Friday, December 16, 2011

Rich Man Dispels Myth about "Job Creators"

The argument that rich people create the jobs is flawed for many reasons, starting with:

  1. Taxes on rich people are already historically low relative to other very prosperous periods, and
  2. Many billionaires and entrepreneurs have already gone on record to ridicule the idea that raising capital gains and income taxes would suddenly reduce the incentive to start companies.

The entrepreneurs would take home slightly less money from their companies, but they'd start them anyway. So cutting taxes for rich "job creators" would only make the job creators richer.

In a lot of ways, multi-millionaire Nick Hanauer is just like many Americans. He lives in Seattle with his wife and two children, and he grew up working in the family business, manufacturing pillows and comforters. He explains one of the things that is ailing our economy is that rich people actually don't create the jobs. He says that what really creates jobs is a healthy economic ecosystem. Specifically, a healthy ecosystem that starts with a company's customers.

Recently, Hanauer wrote an opinion piece for Bloomberg News (which I re-posted for you further down in this article) that was a plea to the government: "Please tax me more."

These days, Hanauer is a venture capitalist who was one of the first big investors in Amazon. He's not quite a billionaire, but not that far off, either, and he insists his plea is all about self-interest.

"I reject the idea that I am advocating higher taxes for myself and other wealthy people because I'm a good person or because I love you," Hanauer tells the host Guy Raz on NPR's All Things Considered "Let me just be very clear: I do not love you. I value you as a potential customer, and we have rigged the economic system in a way to destroy my customer base."

The top income tax rate in America is 35 percent if you earn $380,000 or more a year. Many taxpayers in this category do pay that rate, but many do not.

Hanauer says that the richest of us, billionaires, derive the bulk of their wealth from stock appreciation. Their income strategies often reap hundreds of millions of dollars from those valuable shares in ways the IRS doesn't always classify as taxable income.

No Income, No Income Tax - Bloomberg reporter Jesse Drucker recently found out that, for the most part, the richest people in America pay nothing close to 35 percent. "Larry Paige or Sergey Brin at Google, these are men who are extremely wealthy. They get salaries of one dollar a year."

That's because the wealthiest Americans make their money from money; from stocks and investments. And from a tax perspective there are huge advantages to that.

A wage is taxed automatically, but capital gains from stocks are only taxed when you cash them in. So Drucker found that many of the so-called super rich don't sell their investments at all. To buy cars and houses and groceries and clothes, they borrow money — often at very low rates. (They earn more leaving their cash in investments, which costs them less in interest to borrow).

Since 2003, the richest investors have been able to do even more, thanks to a rule change from the IRS. To avoid paying taxes,wealthy clients can make deals with investment banks for something called a variable prepaid forward contract.

Drucker says. "It basically says: 'I agree to give you my stock at a certain point in the future in exchange for cash now.'"

Drucker says the IRS doesn't necessarily consider that a sale of stocks, even though the bank may pay that investor hundreds of millions of dollars to temporarily own his shares. It allows the investor to avoid paying capital gains taxes, which right now are 15 percent.

So it's not exactly a bending of the rules, but more a bending of the spirit of the rules. In recent years, however, the IRS has been less likely to let people bend the spirit of its rules.

A couple of years ago, a billionaire investor named Billy Joe "Red" McCombs made one of these deals. It made him $259 million, but because it wasn't officially a sale, he didn't report that $259 million as income and it never showed up on a tax return, Drucker says.

"Very wealthy people are pretty regularly figuring out ways to cash out appreciated shares and appreciated real estate in ways that do not show up on tax returns," he says. "And the result of that is that the 17 percent rate that we hear often cited by Warren Buffett, is probably much too high. In reality there are many folks paying effective tax rates that are much lower."

Venture capitalist Nick Hanauer, who makes about an eight-figure income annually, says his tax rate this year was about 11 percent. Most Americans think that the tax rate on the very wealthy is 35 percent, but Hanauer says this is absolutely not true.

"If you're a small business person earning $350,000 a year, your tax rate is 35 percent," he says, "but if you're a hedge fund guy or an incredibly rich person, all of your income is from capital gains or dividends or tax-free municipal bonds – these things are taxed at much lower rates."

Paying A Fair Share - Hanauer invests in companies that hire people, so he is someone who might be called a job creator. Some economists and most Republican lawmakers argue that if you increase taxes on these people the result would be devastating for the economy.

Nick Hanauer says he and other wealthy Americans should pay their fair share in order to give the middle class
tax relief.

But Hanauer says the economy is like an ecosystem and that its lifeblood is the spending power of the middle class, not people like him. He says business people spend their time fundamentally on two things: creating sales and cost containment. Or, as he puts it,"how to not create jobs."

"The fewer jobs you can create, for the revenue you create, the more profit you make," Hanauer says. "The only time that businesses create jobs is when middle-class consumers essentially put a gun to our heads, in the form of orders for products that we can't make ourselves, and then we hire people and create jobs."

His basic argument is to make the wealthiest Americans pay their fair share in order to give the middle class some tax relief.

Defining Income - Perhaps what matters most is how you define income. Your wage is easy, everything else is more complicated. And Bloomberg's Drucker says that complication creates an inaccurate picture of income equality.

"The top 1 percent controls something like 34, 35 percent of the net worth or net wealth in this country, but topped out at about 20 percent of the income," he says. "So that shows you right there that the income inequality that we're talking about is based on tax return data from the IRS which isn't really giving a full indication of the real level of inequality."

Hanauer, who's also co-authored a book about taxes and income distribution called The Gardens Of Democracy, says the system, as it is set up now, is actually bad for the economy. "It's simply widening the gap between the richest and the middle class," he says.

"If Jeff Bezos and I had started Amazon in a poverty-stricken corner of Africa, there would have been no job creation, because there would be no people to buy the stuff from Amazon," he says. "The difference here is the American middle class, which is by every measure, the most extraordinary economic achievement in the history of the world — and there is only one of those."

It is that American middle class that Hanauer calls "incredibly precious," not just for the American economy, but for the world's economy.

Nick Hanauer on Fox News - Like many other Fox News commentators, Neil Cavuto (worth $23 Million) is also part of the 1%.

Almost half-way into this interview, wealthy investor Nick Hanauer admits that the truly rich only pay 15% in taxes because of capital gains, but Neil Cavuto kept interrupting his guest and talking over him. It appears that Cavuto doesn't want his capital gains taxed more and wanted to control the conversation, rather than honestly debate the issue with Nick Hanauer.

Neil used the same old ridiculous argument and told Nick, "If you want to pay more, then write a check right now." Neil Cavuto was very rude.

Nick replied, "Try using that argument at the next company meeting at Fox News. I've run a lot of companies and once in a while somebody will pop up with this attitude. You know what we do with those people? We fire them. Both because they're useless and because they're poison to the culture."

Neil Cavuto raised the issue that Clinton lowered capital gains, but I also heard Bill Clinton say in a recent interview that he regretted doing that. (I regretted that Clinton also signed the Gramm-Leach-Bliley Act to de-regulate the banks in 1999.)

"Even if we imposed a millionaires’ surtax and rolled back the Bush-era tax cuts for those at the top, the taxes on the richest Americans would still be historically low, and their incomes would still be astronomically high. We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Middle-class consumers do." - Nick Hanauer

Raise Taxes on Rich to Reward True Job Creators by Nick Hanauer

December 2011 (Bloomberg) -- 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 manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. in 2007 for $6.4 billion. I was also the first non-family investor in Inc.

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.

Theory of Evolution - 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.

And that’s what has been happening in the U.S. for the last 30 years.

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

One reason this policy is so wrong-headed is that there can never be enough super-rich Americans to power a great economy. 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. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

It’s true that we do spend a lot more than the average family. Yet the one truly expensive line item in our budget is our airplane (which, by the way, was manufactured in France by Dassault Aviation SA), and those annual costs are mostly for fuel (from the Middle East). It’s just crazy to believe that any of this is more beneficial to our economy than hiring more teachers or police officers or investing in our infrastructure.

More Shoppers Needed - 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.

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

Significant tax increases on the about $1.5 trillion in collective income of those of us in the top 1 percent could create hundreds of billions of dollars to invest in our economy, rather than letting it pile up in a few bank accounts like a huge clot in our nation’s economic circulatory system.

Consider, for example, that a puny 3 percent surtax on incomes above $1 million would be enough to maintain and expand the current payroll tax cut beyond December, preventing a $1,000 increase on the average worker’s taxes at the worst possible time for the economy. With a few more pennies on the dollar, we could invest in rebuilding schools and infrastructure. And even if we imposed a millionaires’ surtax and rolled back the Bush- era tax cuts for those at the top, the taxes on the richest Americans would still be historically low, and their incomes would still be astronomically high.

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.

* Nick Hanauer is a founder of Second Avenue Partners, a venture capital company in Seattle specializing in early state startups and emerging technology. He has helped launch more than 20 companies, including aQuantive Inc and, and is the co-author of two books, “The True Patriot” and “The Gardens of Democracy.” To contact the writer of the article ":Raise Taxes on Rich to Reward True Job Creators" - Nick Hanauer at To contact the editor responsible for the article "Raise Taxes on Rich to Reward True Job Creators" - Max Berley at

A speech delivered to a Joint Session of Congress by President Abraham Lincoln, exactly 150 years ago today.

"It is not needed, nor fitting here that a general argument should be made in favor of popular institutions; but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effect to place capital on an equal footing with, if not above, labor, in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them, and drive them to it without their consent. Having proceeded thus far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life. Now, there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless. Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights."

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