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

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 Editor of Xconomy Boston. E-mail him at gthuang [at] xconomy.com. Follow @gthuang

Trending on Xconomy