to many of America’s most successful suburban areas, as investors flee for better tax environments in nearby decaying urban centers.
Over the past 50 years, many businesses have left cities for cleaner, cheaper, lower-taxed suburbs, especially in parts of Illinois, Michigan, New York, Ohio, and Pennsylvania that were once home to the world’s most important industrial centers, which is now collectively called the “Rust Belt.”
Mrs. Clinton’s plan to draw businesses back into these economically depressed areas involves providing expanded tax credits and the elimination of capital gains taxes — taxes on investment income — for certain long-term investments, which have yet to be singled out. On its own, providing tax incentives for investment in low-income areas can and has worked as one way to spur economic activity, but Mrs. Clinton’s economic plan involves so many new and expanded taxes on businesses and investors that it’s likely her tax incentives will encourage the redistribution of existing businesses and investments rather than the creation of new jobs and wealth.
This would be especially true if Mrs. Clinton succeeds in reforming the capital gains tax structure for top-bracket taxpayers. According to Clinton’s proposal, she plans to radically change the way capital gains taxes work so that wealthy investors will be required to pay much higher rates for shorter-term investments than they do today.
Under current tax law, an investor in the top tax bracket pays 39.6 percent on any capital gains earned on investments that have existed for less than one year but only 20 percent on investments longer than one year. Clinton’s plan would make many investors and business owners pay 30 percent or more on capital gains for investments that last less than four years, and it would take six years before investors’ capital gains rate would fall to what it is now on investments that are only 12 months old or older.
Under Mrs. Clinton’s plan, investors would be discouraged from taking risks and incentivized to invest in safer, longer-term projects. But if you’re a business owner or investor, why would you ever start a business or make a new investment in the suburbs or a rural region when a nearby economically depressed area would provide you with a substantial tax break?
Many investors would also be far more likely to pull existing investments in suburban areas and move them to nearby — or even faraway — depressed urban areas, because risk could be better managed when capital gains rates are set to zero. Investors concerned about economic growth or looking to take a risk in an emerging market would have no reason to invest or continue investing in wealthy and middle-class suburbs, especially when they could end up paying nearly one-third or more of any profits they do make in taxes if they have to pull out of the investment within four years. In economically depressed areas, investors would have the advantage of paying absolutely nothing on capital gains over the same period.
Providing tax advantages to help save America’s inner cities could be one of many great ways to encourage economic growth in areas that desperately need it, but not if businesses in other regions are going to be punished significantly. Such a strategy will only encourage investors to move their money from one tax-friendly region to the next; no real economic growth would actually occur.
Hillary Clinton’s plan will do nothing more than create a high-stakes game of economic musical chairs, and America’s suburbs will likely end up being the loser.
• Justin Haskins is executive editor of The Heartland Institute.