I (finally) came across the fascinating article by Nick Hanauer, serial entrepreneur and as of 2007, even more phenomenally wealthy having sold aQuantive to Microsoft for $6.4 billion. Being the first non-family investor into Amazon certainly didn't hurt his net worth either. While written eight months ago, it reads just as well now, if not more so. The context of the piece comes as he, in this super-charged election year, expounds upon potential policy and its impact on the economy.
The title of his article, "Raise Taxes on Rich to Reward True Job Creators," should leave no one without an initial opinion. (I don't know Hanauer, but I suspect that my amazing friend John DeMayo shares some qualities with him in that you might be tempted to disagree, but after tiring yourself debating, you will eventually come to realize he is correct. I say that because of this seemingly counter-intuitive claim by Hanauer.) He says, "I’ve never been a 'job creator.' I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate."
Hanaeur follows up the above writing, "That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be."
As for rich people and job creation, I can only say that then and now, I struggle making sense of trickle down economics, and we'll start with the super-rich version it. Let's take for example someone who gets to live the dream...not quite Hanauer level but still Mega Millions worthy. They sell a business for $100mm. If they live in Manhattan, they will pay 15% federal capital gains and about 12%+ for various state and city taxes (except they will have some great family planning to keep it lower). Some percentage of the above, they would have available to spend - for a (bigger) house, boat, cars, living expenses, etc. Some percent they will invest. It's very hard to imagine not having $50mm to invest. What then comes of the $50mm? How much of that trickles down? We've already seen that the vast majority - 66%+ does not, so it really is about the remainder. Again, Hanauer - "The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000."
Hanauer continues adding, "If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend." It's impossible not to love that."
Does the middle class deserve more? Lower middle? Lower? Whoever will have a larger percent of that incremental cash will go directly into the economy does. Is taxing income above a certain amount the right way to create incremental revenue for others? Personally, I would be happy to pay more money on long-term capital gains. That was one of the biggest benefits of starting a company and selling it later - paying 15% federal income tax not 35%. I'd much rather see increased taxes on the 15% instead of the 35%. Higher federal and state income taxes would impact my decisions, and I suspect they lead to increased cheating (see Dan Ariely's amazing book), not saying that from personal experience of course. Higher capital gains would be a bummer, but it wouldn't lead to increased bad behavior or a decrease in good economic behavior.
As for who creates jobs? I think entrepreneurs and other business creators (large and small) should get more credit than Hanauer assigns. Then again, as for who creates jobs (presuming it is not the rich), it could be chicken and the egg. How does the middle class earn its middle class wages if not for the creation of industries that lead to more middle class jobs? If I could, I would shift the talk from who to making sure the system encourages, that the virtuous cycle Hanauer references works. Are incentives aligned so that those who want to create businesses (and if they are lucky, large wealth) can, and the huge consumer group has money to spend? If a policy doesn't help that, don't do it.
All of which leads me to think that, while I don't get trickle down fully, it works. But, it is all about where the trickle starts. The beauty of entrepreneurs and other businesses is that even if the money didn't originate with them, they will figure out a way to have it trickle back up. We may not know who creates jobs, but we do know who spends the biggest percentage and would spend more had they more.
As for having an entrepreneur in office, I just can't help but think the government could earn money not just collect it. Why doesn't the IRS offer the equivalent of a Forever Stamp, why not offer a subscription service to help procrastinators like me remember when to file or set up automatically billing in advance where I enter in what I want to pay when? Then it deducts it at the right time. How about tax deductions for people who hire people away from certain government jobs? The answer to job creation certainly isn't increasing a work force incentivized to be just average (TSA, public schools, etc.). Bigger government is an extra tax, paying $1.50+ for something that should cost $1.00. And would anyone at the Post Office not prefer Google? Similarly, wouldn't those at the Post Office prefer it run more like Google?
