Well, let’s not be crazy here. The goal isn’t really to promote longer hold times on investment (though I believe that would be a good idea) but rather to increase the amount of taxes paid on the transfer of equities.
I don’t see any increased liquidity risk involved here, though. Stocks would still be liquid - subject to the three day limitation - under the proposed system as under the old. And it’s not like real estate or bonds don’t face the same or greater liquidity risk. In fact, I’d be willing to argue that real estate faces a higher level of liquidity risk simply because of what a drawn out process real estate transfers can be.
Fun aside. A client once brought me some shares of oddball energy firms that his deceased father owned and the client inherited them. He asked me to sell them and add the proceeds to his portfolio. Simple enough.
One of them was so thinly traded that moving 500 shares - what he’d inherited - ended up lowering the share price 38% in an afternoon. I kept getting calls from our trading floor asking if it was OK to lower the price another quarter. Now THAT’S liquidity risk.
The stated goal is to change corporate behavior. The only revenue estimate linked to thus far in this thread shows an expected decline in receipts. Maybe it’s wrong. If you know something we don’t know, please share.
No, no special knowledge. Just a certain knowledge of government and that stating ‘we’re doing this to increase tax revenue’ is a non-starter in a campaign year.
I used stocks and real estate in my example to show the two extremes of liquidity, typically stocks can be bought and sold quickly, whereas real estate is the very definition of illiquidity.
The end result of your above mentioned experience is that your client had less money in his pocket. It cost him money to sell quicker than maybe it could have. I’m trying to frame this new tax proposal in the same vein, it costs money to sell a capital asset too soon. It seems added risk, I’m just trying to get a handle on what kind of risk this is.
As a revenue source for the government it’s a complete failure. If there’s not strategies to get around this already there soon will be. This would slow down the number of taxable capital transactions, so it’s even possible to reduce tax revenues.
This doesn’t really create added uncertainty about the outcome. It takes a known chunk out of that expected outcome. Now because the tax rate varies with time it essentially makes the risk a bigger factor in certain time periods. For that period variance doesn’t go up it’s just that the expected net benefit is smaller.
I thought this discussion had died down in the media, but WSJ had a piece from a Cato Institute fellow which links Clinton’s proposal to one tried by FDR, which the author blames for all sorts of recession and doom and gloom. Regardless of whether FDR’s actions were responsible for economic catastrophe, I’m not sure I’d compare her plan to one that suddenly bumped the max cap gains rate from 25% to 63%.
