An interesting observation by W. Kurt Hauser, an investment economist who 15 years ago pointed out a surprising fact: the federal revenue from taxes in the U.S. has been remarkably constant at 19.5%-- give or take a couple percent-- of GDP each year since 1950. This is despite substantial increases and decreases in the top tax rates, which ranged from 91% to 35%.
When the top marginal tax rate is 90%, the government takes in 19.5% of GDP. When the top marginal tax rate is 28%, the government takes in 19.5% of GDP.
What Hauser's law means is that raising or lowering taxes at the federal level has no impact on federal tax revenue. When taxes are raised, people find ways to not pay taxes. When taxes are lowered, people pay more taxes. In the end, it's a wash.
What does influence federal tax revenue is the GDP. Nineteen-point-five percent of a bigger pie is more federal revenue. A vibrant economy brings in more tax revenue.
The government does better when, and only when, the people who work do better. What a surprise.
So how do we increase GDP? Of course, the most effective way to increase economic activity is to cut taxes, which, as Hauser points out with actual data (not just theory), does not alter the percent of GDP the government collects in tax revenues. Increasing economic production by lowering tax rates brings more money into the federal coffers.
In case you missed it:
Increasing economic production by lowering tax rates brings more money into the federal coffers.
You might ask: why isn't this simple fact-- tax rates don't change the percent of GDP that the government collects in taxes-- widely known? Thank the lefty mainstream media for burying this inconvenient truth. But a recent political event may change just what the MSM can shove down the memory hole.
With Romney's nomination of Paul Ryan, expect Hauser'slaw fact, and a host of other simple facts, to be at the center of the presidential campaign this year.
This election will be about facts.
When the top marginal tax rate is 90%, the government takes in 19.5% of GDP. When the top marginal tax rate is 28%, the government takes in 19.5% of GDP.
What Hauser's law means is that raising or lowering taxes at the federal level has no impact on federal tax revenue. When taxes are raised, people find ways to not pay taxes. When taxes are lowered, people pay more taxes. In the end, it's a wash.
What does influence federal tax revenue is the GDP. Nineteen-point-five percent of a bigger pie is more federal revenue. A vibrant economy brings in more tax revenue.
The government does better when, and only when, the people who work do better. What a surprise.
So how do we increase GDP? Of course, the most effective way to increase economic activity is to cut taxes, which, as Hauser points out with actual data (not just theory), does not alter the percent of GDP the government collects in tax revenues. Increasing economic production by lowering tax rates brings more money into the federal coffers.
In case you missed it:
Increasing economic production by lowering tax rates brings more money into the federal coffers.
You might ask: why isn't this simple fact-- tax rates don't change the percent of GDP that the government collects in taxes-- widely known? Thank the lefty mainstream media for burying this inconvenient truth. But a recent political event may change just what the MSM can shove down the memory hole.
With Romney's nomination of Paul Ryan, expect Hauser's
This election will be about facts.
Michael,
ReplyDeletePerhaps Hauser's law is true. Perhaps not. It's a rather blunt measure taking the top marginal tax rate in relation to the total tax revenue as a proportion of GDP.
Almost by definition, the marginal tax on high incomes provides very little of tax revenue anyway, because there are very few people earning such incomes.
It would be more telling to relate the marginal tax rate on mean or median incomes to tax revenues.
And anyway, high income earners have already managed to reduce their tax obligations by legal means. Such as taking investment income as capital gains instead of dividends.
Mitt Romney probably pays a smaller percentage of his income in tax than you do.
Mike's thesis in this post—increasing economic production by lowering tax rates brings more money into the federal coffers—is an urban legend that has been refuted many times over. Not just by mainstream economists (who burst into laughing when they hear it), but by supply-siders themselves. I have previously cited Bruce Bartlett, an economic advisor in the Reagan administration.
ReplyDeleteI might post separately on Hauser's law, but I see no point in doing that since I already did that in a previous comment elsewhere. There is nothing in this post that addresses Chait's debunking of this silly stuff. See Lying Chart Of The Day, Classic Edition.
The data speaks for itself, oleg. Good try.
DeleteI'll address your points when you address mine.
DeleteIn any event, regardless of Hauser's "law," your central statement in the OP is bogus, and only right-wing nuts like yourself believe in it. It is empirically not true (the data speak for themselves). We are on the left side of the curve. Write that down.
DeleteMichael,
DeleteThe top marginal tax rate isn't 'data'. It's just one point. When the top marginal tax rate was 90%, very few people actually paid it; they avoided taking it as income, instead taking it as unrealized capital gains.
It would be much more sensible to relate the marginal tax rate on median incomes to tax revenue, since it wouldnt be skewed by the very few high income earners.
If you tried to claim that a person with a single episode of fever of 40 degrees Celsius due to the 'flu is sicker than someone with a persistent fever of 38 degrees over three months due to tuberculosis, your colleagues would laugh at you.
You need to consider average tax rates not top marginal tax rates, which very few people pay and not even on all their income.
The OP is comical. This paragraph, for instance, contradicts the very notion of the Laffer curve:
ReplyDeleteWhat Hauser's law means is that raising or lowering taxes at the federal level has no impact on federal tax revenue. When taxes are raised, people find ways to not pay taxes. When taxes are lowered, people pay more taxes. In the end, it's a wash.
People reading this blog suggest from time to time that it is a parody, not a real thing. More often than not I find that they may have a point. But then I can't figure out why the Disco 'tute people keep linking to this blog. Maybe they are bigger fools than I think.
Hauser's law is not the Laffer Curve. The Laffer Curve is debatable. Hauser's Law is a simple fact.
ReplyDeleteThe point about "top marginal tax rate" vrs average tax rates is b.s. The whole debate is about "taxing the rich", not raising taxes on people who make 30k/year. The whole debate is about top marginal tax rates.
This is obvious from Hauser's Fact: tax revenue to the government varies mainly with GDP, and very little with tax rates. There is no debate about that.
Of course, the most effective way to increase economic activity is to cut taxes, which
ReplyDeleteNo, it isn't. There is no correlation at all between tax rates and GDP growth. None. Pretending that cutting taxes will increase revenue by "growing the pie" is simply dead wrong. The one has no effect on the other.
[There is no correlation at all between tax rates and GDP growth. None. Pretending that cutting taxes will increase revenue by "growing the pie" is simply dead wrong. The one has no effect on the other.]
DeleteFine. You assert that tax rates have nothing to do with GDP growth. It is a fact that total federal tax revenues are a function of GDP, not top marginal tax rates, so you are admitting that tax rates have no effect on federal tax revenue.
So why not keep taxes low, if it doesn't matter to GDP or total tax revenue?
Because "Hauser's Law" only evaluates top marginal rates. It doesn't look at capital gains tax rates, lower marginal rates, or really anything else about the tax system. It is an interesting toy, and nothing more. Citing "Hauser's Law" in front of economists will get you laughed at, with good reason.
DeleteYou're admitting that top marginal rates don't appreciably affect tax revenue.
DeleteYou'll note on the graph that the federal tax revenues stayed at about 19% of GDP for 50 years, despite dramatic changes in all kinds of tax rates (including capital gains).
The data is obvious.
Federal tax revenues stay where they are because the many political compromises made when adjusting the tax code are almost always revenue neutral because of behavior. Raising the capital gains rate while lowering the individual rate shifts compensation from capital to cash, doing the opposite does the opposite. The percentage stays the same not because of some immutable law of economics, but because our political system results in a tax code that does so. On the other hand, if you matched capital gains rates individual rates, and raised both, revenue as a percentage of GDP would go up.
Delete"Hauser's Law" is a reflection of U.S. politics, not economics. If it were a reflection of economics, it would hold true for nations outside the U.S. But it doesn't.
You're simply admitting the truth of Hauser's observation, and proposing reasons why it is true.
DeleteI find it amusing that you would draw a sharp distinction between economics and politics. They are heavily interrelated.
I'm sure that there are situations in which, by draconian measures, you could gin up tax revenues as a fraction of GDP by raising taxes.
The fact is that in the US that does not happen. So why all of the crap about needing to "tax the rich" to pay down the debt, etc.
Sounds like political demagoguery, not sound economic policy, to me.
Michael,
DeleteYou still don't get the point. You're either stupid or a liar. You presented Hauser's law as proof of the idea that reducing income tax rates increase tax revenue, which it doesn't, because it only relates top marginal tax rates (which hardly anyone pays and provides such a minute proportion of tax revenue) to tax revenue as a percentage of GDP.
I'd have more confidence in Hauser's law if he'd related the marginal tax rate on median incomes to tax revenue, then at least we'd have a test of the idea that reducing tax rates causes people to become motivated and go out and work harder, earn more money and hence pay more tax, to replace the revenue forgone in the tax rate reduction.
Reducing the top marginal tax rate is generally on money that comes from investments - capital gains and dividends- which have very little personal effort involved.
As others have noted, any change in tax rates is legislated to be tax neutral, just to get it through legislation. You have to consider all taxes, not just the top marginal tax rate.
You're simply admitting the truth of Hauser's observation, and proposing reasons why it is true.
DeleteHauser's observation is "true" because it is a distorted vision of reality. Because the "top marginal tax rate" is not "data" that supports coming to any conclusions concerning the effect of taxation on government revenue, by itself, it is worthless.
I find it amusing that you would draw a sharp distinction between economics and politics. They are heavily interrelated.
Only if you are not particularly observant. You see, if there was an economic argument to be made here, then it would hold true for more than one specific country. But Hauser's "Law" is only applicable to the United States. That indicates that what he is observing is not an economic issue, but rather an issue that is idiosyncratic to U.S. politics.
I'm sure that there are situations in which, by draconian measures, you could gin up tax revenues as a fraction of GDP by raising taxes.
Oh yes, like all the "draconian" measures used by other Western democracies that are somehow able to do exactly that. Note that the fact that other democracies manage to raise more revenue as a percentage of their GDP than the United States does indicates pretty clearly that Hauser's "Law" is, in fact, bullshit.
Hauser's point, which you astonishingly miss completely, is that tax revenues as a fraction of GDP don't change no matter what you do. You can superimpose the graph of changes in top marginal rate, or changes in capital gains tax, or changes in Donald Trump's hairstyles, and the federal tax revenue is 19.5 % of the GDP, for the past 50 years.
DeleteThus Hauser's Law applies over all of the changes in the tax code for the past 50 years-- top marginal rates, median marginal rates, whatever. It doesn't matter. 19.5%. Period.
The top marginal rate kicks in at a threshold that catches many small businessmen, so it's not just investment income. I get killed by the top marginal rate-- I work from January to July just to pay my fucking taxes. I'm not rich.
Your "you have to consider all taxes" is breathtakingly stupid. Hauser's law does consider all taxes. 19.5%. No matter what, for 50 years. That's the point.
OK Mike,
DeleteLink to a graph which shows marginal tax rates on median income and tax revenue as a percentage of GDP versus time..
You might be paying the top marginal tax rate on some of your income, but that's probably due to bracket creep in which the thresholds before new income goes into a higher tax rate haven't been indexed for inflation. Your current income now 50 years ago would have been considered a fortune, but not now.
Do you really work from January to July to pay your taxes? That would be over 50% in taxes over all your income, and the top marginal tax rate is 35%. Are you including other taxes and charges in your figures, besides income tax?
Hauser's point, which you astonishingly miss completely, is that tax revenues as a fraction of GDP don't change no matter what you do.
DeleteWhat you astonishingly miss is that Hauser's Law only works for the U.S. under a particular time period with particular political conditions. Tax revenues most certainly can change, but our political system has entered a web of compromises that has kept the total national tax burden more or less level while shifting where that tax burden lies.
But that political compromise isn't set in stone, and one could easily shift the tax code in such a way that increased federal revenues as a percentage of GDP. The reason that revenue as a measure of GDP hasn't changed is because median tax rates haven't changed much. If median rates changed, then the total amount of revenue would change.
Hauser's "Law" is no more an economic law than the lack of correlation between the number of Scrabble players and federal revenue. Hauser doesn't want you to know that, so he compares federal revenue to the top rate and produces a misleading result.
@anon:
Delete[The reason that revenue as a measure of GDP hasn't changed is because median tax rates haven't changed much. If median rates changed, then the total amount of revenue would change.]
Median tax rates since 1942 have varied from 30% to 15%. That's a lot, not a little, and revenue as a function of GDP hasn't changed much. In 1986, the median rate dropped precipitously from 27% to 15%, without any significant change in revenue as a fraction of GDP.
You lied about the graph that you linked to, hoping no one would bother to check. The graph makes my point, and contradicts yours.
@bach:
DeleteTotal taxes, federal, state, local, FDIC, etc.
Michael,
DeleteCare to link to a graph showing that marginal tax rates on median income has changed from 30 to 15% since 1942 (or did you mean 1962)?.
One graph I've seen:
Http://visualizing economics.com/2007/11/03/nytimes-historical-tax-rates-by-income-group/#.UDAiKmthiSM
shows the total tax paid for the various income groups (highest 0.01%, highest 1%, highest 20%, ... Lowest 20%) from 1960 to 2004. As a percentage of income, total tax paid on median income looks similar to that of total tax revenue as a percentage of GDP.
Total tax paid isn't the same as marginal tax though. You could go into a higher tax bracket and not pay much extra tax if it's only by a dollar. Conversely, the marginal tax rate on your income could drop and you might not get much benefit if you're in the higher tax bracket by just a dollar (and federal revenue doesn't take much of a hit either).
Relating top marginal tax rate to federal revenue is just stupid and mathematically illiterate. You have to compare total tax paid by the various income groups versus total tax revenue, otherwise you're comparing 'apples with oranges'.
If you want to claim that dropping the marginal tax rate doesn't affect tax revenue because people are encouraged to go out, work harder, earn more money, paying extra tax on the extra income and thus offsetting the reduced tax rate, then you'd need to show a different graph; one showing the change in tax revenue after the change in marginal tax rates.
Michael,
DeleteOK, I've just noticed that Anon has a link to marginal tax rate on median income since 1942, which goes up to the '80s. My point still remains though - relating total tax revenue to marginal tax rates - is just silly.
The 30% marginal tax rate though was in 1947, not covered by your original graph.
@bach:
Delete[My point still remains]
You have no point. Over the past 50 years in the US, tax revenue has been 19.5% of GDP, give or take a couple percent, despite major changes in tax rates of all kinds.
This blows out of the water the Democrats assertion that we need to 'raise taxes on the rich' to cut the deficit.
To cut the deficit, we need to do two things: reduce spending, and increase GDP.
You have no 'point".
Michael,
DeleteThe point I was making that it's incomplete to just compare the top marginal tax rate with the total tax revenue. You have to compare overall tax rates. What has happened to the average rate of tax paid by the taxpayer? It's reasonable to assert that it's remained at around 19.5% over time. It's also reasonable to assert that high income taxpayers are now paying a lower percentage of their income in tax, and have done well with the reform in taxation compared to their previous position. It's also reasonable to assert that some lower income groups are now doing worse than before.
Median tax rates since 1942 have varied from 30% to 15%.
DeleteUmm, you didn't understand the graph, did you? The graph shows the median tax rate the median income pays. Not the median rate. This rate spiked to 30% once in 1942. They dropped to 15% briefly in 1997. When the rate goes down that is an indicator that median income has also gone down, and not a good thing.
Median marginal taxes have remained within a narrow band. No one has lied. You are just too stupid to understand what you are looking at.
“Thus Hauser's Law applies over all of the changes in the tax code for the past 50 years-- top marginal rates, median marginal rates, whatever. It doesn't matter. 19.5%. Period.”
ReplyDeleteGreat! Let’s immediately lower all tax rates to 0.1%! Of course that’s silly, but so is Mike Egnor.
-KW
This comment has been removed by the author.
ReplyDeleteNice post thank you Brandon
ReplyDelete