Recently, entrepreneur Nick Hanauer got the chance to essentially say as much to the U.S. Senate. A few points in the remarks are worth noting:
- I'm not sure that I entirely buy the supposed direct relationship between taxes and hiring, if for no other reason than labor costs are an expense to a business and thus not part of its taxable income. It is, however, possible that higher corporate taxes make it less attractive to produce on the margin and therefore companies might not expand as much, but even this argument is challenging since the taxes wold affect all businesses that people put their resources into. (This isn't even considering the fact that much of the "job creators" talk focuses on personal rather than business taxes.)
- The argument that Hanauer makes perfectly characterizes the demand versus supply debate that exists in macroeconomics. Clearly, an economy needs both demand and supply to function, but which comes first? This is basically the macroeconomic equivalent of the chicken and egg problem. (On the other side of the argument from Hanauer you have Say's law, which was sarcastically co-opted by John Maynard Keynes as "supply creates its own demand.") I'm inclined to take Hanauer seriously on this point, since he is clearly speaking from experience.
- I think the statement "the goal of every business--profit-- is largely a measure of our relative ability to not create jobs compared to our competitors" is one of the best parts of the speech. Really, how many companies can you think of that will certainly try everything to get more work out of existing employees (and existing salaries) before bringing in new people?
- From a policy perspective, fiscal stimulus (read, tax cuts that increase the deficit) are attractive because they get people to consume more. Like Hanauer, I've often wondered if policy makers realize that rich guys often don't use but a small portion of their money for consumption. (Talking to you, Waren Buffett. Also, I think the term Hanauer is looking for is "low marginal propensity to consume.") In some cases, there could still be aggregate demand benefits to tax cuts for rich people if they put their extra income into savings, since savings ultimately funds investment. At the present time, however, interest rates (i.e. the cost of borrowing to invest) are already so low that these effects would be greatly muted.
- It's important to understand that the lower tax rate on capital gains as opposed to income is at least partially a result of the fact that the profits causing the capital gains are already taxed at the corporate level whereas labor is a pre-tax expense for companies. (In other words, just because somebody's not physically writing a check doesn't mean that he's not paying a tax.)
You can take or leave Hanauer's normative statements on inequality, but, either way, the guy makes some decent and realistic economic points and highlights some areas that require more nuanced thinking.