Wednesday, December 14, 2011

A Voice from Business on Creating Jobs

[This just in from Bloomberg Business Week!  Read it all before you react. I think some will find this surprising and informative.]
Raise Taxes on Rich to Reward True Job Creators
By Nick Hanauer
December 07, 2011 10:22 AM EST

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.

Take time to read on here


Anonymous said...

This is such the typical "it's not fair" approach to the problem. It's ironic when a flat tax solution is offered the same "it's not fair" shouts come from the same people who want to tax the rich more. How much tax is enough? The 50% doesn't seem to be - so why not 90%. Would that be enough?!

Anonymous said...

The author didn't say a word about "fairness." He's making an evidence/experienced based argument.

And I don't know where 50% came from, much less 90%. The only numbers I have heard seriously discussed are the present top rate of 35% versus the pre-Bush-tax-cut rate of 39%.

Anonymous said...

Here's the real scenario. Drive by an empty field or lot. How many customers are standing at the edge of this empty space? None. But the prospect of customers does engage the entrepreneur. So s/he develops a business plan (can be done alone, but not usually, thus multiple people are working), attracts capital (a process which employs people), plans a building and initiates a building project (again, more employment), then develops a marketing strategy and ad campaign (usually requiring consulting support or partnerships with media professionals).

Where are the customers? They are not yet aware of the product, service, or personnel who will meet their needs. They just drive by the lot and wonder what the owner will do with it, if they think about it at all.

There is a half-truth at work in the writer's message. Customers do create demand, which brings into existence business opportunities. But the process described above can not function without ca$h. The customer hasn't paid for his first lunch, first pair of shoes, room full of carpet or whatever the new company will provide until a lot of time and money has been spent. And the failure rate of small businesses is very high - for the small entrepreneur the hours are very long, and they must master every aspect of the business, since they usually do not have the money to pay for a broad range of employees in the short term. The term "burn rate" describes the cash flow scenario for the first years of most start-ups.

If all goes pretty well a kind-of wealthy person becomes a very wealthy person, and many people get jobs all while hundreds or thousands of customers drive by the new business and critique the place's appearance, hours of operation, helpfulness of employees, and cleanliness of the bathrooms. All this is fine and ensures the entrepreneur does not take customers for granted.

A customer is not a customer until s/he actually buys something. S/he can not buy anything unless someone (a business owner) is willing to invest in a system to offer it.

I can anticipate the next argument- "We're not talking about the up and coming entrepreneurs. We're for them. Its the filthy rich we are fed up with." Think about that. Who would start a business if they knew the moment they crossed over into envy territory (whatever is defined as filthy rich at the moment) then they will be hypertaxed. All that work, all that risk has low reward. Why don't they just save the effort and keep their money instead of investing in a new business?

The arguments in support of taxing the wealthy neglect the fact that our economy is fluid. The value in a classless political economic system is upward mobility. Take that away and you get broad poverty. That's what is wrong with a progressive income tax. 47% of Americans (and non-Americans) pay no income taxes. Yet the upper 10% pay almost all of it.

Not fair and continuing these policies will destroy our economy.

Anonymous said...

The whole "lets tax the rich" screams not fair. Once the rich pay property tax, retail tax, gasoline tax, etc. they pay well over 50%. As mentioned by the other post, they pay the majority of tax. That is not only evidence but fact.

Anonymous said...

Anon 10:40: please cite a source. I have never heard anyone reputable suggest the rich pay over 50% in taxes. And let me define "rich" for this purpose: someone making over $500,000, that is, the top 1%.

Anon 10:25: Very reasonable points, except that the only two tax rates under discussion are 35% and 39%. I do not believe for a minute, and I know of no empirical evidence suggesting, that paying an extra 4% will somehow sap that taxpayer's motive to make the next $100,000, or $1,000,000.

Anonymous said...

Do you honestly need evidence of the taxes I listed as being viable? Even if you use the 35% rate the rich will pay 50%. Your definition of rich is inaccurate. Anyone making over $250K are in the 35% tax bracket. Which is the typical small business owner. For you to isolate the 1% is not reality. Liberals, which I assume you are, will always target anyone who is driven to provide for themselves and their employees who are willing to work without relying on gov. assistance.

Anonymous said...

Keep your day job Larry because it's plain you don't know the first thing about economics.

Anonymous said...

Please don't make any assumptions. And I am not targeting anyone. I provided a definition to avoid misunderstanding. If you prefer "rich" = $250,000/year, that's fine. It was just a factual question.

Almost no one pays their nominal tax rate. That's why they're called nominal. My nominal tax rate is 28%, but my effective rate, after deductions, is about half that. Property taxes are less than 5% of my household income. Sales taxes are probably 3-4%. So I pay about 22% of my household income in all taxes combined. Simply adding up 35% (income) + 8% (sales) + 3% (property), etc., is not a remotely accurate picture of what someone actually pays.

So ... cite?

Anonymous said...

Anon 12:05:

The entire post is a quoted article. Why would Larry have to understand economics to quote someone else?

Are you suggesting that Nick Hanauer doesn't understand economics?

"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."

That's the source, not Larry.

Anonymous said...

Nick Hanauer - a wealthy Marxist. Why doesn't he give away his wealth and take a pauper's vow? if he gave it to the middle class, he would be creating jobs!

Anonymous said...

I found it for you:

For 2007 (last year given):

Effective income tax rates:
top 20% = 14% tax rate
top 10% = 16%
top 1% = 19%

All federal taxes (includes payroll, capital gains, etc.):
top 20% = 25%
top 10% = 26.7%
top 1% = 29.5%

Let's just say you make $500,000 a year and have a $1,000,000 home, and spend $150,000 subject to the sales tax, you'd pay:
$150,000 (30%) in all federal taxes
$25,000 (2.5%) in property taxes
$12,000 (8%) in sales taxes
Total: $187,000, or 37.5%

Not 50%.

Anonymous said...

I was impressed that the commenters had so far avoided labeling and name calling. I was afraid it was too good to last.

Anonymous said...

Anon 232, you're an idiot.

Anonymous said...

I cited facts. You call names. I will simply let your comments speak for themselves.

Anonymous said...

Federal personal income tax 35%
State & local income taxes 10%
Sales tax 9%
Social security & Medicaid 7%
Property tax 2.5%
Fuel/gasoline tax .5%
Other (Estate, fees, licenses, etc..) apprx. 5%

Thought I would help you out with the full picture. 69%

Anonymous said...

Please see previous comments.

You don't pay sales, property or gas taxes on your income, but on what you spend or the value of your property.

You don't pay income tax on your whole income, but on income after taking exemptions and deductions.

You can't simply add up percentages. It doesn't work like that.

Anonymous said...

Oh, and states that have income taxes - and not all do - typically have rates of 3-6%. Only 2 ever hit 10%.

And after listing all the others, I seriously doubt anyone pays 5% in "other" taxes. (I don't think anyone pays estate taxes on a regular basis.)

Exaggeration is not very instructive.

Facts matter.

Anonymous said...

I think this is factual:

Media reports in recent weeks say that Senate Democrats are considering a 3% surtax on income over $1 million to raise federal revenues. This would come on top of the higher income tax rates that President Obama has already proposed through the cancellation of the Bush era tax-rate reductions.

If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.

Here's the math behind that depressing calculation. Today's top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%. The 3% millionaire surtax raises that rate to 44.5%.

But payroll taxes, which are income taxes on wages and salaries, must also be included in the equation. So we have to add about 2.5 percentage points for the payroll tax for Medicare (employee and employer share after business deductions), which was applied to all income without a ceiling in 1993 as part of the Clinton tax hike. I am including in this analysis the employer share of all payroll taxes because it is a direct tax on a worker's salary and most economists agree that though employers are responsible for collecting this tax, it is ultimately borne by the employee. That brings the tax rate to 47%.

Then last year, as part of the down payment for ObamaCare, Congress snuck in an extra 0.9% Medicare surtax on "high-income earners," meaning any individual earning more than $200,000 or couples earning more than $250,000. This brings the total tax rate to 47.9%.

But that's not all. Several weeks ago, Mr. Obama raised the possibility of eliminating the income ceiling on the Social Security tax, now capped at $106,800 of earnings a year. (Never mind that the program was designed to operate as an insurance system, with each individual's payment tied to the benefits paid out at retirement.) Subjecting all wage and salary income to Social Security taxes would add roughly 10.1 percentage points to the top tax rate. This takes the grand total tax rate on each additional dollar earned in America to about 58%.

Then we have to factor in state income taxes, which on average add after the deductions from the federal income tax roughly another four percentage points to the tax burden. So now on average we are at a tax rate of close to 62%.


Taxes on investment income are also headed way up. Suspending the Bush tax cuts, which is favored by nearly every congressional Democrat, plus a 3.8% investment tax in the ObamaCare bill (which starts in 2014) brings the capital gains tax rate to 23.8% from 15%. The dividend tax would potentially climb to 45% from the current rate of 15%.

Now let's consider how our tax system today compares with the system that was in place in the late 1980s—when the deficit was only about one-quarter as large as a share of GDP as it is now. After the landmark Tax Reform Act of 1986, which closed special-interest loopholes in exchange for top marginal rates of 28%, the highest combined federal-state marginal tax rate was about 33%. Now we may be headed to 62%. You don't have to be Jack Kemp or Arthur Laffer to understand that a 29 percentage point rise in top marginal rates would make America a highly uncompetitive place.

Anonymous said...

I notice there is no source on your quote. But it doesn't mater. I'm talking about what actually happens today, not proposals or talking points.

Let's leave off the hypotheticals. Please find one example of an actual American who paid 50% of their income in taxes in the last 10 years. Just one. With a reasonably reliable source.

Anonymous said...

Follow the hyperlink.

Anonymous said...

Name one American:

The IRS doesn't provide names. I don't pay 50% or more, so I can not meet your standard of proof. Admitting that I don't meet your standard of proof does not mean your standard of proof is valid. I could just as easily ask you to name one poor person who lost his or her job because of a direct action by one of the top 400 most wealthy Americans. Of course, you'll have to name the person responsible for the job loss. And just b/c they may have an office with a given company that laid off an employee does not me he or she was directly responsible for it.

Good luck.

Anonymous said...

Since we can't find individual people, more numbers:

Size of AGI Average Tax
(in $) 2008 % of AGI

1-25,000 1.76
25-50,000 5.32
50-100,000 8.41
100-200,000 12.59
200-500,000 19.50
500-1,000,000 23.92
1-10,000,000 24.47
10,000,000 + 20.89
109,736,000+ 18.11
(top 400)

Source: Forbes (below)

With average effective federal tax rates peaking at 25%, I feel quite confident no one in this country pays over 40% in taxes. The myth of the 50 percenters has been pure fiction in this country since at least 1982.

And I never suggested that the wealthiest 400 had cost anyone a job. You did suggest (well, flat out say) the "wealthy" (undefined) paid over 50% of their income in taxes.

Anonymous said...

There are a number of anonymi at work here. I prefer to keep it that way, even though it causes confusion. The IRS version of your Forbes information reveals something else of interest. Follow this link and see page 10.

The bottom half of wage earners pay and average rate 1.85 percent on their incomes. The top .01% pay over 24%. Fair? I don't think so. And yet you want more?

While you seem to be arguing that its not fair that the wealthy pay a meager 11% or 14% or whatever, you are not concerned that half the country pays almost nothing.

I did argue above that all the effort of going into business required wealth and does create jobs, even before a customer knows of the existence of a new business. Someone, probably you, claimed that an increase in taxes would never prohibit a person from starting a business. That's not true. But there are several factors at play simultaneously.

The uber rich do not open a Subway shop on a vacant property. They, like Warren Buffet, invest broadly in holding companies or deeply in singular industries. Tax policy plays a key role for these investors as they know their investment will not pay off for many years - and even then not necessarily in cash return on investment. Sometimes they invest in a "loser" and some time they invest in "winners" defined by the timing of a sale. These returns must be balanced with their entire portfolio. A low tax rate keeps them digging for growth opportunities and a high tax rate keeps them digging for safe harbors. This leads directly to job growth/loss as the case may be.

Anonymous said...

But I've said this many times before. Hypothetically, even if you take all their earnings (and I am not saying that is your position) you still can not pay for the entitlement buffet the lower 50% rely upon. So the answer to funding for liberals and socialists must be in the more broadly defined wealthy class - a.k.a. the upper middle class.

These are the entrepreneurs who start businesses, hire people, and struggle to achieve. A business plan must contain a budget and a strategy that convinces investors that a positive return on investment exists in the near future. A 3-5 percent increase in taxes will dissuade investors from supporting this entrepreneur. The bank wants an return on that business as soon as possible and this kind of entrepreneur does not have a portfolio of winners and losers to work from. This one business must be a winner. And if it does win, then this person wants to expand his business, say by opening a second store, then the 3-5% tax increase again plays a significant role.

I think I can defend as detrimental the impact of a 3-5% income tax increase on the upper class (along with all the other taxes and fees the current president and his party have in mind for the wealthy).

How can you defend as legitimate the IRS report that 50% of the wage earners pay only 1.85% of their income in federal taxes?

Anonymous said...


1-25,000 1.76
25-50,000 5.32
50-100,000 8.41

Under 25,000 makes you poor in almost anyone's eyes. Do we really want the poor paying taxes they clearly cannot afford? No.

The next group 25-50,000 (under median) pays 5% - seems about right.

The next group 50-100,000 pays about 8.5% ; again 8% seems about right seems about right at this level.

None of these are wealthy people. They are barely making it at varying levels of personal success.

Now those making 200-500,000 pay about 19.50
those making 500-1,000,000 about 23.92
those making 1-10,000,000 24.47

Again, seems about right.

What doesn't seem right is
10,000,000 + 20.89
109,736,000+ 18.11

The uber-wealthy paying less than the upper middle class. That just doesn't seem fair.

If you profit from our society, you should help pay for more of its infrastructure.

I am not at all anti-wealth. Bill Gates and Warren Buffett seem like quite nice people - giving away 10's of Billions of dollars to better society. I have also personally known several very wealthy people. They seemed quite upright and moral.

I have no inherent issue with wealth. I just want a sane, efficient tax policy that takes into account the needs of the country. Warren Buffet and the author of the article from this post just want the same.

Not confiscation - just sanity.

We may never agree, but I appreciate your discursive tone.

Anonymous said...

"Seems about right." In other words, you don't consider any of the reasoning I provided above - or any reasoning at all -have when establishing a tax rate. I demonstrated that economic investment (job creation) is hampered when the wealthy experience tax increases. More of the poor will experience unemployment and fewer options to change jobs when taxes increase on the wealthy. But that "feels about right" to you.

Not to mention that once a group of people begin to feel entitled to a benefit they also begin to seek additional entitlements. Have you ever heard this one: "The poor suffer the most from private insurance markets. The rich can afford healthcare at any cost. This is not fair. Let the rich pay for healthcare. "

This is precisely the argument used to create obamacare and is another "theoretical" tax you do not want to discuss. It all adds up a percent or two at a time.

Can you set limits to entitlements? I don't thin you can. Once you begin setting tax rates based upon intuition nothing fair can be produced.

We have created a class of people in our society - not racial and not gender specific - that know it does not need to work or produce anything.

Lets try this again. A highly wealthy person will protect his portfolio for long run best performance. A moderately wealthy person will attempt to leverage his wealth for growth and if entrepreneurial will seek more immediate returns. Increasing taxes on either party will produce a downward effect on productive investment (reducing job growth). These traps the poor and lower classes in few job choices - or in unemployment status. Further those that never intended to work benefit by govt. programs designed to help those who really want to work and succeed.but can't. Taxes increaseand and theto economy suffers. This isis Europe. Do you get this?

Anonymous said...

Let me flesh out "seems about right."

Have you ever heard the story of the widow's mite, one of Jesus' parables? Several wealthier people go by the collection plate and drop in several large coins. A widow goes by and drops in a single mite. Jesus praises the widow for her generosity. Obviously her mite was more significant to her than the many coins the wealthy put in. Luke 21

Same principal for taxes. (Percentages are from comment above.)

A family making $20,000 puts in $400 - a mite, but all they could possibly do - they really can't afford that - ever try to live on $20,000 with a family of 4?

Another family making $40,000 puts in $2,000. Not huge, but real money - both to them and for the system.

The next family making $60,000 puts in $4,800. A significant contribution at that income level.

Now a family making $25,000 puts in $50,000. Again, real money, but leaving them $200,000 to live on (10x our first family).

Another family making $5,000,000 puts the wopping sum of $1,250,000 in the plate. (Thanks!) This still leaves them $3,750,000 to live on (187x the first family; 18x as much as the $250K family).

From those to whom much has been given, much will be expected. Luke 12:48

So, I say again, "seems about right." Since tax policy is in part about fairness, there are no perfect, scientific decisions. In some ways it comes down to "seems about right." The amounts above seem fair to me - everybody's contributing what they can; nobody is subject to a confiscatory burden; they all still have a reasonable amount of their own money to live on. The widow gave her mite, and much was expected from those who had much to give.

Anonymous said...

And, yes, of course you can set limits to entitlements. Such limits are in place right now. They are continually hashed out in Washington. I am not aware of any unlimited entitlements.

But please do not make any assumptions about my love for entitlements. I am talking only about reasonable tax policy, as was the author of the article quoted. How it's spent is obviously closely related, but still a different subject.

Anonymous said...

BTW: I do not agree you have "demonstrated that economic investment (job creation) is hampered when the wealthy experience tax increases." You have argued that point, not "demonstrated" it.

Still,while we may not agree, I appreciate your polite tone and the genuine discussion.

Other (rude) Anons: Take note. It really is possible to disagree without being disagreable!

Anonymous said...

Anon 1058, would you be so kind as to pass the Poupon and crumpets? Thanks so much.

Anonymous said...

Well, the point of the parable of the widow's mite is about sacrifice and it's representation of personal faithfulness - a voluntary act. It is not about tax policy. Never was intended to be about taxes and should not be used as a basis for political discourse.

Regarding your criticism of my term "demonstration" I hope you have driven by that vacant lot, considered the bank's role in meeting ROI goals, and distinguished between the extremely rich and the up and coming wealthy. This is not a lab experiment, but it is a reference to real-life behavior. I've shown, illustrated, and I think demonstrated principles in play.

The outcome of a general "tax the rich" and never tax the "poor" policy is Europe and today's economic headlines for the USA. I was waiting for you or someone to then move on to the next liberal/socialist argument - the banks refusal to take risks over the impact of a mere 3% change in the tax code on those entrepreneurs in the upper middle income bracket. I suppose you'll get there. But it all leads to the same principle, which is lending on the basis of emotion rather than performance data will cause pain.

Thus, the most tangible aspect of my demonstration is in the news that banks are holding their money, taking fewer risks.

And, of course, I expect you to consider your own beliefs about tax policy to be "reasonable." You just haven't anchored your arguments on any form of "reason."

Maybe you could do that for us.

My argument is that the market responds to increased taxes by reducing risk taking behavior. And we see the affects of that daily by high unemployment, low capital investment, low business start-ups, and - get this - polling data that indicates the voting populace is concerned over big govt. programs. These factors are reasonable causes for our current financial situation.

Your support of increasing taxes on the wealthiest seems to be; (1) they'll never miss it [I think this misses the point]; (2) its not fair for some to be wealthy while others are not [not true as wealth may be the result of unfairness but a causal relationship does not exist in all cases]; (3) giving the wealthy a lower tax rates doesn't seem to benefit the poor [I've argued otherwise]; and (4) the Bible tells us to help poor people [yes, and it emphasizes individual sacrifice which is compatible with my view of taxation].

Did I miss something? I'm still searching your messages for sound reasons. Help us out here.

Anonymous said...

We'll just have to disagree about a few things:
1. The breadth which Jesus' teachings should be given, including application to public policy;
2. I've given many reasons for what I think - it's not really fair to say I haven't;
3. I do not think 'raising' taxes (really just not extending the 'temporary' Bush tax cuts) in a time of severe budget shortfalls is anti-wealthy. I know and like a number of wealthy people. Nor am I anti-wealth. I admire Bill Gates and Warren Buffet, among others.

But thanks for the civil conversation.

Anonymous said...

More Poupon anyone?