Hillary Clinton’s Proposed Destruction of the Economy

Hillary, the Left Face of Obama                    Image Credit: Flickr.com/azrainman

It is virtually impossible to discern anything positive about Hillary Clinton’s proposals for the economy. Having been greatly moved to the Left of Barack Obama by the presidential primary campaign of Bernie Sanders, the socialist senator from Vermont, Hillary appears to be evolving steadily to anti-free-market and anti-capitalist positions.   

To date, I have given little attention to the proposals of the Democratic candidates for President. The fact the Democrats have only three prominent Presidential candidates, and of those three Hillary appears to be virtually a shoo-in, makes covering the Democratic ideas for the future somewhat simpler. As of today the RealClearPolitics.com poll averages in the Democratic primary race put Clinton way in front as the favorite of 54.6% of Democrats, with Bernie Sanders at 32.6%. Martin O’Malley, the former governor of Maryland (for which many of us Marylanders heave a sigh of relief), is almost invisible at 2.6%. From his own viewpoint, despite the fact he is a distant second in the polls, Bernie Sanders can not consider his candidacy to be a failure. Just by having influenced Clinton to move so far leftwards, he must consider his candidacy to be a success.

Initially Clinton adopted positions pretty standard for Democrats: she is in favor of raising a national minimum wage to $15, cutting middle class and small business taxes, increasing taxes on the wealthy, more spending on infrastructure, new child care benefits, subsidies for college tuitions, laws to aid unions to expand, and increasing punitive damages on both corporations and their CEOs for infractions of the Dodd-Frank Act. In addition she would “encourage” long-term economic growth by increasing corporate short-term capital gains taxes. The figure below produced by the Tax Foundation illustrates the differences between current law and Clinton’s proposal.

Currently, capital gains taken after less than one year is subject to a 39.6 percent rate plus a 3.8 percent surtax; after one year capital gains are taxed at a 20 percent rate plus a 3.8 percent surtax. Clinton would change this time-dependent structure to a 39.6 percent rate for capital gains taken after less than two years, a 36 percent statutory rate for gains between two and three years. Then her plan would have the statutory rate decline by four percent per year until it reached the long-term rate of 20 percent after six years. Leave it to a Democrat to encourage long-term investments by increasing short-term taxes and the complexity of the tax structure!

Recently, however, the Wall Street Journal has reported Clinton has progressed even farther to the left of Obama with her reaction to corporate “inversions”, which allow U.S. multinational corporations to escape the punitive U.S. tax regime. Readers of this website may recall two posts I have written on this dilemma: Beware BEPS and The First of the BEPS Refugees. The basic problem is the non-competitive corporate taxes levied by the U.S. federal government, as described in Economic Effects of Current Tax Policy. The non-competitive nature of U.S. corporate taxes is due to more than their high level, but to the world-wide tax approach of the United States as well. This means that profits earned by a U.S. multinational overseas is taxed first in the country in which the profit was earned, and a second time by the U.S. if the profit is repatriated to the United States. Almost every other country in the world taxes their multinationals according to a territorial approach; that is, their multinationals have their profits taxed only in the country in which the profit was earned. By relocating their headquarters in such a country that also has a more competitive tax regime, a formerly U.S. multinational can make itself internationally competitive again. Recently, the pharmaceutical giant Pfizer has been seeking such a relocation by a $160 billion merger with the Irish-based  company Allergan, after which Pfizer would assume Allergan’s legal identity in Ireland.

How would we expect Democrats to react to U.S. companies leaving the United States and relocating themselves as foreign companies? Why, by denouncing them as traitors of course; and then by seeking to create some rule or law that would severely penalize such companies. They would never think of changing from a world-wide to a territorial tax approach, nor to reduce U.S. corporate taxes so that U.S. companies could become internationally competitive again!

The Wall Street Journal reported Clinton wants to go even further than Obama’s Treasury department, which wants to impede corporate inversions by enacting new regulations. Currently, U.S. law requires 20% of the new, combined company after inversion to be held by foreigners. Mrs. Clinton would have the Congress amend the law to increase that fraction to 50%. The U.S. holdings of the new foreign company would now be American subsidiaries, and Clinton would have Congress prohibit loans from the new foreign parent company to its American subsidiaries. Currently the American subsidiary could write off the interest on any such loan at higher U.S. tax rates, while repayments on the loan would be taxed as income at the lower tax rates of the parent company’s new foreign home. To stop these loans legally would require an act of Congress, but the Wall Street Journal reports, “Mrs. Clinton suggests she would expand on the bad Obama habit of rewriting the law via executive action”.

Finally, if all else fails in stopping the relocation of a U.S. company overseas, Mrs. Clinton would impose an exit tax. Yet, even if she succeeded in preventing a company from relocating overseas, she would not solve the underlying problem of the U.S. federal corporate tax rate of 35% being the highest in the developed world. The Wall Street Journal points out this tax burden increases to 40% on average if you include state taxes. As the WSJ states, “But high rates create a vicious policy cycle, because governments that try to sustain their high rates in the teeth of global competition inevitably end up spending resources adding regulation after regulation in an effort to close off the exits.” One can observe this principle in action with Mrs. Clinton’s proposals.

As I have written in a number of posts (see The Burden of Economic Regulations, The Debilitating Effects of Obamacare, Economic Effects of the Dodd-Frank Act, Economic Damage Created by the Fed, What is the Economy’s Condition?, Post Script on the Economy’s Condition,  Will the U.S. Have Troubles Soon Financing Its Debt?, What Does Falling Money Velocity Tell Us?, and What Do Others Think About the Economy?), the U.S. economy has been put in a dire condition by world events and the Obama administration already. If Hillary Clinton is successful in imposing her economic designs, she would only finish the job of killing the American economy.

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