You make torque at the crankshaft, and this is a moment of force that is used to calculate horsepower. The more revs you have while making that torque the more horsepower you are making - you are able to do more work due to being able to exert that moment of torque more times per minute (more rpm!)
A dynamometer will calculate "tractive effort" which is the amount of torque and/or horsepower made at the wheels. The gear the transmission is in at the time will effect this - if you made 400ftlb in 3rd gear, the reading might be 600ftlb in 2nd gear and 1000ftlb in first gear. This is because the transmission is now turning a lot slower for the given engine rpm - about a 1.5 and 2.5 reduction for second and first gear, respectively.
You are able to tow better in 1st and 2nd because the engine is turning more rpm (more moments of tractive effort) over the same amount of time, assuming a fixed speed.
- boingk
EDIT: As discussed above, the gear you are in will affect the 'tractive effort' reading but it will not affect the horsepower because at any given rpm the engine will be making a set amount of torque, and thus a set amount of horsepower. The 'tractive effort' might be able to be manipulated by the transmission with gearing, but the torque and horsepower actually made at the engine remains constant.