An often-heard refrain, increasingly voiced in US politics, is that corporate America is excessively influenced by short-term stock-market considerations.
While the U.S. presidential election is not particularly focused on policy at the moment, the campaign will soon end, at which point people will govern and policies will be adopted. Given that both Republicans and Democrats have criticized short-termism, it is possible that some of those policies might aim to address it. They are unlikely to make any difference.
Not only has the problem of short-termism been woefully exaggerated, but the policy proposals for addressing it are severely lacking.
Consider Democratic presidential nominee Hillary Clinton’s proposal – which Vice President Joe Biden has endorsed – to use the capital gains tax to encourage shareowners to hold on to their stock for a longer time.
If less trading makes markets more volatile and unpredictable, taxing short-termism could turn out to be a cure worse than the disease.
The idea is that when shareowners furiously trade their stock, corporate executives feel pressed to ensure high earnings every quarter, so that the share price does not fall. Investment in, say, research and development, despite its long-term benefits, can induce shareowners to sell, punishing the company with a declining stock price.
Today, the lower capital gains rate is available on shareholder profits made when selling stock held for one year or more. Clinton and her advisors hope, instead, to tax capital gains at ordinary rates for stock held for up to two years, after which the rate would decline by four percentage points per year until, after several years, it reached the current long-term rate, which tops out for wealthy investors at 20 percent.
If stockholders know that holding a company’s stock will eventually allow them to benefit from a lower tax rate, the argument goes, they will be more willing to withstand a drop in that company’s quarterly earnings. With greater scope for longer-term thinking, executives would make decisions that have a long-term payoff, even if they are costly today.
The plan certainly sounds reasonable. The problem is that a falling tax rate for capital gains will not stop most stockholders from trading; at most, it will impel some of them trade less often. Executives will still have to worry about the price that traders accord to their stock.
Of course, curtailing the velocity of trading may have other effects, both good and bad. If too many resources and too much brainpower are now devoted to finding slight underpricing or overpricing of stock, Clinton’s program might be a good thing, as it would help to reallocate those resources. If, however, less trading makes markets more volatile and unpredictable, taxing short-termism could turn out to be a cure worse than the disease.
Four of the ten biggest U.S. companies, measured by stock-market capitalization, are Amazon, Apple, Alphabet (Google), and Microsoft. None of them can be accused of failing to invest in R&D or other long-term, sometimes even visionary, projects.
In any case, Clinton’s program will not achieve its stated goal of inducing those doing the trading, and thus setting stock prices, to take a longer-term perspective. Nor will it make corporate executives less concerned about the next quarter’s results. Prices will, after all, still be going up and down.
There is another reason the proposal will not be effective: many of the largest shareowners are institutions that don’t pay tax anyway, such as pension funds and foundations. And many other stockholders buy and sell within a year, even though it means paying the full tax rate. Their decision-making time horizon will not be affected by a long phase-in of the more advantageous tax rate.
But the fact that Clinton’s plan will not achieve its goal is not exactly the end of the world. Contrary to widespead belief, stock-market-induced short-termism is probably not much of an economic handicap anyway. There is considerable (though not conclusive) evidence that it is not nearly as widespread – or as problematic – as many think.
Consider this: four of the ten biggest companies in the United States today, measured by stock-market capitalization, are Amazon, Apple, Alphabet (Google), and Microsoft. None of them can be accused of failing to invest in R&D or other long-term, sometimes even visionary, projects. And the stock market supports all of them well. If they can do it, others can – and surely do.
Simply put, ending short-termism has turned into a bigger political issue than it deserves to be. It is a cause that resonates widely not because short-termism is hampering the economy, but because saying that it is justifies protecting those with a stake in the status quo – well-paid employees; CEOs and senior managers; and board directors – from rapid change.
The bottom line is that there are bigger, more pressing problems to address. And, even if short-termism were a major problem, Clinton’s tax proposal would not resolve it. The good news here is that the plan is not particularly high on Clinton’s agenda, leaving a chance that she might not feel compelled to implement it when elected.
Mark Roe is a professor at Harvard Law School.
Copyright: Project Syndicate, 2016.