Paul L. Caron

Saturday, December 3, 2011

Venture Capitalist: Taxing the Rich Leads to Job Creation

NickBloomberg op-ed, Raise Taxes on Rich to Reward True Job Creators, by Nick Hanauer (Partner, Second Avenue Partners, Seattle):

It is a tenet of American economic beliefs, and an article of faith for Republicans that is seldom contested by Democrats: If taxes are raised on the rich, job creation will stop.

Trouble is, sometimes the things that we know to be true are dead wrong. For the larger part of human history, for example, people were sure that the sun circles the Earth and that we are at the center of the universe. It doesn’t, and we aren’t. The conventional wisdom that the rich and businesses are our nation’s “job creators” is every bit as false.

I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including ... Amazon.

Even so, 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.

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.

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it’s the other way around.

It is unquestionably true that without entrepreneurs and investors, you can’t have a dynamic and growing capitalist economy. But it’s equally true that without consumers, you can’t have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.

That’s why our current policies are so upside down. When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer. ...

Since 1980, the share of the nation’s income for fat cats like me in the top 0.1% has increased a shocking 400 percent, while the share for the bottom 50% of Americans has declined 33%. At the same time, effective tax rates on the superwealthy fell to 16.6% in 2007, from 42% at the peak of U.S. productivity in the early 1960s, and about 30% during the expansion of the 1990s. In my case, that means that this year, I paid an 11% rate on an eight-figure income. ...

I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages....

It is mathematically impossible to invest enough in our economy and our country to sustain the middle class (our customers) without taxing the top 1% at reasonable levels again. Shifting the burden from the 99% to the 1% is the surest and best way to get our consumer-based economy rolling again. ...

We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

(Hat Tip: Francine Lipman.)

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You make some very interesting comments concerning the wealthy and creation of jobs. We have been hearing for many years that the rich taxpayers are the ones that start new businesses and hire employees, but you say not true. I have to say that I am surprised to hear this and am wondering if you wrote the post to stimulate comments, or is this actually the case. This may be true in your situation, but do you know for a fact that it applies to all or most wealthy individuals. I can recall several companies that were started by a rich individual, and he did in fact hire many employees. If the rich really don't help to create jobs, then why do the Republicans protect them with their lives? That may be a stupid question, after all, they are self serving politicians, and most of them lawyers!!!

Posted by: Gustav | Dec 3, 2011 3:51:30 PM

As the tax preparer for at least 10 over $100 million asset value taxpayers, I say this guy is full of bull crap.

Posted by: Lee H | Dec 3, 2011 3:55:02 PM

My first thought is that the last thirty years of economic growth can not be seriously described as having been short of consumer spending. But to this gentleman's point...A true job creator has more effective ways to make products affordable: innovation. (Think of Michael Douglas on the beach talking on his $4,000 brick of a cell phone.) Innovation needs savings and investment not consumption. And through those patches in which you are on an innovation rut, invest in your consumers by cutting your own profit margins.

Posted by: MG | Dec 4, 2011 7:03:36 AM

Gustav- rather then throw dung- which is typical of party lines- bring forth evidence of your position.

Posted by: Nick Paleveda MBA J.D LL.M | Dec 4, 2011 8:33:45 AM

Demand--consumer spending is 15% below trend. Business fixed investment is at pre-recession levels. Yet, the recession continues.

We have a backlog of about $2 trillion in infrastructure projects to do. So we should do them. The man is right.

Posted by: jim harper | Dec 4, 2011 6:34:18 PM

Nick Paleveda MBA J.D LL.M: rather than throw dung-which is typical of party lines-bring forth evidence of your position. The author makes a point that I have been arguing at a grass-roots level for a long time. Where is the evidence that tax cuts create jobs? Or stimulate the economy? We all accept this as "fact," but I have yet to see any empirical--or even anecdotal--evidence that this is true. In fact, all anecdotal evidence is to the contrary. Reagan's 1981 tax cut was followed by a deep recession. Bush 43's tax cut was followed by a recession. Reagan's massive 1984 tax increase was followed by a long and broad economic expansion. Ditto for Clinton's 1993 tax increase. Sup?

Posted by: Publius Novus | Dec 5, 2011 7:50:36 AM

To paraphrase: there ain't nothin special about your capital (other than needing some crumb pickers like Lee H to tend to it), but the entrepreneur is sacred. He is the engine that drives the economy and gives capital its returns. Capital should pay its fair share or its greed will undermine the whole system.

Posted by: Matt | Dec 5, 2011 4:33:46 PM