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Congressman Ro Khanna

Representing the 17th District of California

Tech CEOs know inequality is bad. So why does Silicon Valley want tax cuts?

November 3, 2017
In The News

In the past year, as Silicon Valley has become a lightning rod for public anger over increasing inequality of wealth and power, tech giants have been discreetly supporting a slew of lobbyists to push corporate tax cuts, which may just inflame the very inequality that could turn public opinion against the industry.

Instead of simple tax cuts, tech leaders should deploy their army of lobbyists, policy wonks and economists to reimagine tax policy for a modern economy, where the gains from economic growth are increasingly divorced from working-class jobs and wages.

The tech industry’s secretive and unimaginative approach to tax reform is as hypocritical as it is self-destructive. Silicon Valley’s business and political leaders have spent the last year popularizing creative new ways to redistribute wealth through higher taxes as a response to automation and inequality. The tax cut, libertarian trickle-down approach just is not consistent with the actual politics of technologists.

A recent survey I conducted with two professors at the Stanford Graduate School of Business, David Broockman and Neil Malhotra, found that a decisive majority, 62 percent, of tech company founders support higher taxes and redistribution (but less regulation). We surveyed over 600 founders, selected through a well-established industry database of start-ups, Crunchbase. Our survey questions on taxes were inspired by a wave of tech luminaries who have begun publicly discussing why higher taxes and broad cash redistribution, commonly known as “basic income,” may be the solution to automated job loss.

Tech leaders realize the nation is in desperate need of audacious and creative long-term solutions to economic woes. Unlike their CEOs speaking as individuals, however, companies and their lobbyists have been careful to avoid controversial policy ideas that do not directly impact their bottom line. But this very silence will have consequences far worse than speaking up.

The problems that technology cause are not limited to some hypothetical futuristic dystopia. The innovations that fuel global supply chains have already claimed millions of manufacturing jobs, the clustering of high-skilled jobs in fewer expensive cities has gutted middle-American towns and advanced robotics has shrunk entire industries, such as mining, that were once stable sources of regional wealth.

As a result, some leaders in the tech community have begun voicing their concerns about tax cuts.

“My team and I are already intensely motivated to expand the company we manage, and lowering the corporate tax rate isn’t going to make us create jobs any faster,” wrote Marcus Ryu, the CEO of Guidewire Software. “I believe tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy.”

We’re already beginning to see why CEOs like Ryu are warning about the long-term dangers of inequality to the tech industry.

“There’s blood in the water in Silicon Valley,” wrote BuzzFeed editor Ben Smith. “The new corporate leviathans that used to be seen as bright new avatars of American innovation are increasingly portrayed as sinister new centers of unaccountable power, a transformation likely to have major consequences for the industry and for American politics.”

Voices on both the right and the left are calling for antimonopoly regulation of tech giants. Labor is demanding unionization of the industry’s vast independent contract workforce and the White House has come out in full force against free trade deals and more high-skilled immigration.

As damaging as antitrust, unionization and limited immigration could be to Silicon Valley’s business models, the next wave of backlash could be even more debilitating. “If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us,” wrote noted investor Nick Hanauer.

The United States could easily follow in Europe’s path, with more violence and elaborate regulations. In France, angry cabdrivers burned cars and attacked Uber drivers. At one point, in Germany, Uber drivers were required to return to a depot after each trip, ensuring that new carpooling features couldn’t possibly efficiently pick up and drop off passengers continuously along the same route as they do in the United States.

Americans, especially those whose lives have been most disrupted by Silicon Valley, are showing similar signs of anger. In 2013, protesters in San Francisco burned effigies of the tech industry’s private commuter shuttles and smashed windows. Despite the extraordinary wealth the industry has brought to many residents, the very presence of tech firms and their well-paid employees have caused living costs to skyrocket.

While anger in San Francisco has subsided since the protests, tech firms continually underestimate just how much power governments have in regulating technologies that hurt wages and jobs. For instance, more than 50 years after self-service gas stations were commercialized, the state of Oregon was still debating whether drivers should be allowed to pump their own gas, with some critics contending that the anti-“self-service” law should protect station attendants from automated job loss. In New Jersey, such a law is still in place, too.

Fortunately, the tech industry need only look in its back yard for examples on how to creatively engage policymakers on tax reform.

Silicon Valley’s own congressman, freshman Rep. Ro Khanna (D-Calif.), introduced new legislation that could potentially reverse 20 years of wage stagnation through a refundable tax credit. Khanna’s bill, the GAIN ACT, was inspired by a thought experiment from Chuck Marr of the Center for Budget Policy and Priorities, who was asked by the New York Times to imagine just how much in tax redistribution it would cost to ensure rising wages.

After reading the piece, I reached out to a known expert on the topic, Elaine Magg of the nonpartisan Tax Policy Center, and asked her if she could precisely estimate the costs and distribution mechanism for Marr’s idea through the government’s existing wage subsidy program, the Earned Income Tax Credit. The end result was a proposal to expand the Earned Income Tax Credit up to roughly $3,000 for childless workers and $12,000 for large families, with a government matching refund of about 40 cents for every dollar earned on the job, up to a certain income (more details about the bill here). So for example, a family with two children and an income of $18,000 would get a credit worth more than $10,000.

The cost and economic benefits of the GAIN Act are a mirror image of a tax cut program recently proposed by Republican leaders, who estimate that a roughly $1.5 trillion deficit-financed tax cut will, through more employment, eventually boost wages by an average of a few thousand dollars.

That is, both plans have come to the same conclusions about what tax reform can do for shared prosperity, but they’re based on radically different economic theories of how to boost working and middle-class wages.

I should be clear: The tech industry’s responsibility is not limited to economics. The spread of fake news, the eerie manipulation of political ads by hostile foreign agents and the gender wage gap are all receiving government scrutiny. Innovators must find creative solutions to all of these issues or face severe regulation.

But inequality and lack of opportunity will be the most expensive problem to solve, which is why once-in-a-generation tax reform is such an important time to act. The solution does not have to involve corporate tax cuts; it could involve raising personal tax rates or ending tax deductions for homeowners that affect rental prices in expansive cities.

In some capacity, technology leaders have already recognized that America will need to redistribute wealth. The burden of finding new solutions may seem onerous, but it may be much preferable to the consequences of staying silent and letting inequality fester.