- Nick Hanauer is a Seattle-based entrepreneur and venture capitalist.
- In June, he was one of 19 American billionaires and multimillionaires who signed an open letter, published in The New York Times, asking 2020 presidential candidates for a tax on the wealthy.
- In this opinion piece, he explains why he signed the letter.
- Hanauer argues that a wealth tax would increase investment, grow the economy, and create better jobs.
- Visit Business Insider’s homepage for more stories.
When I was asked to join 17 other zillionaires in signing on to a letter supporting a modest wealth tax, I didn’t hesitate for a nanosecond – not just because it is the right thing to do for the American people, but because it’s the right thing to do for the American economy. In fact, as a venture capitalist and serial entrepreneur who has made a personal fortune founding or funding more than 30 companies, I have come to the conclusion that a wealth tax would actually increase investment, boost productivity, grow the economy, and create more and better jobs.
Now, I know what you’re thinking: That’s crazy talk! For decades, rich guys like me have been selling you tax cuts on the merits of pure economic stimulus. The rich are “job creators,” we’ve told you. The more money we have to invest in creating jobs, the better the economy is for everybody.
To be clear: There is simply no empirical evidence to support the claim that raising top tax rates slows economic growth. When President Bill Clinton hiked taxes, the economy boomed. When President George W. Bush slashed taxes, the economy ultimately collapsed. It wasn’t until after most of the Bush tax cuts expired during the Obama administration that the post-Great Recession recovery started to pick up steam – an ongoing recovery that, as uneven as it has been, has grown into the longest economic expansion in U.S. history.
And then, of course, there’s Kansas.
In 2012, Kansas Governor Sam Brownback famously embarked on what he called a “real live experiment,” pitting pure trickle-down theory against economic reality. Unfortunately for Kansans, reality won. After slashing taxes on individuals and corporations to as low as zero, Kansas dramatically lagged its neighbors and the nation in both GDP growth and job creation. But just two years after these disastrous tax cuts were repealed, Kansas has been declared the economic “comeback state of 2019.”
And Kansas is far from an outlier. Studies from the Center on Budget and Policy Priorities, the nonpartisan Congressional Research Service, and the centrist Brookings Institute all find that if there is any statistically significant correlation between top tax rates and growth, the slope is positive. “The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel,” the Brookings authors noted. “However, theory, evidence, and simulation studies tell a different and more complicated story.”
You see, the problem with today’s economy isn’t that rich people like me don’t have enough capital to invest; it’s that we’re not productively investing the glut of capital we already have. And it’s a problem greatly amplified by the dramatic rise of income and wealth inequality over recent decades. Since 1989, the top 1% of Americans have grown $21 trillion richer, while the bottom 50% have grown $900 billion poorer. We in the top 0.1% now own more wealth than the bottom 90% of Americans combined. And this gets to the real cause of our nation’s chronically slow growth in wages, productivity, investment, and output: our accelerating crisis of economic inequality. We are concentrating cash in the hands of people and corporations who already have more money than we know what to do with, while starving consumers of the spending power that accounts for 70% of GDP.
The anti-growth consequences of this hoarding of wealth can be seen in the precipitous decline in what economists call the “velocity of money” – the rate at which dollars recirculate through the economy. During the years preceding the Great Recession, every dollar in circulation typically changed hands about 17 times over the course of a given year. For example, you spend a dollar on coffee, which the coffee shop pays to the barista in wages, who in turn spends it on a burger, and so on. But in recent years, each dollar in circulation is being spent an average of only five times a year – one of the slowest rates on record. This means that each dollar in circulation today is generating 70% less economic activity than a dollar did just ten years ago. What explains this dramatic slowdown in the velocity of money? “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it,” explained the St. Louis Fed in a gloomy 2014 blog post.
So, how do we get money flowing back through the economy again in the face of such unprecedented hoarding wealth? How do we deliver the good jobs and good wages American workers desperately need?
Raise taxes on the rich. Really.
Raise taxes on the rich, and almost anything the federal government does with the revenue will pump more money through the economy than what the wealthy are doing with our hoarded cash today. Tax the rich to put money back in the hands of the American people through middle-class tax cuts, and corporations will expand production and payrolls to meet the resulting spike in consumer demand. Tax the rich to invest in roads, transit, bridges, health care, schools, and to transition to a green energy economy, and we will create millions of good-paying jobs while building the physical and human infrastructure on which our collective prosperity relies.
If top tax rates were high, profits low, private investment capital scarce, unemployment rising, and inflation out of control, a wealth tax might not be the best idea. But that’s not the economy we’re living in today. What our economy needs now is to get those trillions of dollars of hoarded cash off the sidelines, and back into the hands of working- and middle-class Americans.
A wealth tax would not just be fair, it would be pro-growth. And don’t let the trickle-downers tell you otherwise.