Hauser's Law: "You Can't Soak the Rich"

[kstar]

Interesting recent WSJ article.

Basically, Kurt Hauser says that government tax revenue stays fairly constant at 19.5% of GDP irrespective of tax rates, so the only way to grow receipts is to grow the GDP. Further, higher taxes are a disincentive that ultimately shrink GDP, thus lowering receipts.



Article - emphasis added is mine:

You Can't Soak the Rich
By DAVID RANSON
May 20, 2008; Page A23

Kurt Hauser is a San Francisco investment economist who, 15 years ago, published fresh and eye-opening data about the federal tax system. His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues. I think his discovery deserves to be called Hauser's Law, because it is as central to the economics of taxation as Boyle's Law is to the physics of gases. Yet economists and policy makers are barely aware of it.

Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example.

The interactions among the myriad participants in a tax system are as impossible to unravel as are those of the molecules in a gas, and the effects of tax policies are speculative and highly contentious. Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?

Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

The chart nearby, updating the evidence to 2007, confirms Hauser's Law. The federal tax "yield" (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% to the present 35%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.

The data show that the tax yield has been independent of marginal tax rates over this period, but tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP.

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.

Although Hauser's Law sounds like a restatement of the Laffer Curve (and Mr. Hauser did cite Arthur Laffer in his original article), it has independent validity. Because Mr. Laffer's curve is a theoretical insight, theoreticians find it easy to quibble with. Test cases, where the economy responds to a tax change, always lend themselves to many alternative explanations. Conventional economists, despite immense publicity, have yet to swallow the Laffer Curve. When it is mentioned at all by critics, it is often as an object of scorn.

Because Mr. Hauser's horizontal straight line is a simple fact, it is ultimately far more compelling. It also presents a major opportunity. It seems likely that the tax system could maintain a 19.5% yield with a top bracket even lower than 35%.

What makes Hauser's Law work? For supply-siders there is no mystery. As Mr. Hauser said: "Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation."

Putting it a different way, capital migrates away from regimes in which it is treated harshly, and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax-intolerant.

The economics of taxation will be moribund until economists accept and explain Hauser's Law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge. And if this requires overturning existing doctrine, then so be it.

Presidential candidates, instead of disputing how much more tax to impose on whom, would be better advised to come up with plans for increasing GDP while ridding the tax system of its wearying complexity. That would be a formula for success.

Mr. Ranson is head of research at H.C. Wainwright & Co. Economics Inc.

http://online.wsj.com/article/SB121124460502305693.html?mod=djemWMP

[gprsh924]

This is such basic, simple, and widely accepted economic theory that it amazes me that anyone attempts to argue with it.

[kstar]

Originally Posted by gprsh924

This is such basic, simple, and widely accepted economic theory that it amazes me that anyone attempts to argue with it.

Just wait.

[tabs]

NO FKING *****....I recently commented that if the USA goes the way of Great Britain with a egregious tax rate the very wealthy will leave the country and go elsewhere to avoid taxes. As in why did The rolling Stoned leave Britain and set up residence in France and later the USA. Now you know why the Beatles wrote "TAX MAN" "One for you 19 for me. "

[tabs]

You want to promote savings in this country eliminate taxing savings accounts as regular income and lower capital gains taxes. Otherwise WHY save any money..

[widgeon13]

In spite of the fact that this is sound economic theory, the general population will not understand or believe the facts. It's like when 401K's first appeared on the scene, many people did not want to use it as an investment tool because they refuesd to believe it was good for them, they thought it was 'smoke up the arse", same reason many would not believe Hauser's Law if it was explained by a politician.

So rather than do what is right we are forced to do what is convenient in order to ensure votes.

Very sad situation.

[kstar]

The chart would help, but it didn't work for that guy with big ears many years ago.

[red-beard]

Originally Posted by tabs

You want to promote savings in this country eliminate taxing savings accounts as regular income and lower capital gains taxes. Otherwise WHY save any money..

I'm sorry, but anymore "playing with" the btax will only create more gaming. We need to eliminate all deductions. We need to put in a straight tax, preferrably a consumption.

[djmcmath]

It sounds almost like "trickle down economics," which has, in fact, been widely disputed. Put this way, it's pretty obvious, but people have been arguing about this forever. Further, I don't think that the common man on the street will disagree -- for him, it's common sense. Cut my taxes, leave me more money to spend, and I'll spend more money. It's pretty simple. But we don't need to impress the man on the street with this truth -- it's the man who makes tax law we need to impress. Unless we can convince the idiots in congress to quit suing sovereign states, get off their keisters and fix this problem, we'll never see change.

Dan

[Tobra]

I find it sort of unsettling that the government policies discourage saving and other responsible behavior, and encourage irresponsible behavior such as a single mother on the dole with 3 kids getting a cash incentive to have more kids.

[Superman]

Yes, "trickle-down" economics has been debunked. Dubya's dad called it "Voodoo Economics." And yet, any time I want to find a group of folks that continue to believe in this false conclusion, I can. Here, and in other conservative groups.

And of course, the thing that allows this false conclusion to seem plausible is the argument that tax cuts stimulate spending and/or saving. Sure, this is true. But so is the fact that people in the top tax bracket have the resources and savvy to avoid paying that rate on all but a small fraction of their total income. You can raise the top tax bracket to 100%, and not change revenues. Nobody's going to pay that. Changes in GDP result in revenue changes. Changing the top tax bracket do not. Duh.

And finally, here's a test. This is a test for you guys who consistently take the position that, always and everywhere, tax cuts will either raise gubmit revenues, or at least will not cause revenues to fall: Okay. Here we go. If this is true, they why don't we lower the marginal tax rate to 0%?

Nevertheless, I will probably never hear the end of this mythology that we can fund projects with tax cuts. It plays REALLY well with the voters. Proposing desperately-needed transportation infrastructure improvements and tax reductions at the same time is very popular with voters. Just ask Tim Eyman. Or that Rossi guy. Just don't admit you believe this to someone who actually understands public finance. Actually, Eyman and Rossi probably do understand public finance. But the mythology is still their best political tactic.

[Rodsrsr]

Maybe there is no one answer. Perhaps there are different solutions for different economic problems. I have not verified this, but I read that this is the first time tax's have not been raised during a time of war. Another point is that you can lower taxes all you want, but if government spending is out of control it will be a wash.

[island911]

Originally Posted by Superman

Yes, "trickle-down" economics has been debunked. Dubya's dad called it "Voodoo Economics." ....

wait wait... so you think Dubya debunked "trickle-down" economics by calling it "Voodoo Economics"?
You know, he called it that before Regan got in office... and before Regan showed how lowering taxes increased revenue.

[einreb]

Originally Posted by island911

Regan showed how lowering taxes increased revenue.

That must make H.W. Bush a real moron...



If we change how we calculate inflation and then send all the boomers to the low levels of Florida that will soon be under water, we can really make that graph shine.

[boba]

Originally Posted by island911

wait wait... so you think Dubya debunked "trickle-down" economics by calling it "Voodoo Economics"?
You know, he called it that before Regan got in office... and before Regan showed how lowering taxes increased revenue.

Wrong Bush.

[boba]

Originally Posted by einreb

That must make H.W. Bush a real moron...

Again wrong Bush.

If you guys want to make a point try to get your "facts" right.

[einreb]

Originally Posted by boba

Again wrong Bush.

If you guys want to make a point try to get your "facts" right.

My post was sarcastic. I was giving HW Bush credit for raising taxes when he needed to at the risk of political suicide.

[boba]

Originally Posted by einreb

My post was sarcastic. I was giving HW Bush credit for raising taxes when he needed to at the risk of political suicide.

OK, sorry, I did not get the sracastic comment.

[kstar]

Super:

I don't think anyone believes that lowering taxes to 0% would really get receipts up. But, there does exist some point along the curve of tax rates where receipts can be maximized - I think this concept is generally accepted.

Laffer was basically looking for the optimum point (tax rate) where government could maximize receipts. He stated that both a 100% and 0% tax rate would generate no revenue.

I think folks like me argue that the point of maximizing receipts does not exist above where rates are now in the US.

Arguing that tax levels do not affect the flow of capital into or out of the USA, or that tax rates do not play a role in the propensity of folks with money to invest and take risks is silly, IMO.

I think we all might agree that the current code itself is too complicated and overburdens people and businesses via compliance costs AND is a coveted tool of power for the legislators.