Democratic presidential candidate Hillary Clinton suggestedMonday that she may endorse lower capital gains taxes on long-heldassets as a way to discourage a quick-profits mentality in the U.S.economy.

That could mean a sliding scale of tax rates on investments,offering a tax break to patient investors while continuing tosubject the profits from fast trades to the highest marginaltax rates. Today's system, by contrast, features a preferential taxrate on assets held more than a year. But it makes no distinctionbeyond that. Gains on stocks held for 366 days aretaxed at the same rate as those held 36 years.

“I will soon be proposing a new plan to reform capital gainstaxes to reward longer-term investments that create jobs, more thanjust quick trades,” Clinton said during an economic policy speechin New York.

Clinton didn't offer further details, and her campaign didn'timmediately respond to questions, but Neera Tanden, one of her mostprominent outside advisers, last month proposed a sliding-scalecapital gains tax in which the rate would decline the longer anasset is held.

“Once an investor holds a share past the one-year mark, the taxcode provides no incentives to maintain the position any longer,”Tanden and investor Blair Effron of Centerview Partners wrote. “Asliding-scale capital gains tax would involve more time horizons,extend further into the future, and avoid the kinds of kinks in taxschedules that policy wonks hate.”

Under current law, the top capital gains tax rate on assets heldfor less than a year is 43.4 percent. That rate drops to 23.8percent for assets held more than a year.

If this proposal sounds familiar, it is. President Bill Clintonsigned a law in 1997 that would have imposed an 18 percent topcapital gains tax rate on assets purchased after 2000 andheld for at least five years. The Bush tax cuts of 2003 erased thatidea and replaced it with lower rates for all.

It's also unclear how big a practical effect a sliding-scale tax rate would have. Many stocks already aren't subjectto taxes at all because they're held by university endowments,retirement accounts and pension funds.

Unlike Republicans who have proposed eliminating the capitalgains tax, Clinton has a proposal that would limit how much thewealthiest households could benefit from lower capital gainstaxes.

She backs the Buffett Rule, an Obama policy named forbillionaire (and Clinton backer) Warren Buffett that calls for aminimum 30 percent tax on the highest-income households. Dependingon where she sets the capital gains rates, the Buffett Rule couldclaw back some of the benefits.

Clinton's reference to “quick trades” is “silly'” because thefastest trades are subject to high tax rates already, said MalcolmSalter, a Harvard Business School professor who has proposed agradually declining tax rate for capital gains that would hit zeroafter five years. Still, he said, the idea of preferentialcapital gains tax rates for long-held assets has promise as a wayof encouraging companies to change executive compensationpractices. And, he said, it could shift the political discussion oncapital gains out of the usual back-and- forth debate between themerits of the growth that could be spurred by lower rates and therevenue that would be lost to the Treasury.

But Salter questioned whether Clinton's middle road—offeringinvestors a break on capital gains taxes in return for morelong-term investments—is salable in the current politicalenvironment. The idea should be raised, he said, in the context ofa broader discussion about the “institutional corruption that'seating away at the core” of American capitalism. “The Democratswould have a very difficult time trying to sell this because mostpeople don't understand what's at stake,” said Salter, who said hehasn't been in touch with Clinton's team.

That “quick trades” line also drew a quick rebuke from anothertarget of Clinton—the private equity industry. Clinton's move totax carried interest as ordinary income, not capital gains, is atodds with her stated desire for patient investing, said SteveJudge, president of the Private Equity Growth Capital Council.“Taxing long-term carried interest as anything other than along-term capital gain would deprive private equity, venturecapital, real estate, and many other businesses of the sametreatment available to other kinds of businesses that sell along-term capital asset for a profit,” he said.

It's not clear if Clinton will back the changes to capital gainstaxation that President Barack Obama proposed earlier thisyear.

The president wants to raise the top tax rate to 28 percent andchange a rule that lets people pass appreciated assets to theirheirs at death without paying income taxes on the gains.

Bloomberg News

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