Wealthy Will Laugh All the Way to the Bank If I-1098 Tax Measure Fails, Says Investor and Activist Nick Hanauer

11/1/10Follow @gthuang

By his own estimate, Nick Hanauer makes 500 times as much money as me. So why is he angry?

Easy. Because it’s looking like Initiative 1098, Washington state’s proposed income tax on people making more than $200,000 a year ($400,000 for couples), probably won’t pass at the polls tomorrow. Hanauer and Bill Gates, Sr. are strong proponents of the measure, as is Microsoft co-founder and chairman Bill Gates. Opposing them are Steve Ballmer, Paul Allen, Jeff Bezos, and what Hanauer estimates to be 70 percent of the wealthy people in the state.

This is an issue that has divided the technology and business community at all income levels. Indeed, it seems obvious that rich people like Hanauer, an early investor in Amazon.com (and many other lucrative ventures), have the most to lose if the measure passes. But he sees things very differently, as he explained when we met last week in Seattle.

Hanauer is a founder of Second Avenue Partners and has been an investor in some very successful companies besides Amazon, including aQuantive (acquired by Microsoft for $6.4 billion in 2007), and Insitu (acquired by Boeing for some $400 million in 2008). Ever the contrarian, Hanauer has become increasingly active in Democratic Party politics over the years, and is working on a new book with Eric Liu about reinventing government and economic thinking. (The two co-wrote The True Patriot, which was released in 2008.)

As Hanauer sees it, the argument over I-1098 boils down to two things: a moral issue and an economic prosperity issue. Forget the moral argument for now (although I think that’s where his heart is). Opponents of the measure—including prominent Seattle venture capitalists Bob Nelsen and Matt McIlwain and big companies like Microsoft and Boeing—have argued that instituting the tax will make Washington state less competitive in its quest to recruit high-tech talent. They have also argued that new taxes on the rich would eventually lead to new taxes for everyone.

Hanauer counters that this is part of the longstanding fallacy that as regulation, government activism, and taxes on the rich go up, business and the economy go down. “The limited government story just isn’t true,” he chides. “If it was true, Somalia would be a garden spot, and Canada a hellhole.” What’s more, he says, all of the richest and most tech-competitive states have high taxes, including California, New York, and Massachusetts.

So what’s his economic prosperity argument, as pertains to Washington’s innovation ecosystem? In fact, the new tax “will lead to more prosperity for me,” he says.

If Washington’s wealthy citizens paid their fair share, he says, more money could go into government for crucial infrastructure like education and health care. Ideally, that translates into a bigger pool of healthy, talented workers to drive growth at businesses. It would create better jobs, and more prosperous consumers who would spend more money on new products, Hanauer says. And that means more money for the companies Hanauer and others invest in—and ultimately greater returns for them. Asked to quantify this return, Hanauer estimates he’d get 10 times his money back on the extra millions he would pay in state tax each year.

“Money is the lifeblood of the economy. But exactly in the same way as the human body, circulation is everything,” he says. “If blood coagulates, you die.” Hanauer points out that in 1980, the top 1 percent of Americans earned 8.5 percent of the total income, while the bottom 50 percent earned 18 percent. Today, the top 1 percent earn about 23 percent and the bottom 50 percent earn just 12.5 percent. He warns that this ever-widening gap between rich and poor could lead to economic collapse, and a “revolution” that could destabilize the country.

On the flip side, he argues, “Apple [or Amazon] could be twice as big a company if the average American were more prosperous…True self interest is mutual interest.”

Of course, opponents argue that government is wasteful and shouldn’t get any more taxpayer dollars. Hanauer admits that inefficiency is always an issue, but says the measure’s wealthy opponents won’t propose better ways to pay their fair share. “What I can guarantee is that the people who funded the opposition to 1098 will not organize a campaign for tax reform which includes the wealthy paying their fair share,” he says. “It will not happen.”

Clearly, Hanauer was agitated when we met, as recent polls indicate his argument will probably lose. I think the whole thing boils down to personal feelings about social justice and the role of government—as well as the prospect of change in a difficult economy. Granted, I’m just a guy from Taxachusetts who lived in Seattle for a few years. But I was surprised that Washington has no income tax. There are only six other states like that—Texas, Wyoming, Alaska, Nevada, Florida, and South Dakota (New Hampshire and Tennessee tax dividends and interest income). In my view, these places are known more for their frontier mentality than their progressive innovation hubs. Is that good company to keep? You be the judge.

Had he been running the campaign for I-1098, Hanauer says he would have appealed to the one emotion that trumps fear—and that is anger. If the measure fails, he says, the wealthy “will be laughing all the way to the bank.” But Hanauer won’t be one of them.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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  • Dave Lukas

    I have all the respect in the world for Nick Hanauer, but his argument is both weak and wrong. The fact that CA, NY, and MA have both strong tech clusters and state income taxes doesn’t mean the taxes don’t harm those economies. That evaluation is a really complicated one, especially since we don’t have a perfect control, and to just gloss over that fact by saying “hey, look at them!” is silly.

    Re: the Canada and Somalia example… I think we all know that plenty more is needed to stimulate a high-growth economy than just intelligent tax policy–political stability and integrity, human capital, etc. So that strikes me as another disingenuous argument.

    We need our state government to have the fiscal responsibility to do away with the absurd B&O tax without implementing an income tax. It would be a huge boon to business in the state, and the ultimate growth in jobs, economic output, and standard of living would dwarf the first few years of lost tax revenue.

  • Phil Evans

    Disingenuous/weak/wrong is not mentioning that Washington has one of the most regressive tax structures in the nation, Dave. A third leg is needed, and what is more, we’ve seen too much of the mindless (or perhaps silly?) rush to cheaper (often misnamed efficient).
    I know this is to be expected from the readership of xconomy, but what about simple fairness and justice? Does that ever get any press or consideration? Is profit the final arbiter? I’m going to go out on a limb and say that for many creative people in this area, it is not the sole quality of life issue.

  • Bruce Boyd

    Read your article accessed from sns – comments:

    - The moral issue is the real issue, everyone should be treated equally. Government/congress should not have the ability to decide what is a ‘fair share’. That definition changes with different representation. That in itself makes it an invalid concept. Who decides?

    - He quotes high tax states like California as being successful. Has he looked at them recently – totally dysfunctional! People are leaving California in droves for the low tax states like Texas and I will soon be one of them. More income to states generates a higher percentage of wasteful spending. Governments functions should be limited. Education and healthcare should be private.

    - His reference to Somalia and Canada are juvenile. However since he brought up Canada, look how they reduced taxes and government services several years ago and are now prospering or is that your job as the author?

    - He talks about ‘ideally’ what would happen, but that idealism he references never does happen. Keynes economic ‘theory’ does not work.

    - Buffet and Gates who want to give more to the government are surely free to do so but they have no moral validation to require me to do the same.

    - Higher taxes have been shown time and again to cause the stagnation/coagulation he is worrying about.

    - Revolution comes from higher taxes and government interference in liberty. Government causes the disparity in incomes that he laments.

    - He indicates he would tap emotions to win the vote!! I am assuming that would be the emotion of envy and I am sure we need more of that!

    - Why do you even give him any credibility? Your article was poorly written…. unless you have an agenda.

    - Sign me up for the frontier.

    bruce boyd

  • Dave Lukas

    Phil, agreed on your first point. WA’s B&O tax is absolutely archaic. But I don’t agree that a state income tax is the solution.

    I’m not trying to equate the profits of businesses and wealthy individuals to quality of life. Rather, I contend that resources put at the disposal of the state are apt to be badly misallocated by bureaucrats who are seeking short-term reelection and not long-term investment in the economy, and burned through by the mind-numbing inefficiencies of the public sector. I don’t believe that is an outcome that best serves fairness and justice.

  • Phil Evans

    Dave, I appreciate your considered response–especially in the current charged atmosphere. Could you perhaps offer another plausible solution, if not some form of state income tax?
    Government may often be poorly managed, but you paint it with only one brush: funds are misallocated in many companies–large and small; some segment of workers are self-interested and less than productive; and burning though prodigious amounts of money pursuing short-term profits instead of long-term strength got to be cliche recently. But some entity still has to provide continuity of safety and security, build infrastructure with 100-year lifespan, etc. There’s a lot of room for improvement, too true–but what are the real pragmatic options?

    @Bruce Boyd: enjoy Texas, there’s a running bet on the World Series between the Governator and Rick Perry ;-)

  • Dave Lukas

    Phil, yes, the uglier facets of human nature permeate the private sector too. But a profit-motivated organization has shareholders who will throw out bad managers, or simply direct their capital elsewhere. Taxpayers are stuck paying taxes–we can’t redirect our capital to what we see as a more efficient use of it. And most voters don’t understand economics well enough to even recognize a bad manager, let alone are they sufficiently incentivized to unelect that person. And if they were, as occasionally happens (despite ~95% Congressional reelection rates), they typically have a universe of two candidates with diametically opposite platforms from which to choose.

    I know I expanded the scope of my rant a bit from the original context. And I know I’m articulating the problem (or one little piece of the problem) and not actually providing a solution. I don’t have a solution–at least not one fix-all solution. I would posit that the solution would involve some painful fiscal austerity, and probably policy directed at promoting philantrhopic activity among the top earners that 1098 targets (a population that, btw, does not include me). But I sure don’t think 1098 is the answer.

  • TLeaver

    I’ve never bought into the taxes affecting the ability to attract talent argument. As a young professional looking at how my career will progress, it is not a consideration for me. What is a consideration is working in an environment where there is opportunity for me to succeed and do what I love. Personal taxes are hardly high-ranking concerns.

  • http://instantcallout.com Joe

    The writer upholds California as doing good and Texas as doing bad? Newsflash, California has been flirting with bankruptcy for a few years and it’s common knowledge that Californians are escaping to high tech Texas in droves. You know, that frontier state where backwards companies like Texas instruments and Dell are based. Oh yea, and no mention of Wyoming and South Dakota being in the top 5 states with the lowest unemployment rates.

    Has the writer or author heard of a place called China that massively reduced regulation 30 years ago and rose from being literally dirt poor to the number 2 and soon number one wealthiest in the world? Has he heard of the similar stories for Hong Kong, Singapore, Chile and many other places? Or that both Canada and Sweden significantly lessened regulation some years ago?

    The evidenced fact is that people calling for more taxes during a depression don’t have the slightest clue about what helps or hurts job creating businesses. Hint-it’s not taking more of their money and giving it to the public unions dominated state governments, or the $600 toilet seat using federal government.