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Hillary Clinton - Does the Country Really Need Another Economic Ignoramus?

Politics / US Presidential Election 2016 Aug 16, 2015 - 09:24 AM GMT

By: Investment_U

Politics

Alexander Green writes: Readers sounded off on my column a couple weeks ago about Hillary Clinton’s plan to nearly double the top tax rate on long-term capital gains to 43.4%.

As this is a column by and for investors, most readers nodded in vigorous agreement with my view that this plan would hurt not just investors but the poor and middle class as well.


But others hailed the move. They might be careful what they wish for...

Candidate Clinton wants to put an end to “quarterly capitalism,” the supposed corporate practice of focusing on short-term earnings at the expense of long-term growth.

I’ve heard a few academics and left-leaning economists grouse about the same thing. Yet I’ve noticed their complaints all have one thing in common: They never give a single example of a company that actually does this.

Sort of makes you wonder just how big a problem this really is.

Especially when some companies regularly deliver billions of dollars in short-term losses and the market drives their share prices skyward anyway.

Unlike Mrs. Clinton, I’m happy to provide examples.

A few years ago, entrepreneur Elon Musk created Tesla Motors (Nasdaq: TSLA). It builds cars without a gasoline internal combustion engine with hundreds of moving parts. Instead they have electric motors with one moving piece: the rotor.

Motorists have gone gaga for the battery-operated vehicles, even though prices start at $101,500.

Tesla lost $3.18 a share in the most recent quarter. In fact, Tesla has lost money every quarter. But sales are growing at a 52% annual rate. And the stock is up 400% over the last five years.

Or take Amazon.com (Nasdaq: AMZN), the nation’s e-commerce leader. Over the past decade it has gushed red ink, reporting tens of billions of dollars in losses.

Founder and CEO Jeff Bezos told investors to expect them. He ignored calls for quarterly profits and instead grew sales - exponentially.

The market’s reaction? Amazon shares are up more than 60-fold over the last 13 years.

So here’s a question for Mrs. Clinton, who feels we urgently need to increase the capital gains tax by 82.3% to end our mindless preoccupation with short-term profits...

Why would investors reward Amazon and Tesla for focusing on long-term corporate growth at the expense of quarterly earnings growth... but not other companies?

The short answer is they wouldn’t.

And higher taxes don’t just mean a lower net return on your capital. They reduce the capital stock available to invest in factories, distribution centers, buildings, equipment, technology and workers.

They dampen economic growth and decrease employment opportunities.

The higher tax rate also harms the mobility and efficient allocation of capital. Investors would sit and wait for a lower tax rate - or not invest at all.

Last week, I played golf with an old buddy who is a top money manager at BB&T. He pointed out that many of the bank’s clients - especially the elderly ones - resolutely refuse to diversify their portfolios or seek out better-performing investments.

Why? Because the punitive capital gains tax rate makes selling their long-term assets prohibitive.

As a result, they take on too much risk when they can least afford it. (Many have the majority of their liquid net worth tied up in one or two securities.) That means they also don’t provide much-needed capital to enterprises that may be more deserving.

That seems like a high price to pay to solve a problem that doesn’t exist.

Good investing,

Alex

Source: http://www.investmentu.com/article/detail/47090/2016-presidential-election-does-america-need-another-economic-ignoramus#.VdA5ik3bIWo

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