You Can't Soak the Rich [Regardless of tax rates, federal tax revenue is always 19.5% of GDP]

Wall St. Journal ^ | May 20, 2008 | David Ranson

[grundle]

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

Like science, economics advances as verifiable patterns are recognized and codified.

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."

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%.

...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.

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."

...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.

[Balding_Eagle]

You forgot the SARCASM OFF tag at the end.

[Myrddin]

If the economy slows and revenue slides, then they’d have to make budget cuts, wouldn’t they?

There is the fallacy in your logic. They never cut spending. There is no care for whether spending creates a deficit. It's the same logical fallacy that haunts the "fair tax" people. They mistakenly believe that reduced revenues would result in reduced spending. Politicians have a mental disconnect on the concept with living within a budget.

[Tublecane]

“Politicians have a mental disconnect on the concept with living within a budget.”

But there must be a way to stop them, short of the impossible dream of electing people that will shrink government. How about runnaway inflation, Weimar-style?

[Myrddin]

But there must be a way to stop them

Choose well on Nov 4th.

[Tublecane]

“Choose well on Nov 4th.”

What, are you kidding? Have you listened to McCain? He’s behind the bailouts, he wants to cover people when they move from job to job, and he wants nationalized community colleges. Need I go on?

[Cruz]

ping

[reed13]

save for later

[Myrddin]

McCain isn't the only person on the ballot Nov 4th. You'll be electing a Congressional Representative, possibly a U.S. Senator, state and local officials and possibly deciding on ballot measures. The Presidency is important, but it's not the whole enchilada. Electing conservatives to the legislative branch is every bit as important. Look at the last two years with Pelosi running the House and Reid running the Senate. That needs to be turned around.

[CutePuppy]

Two minor (nitpicking) points:

1. something as large and apparently complex as the U.S. economy nevertheless has an inherent regulation, almost like homeostasis, that is basically impervious to government meddling.

IMHO, not really. The economy will shrink, expand or growth rate slow down at different rates due to government meddling (tax rates and regulation) according to Laffer Curve, the tax revenue collected by the government will stay almost constant as a percentage of the GDP / economy, according to Hauser Law.

2. I wonder if research would show that the percentage of wealthy, middle class and poor stays about the same...

I don't think research is necessary. By definition, generally the "wealthy, middle class and poor" are expressed as percentile of population, so then by definition, the percentage of each group would stay exactly the same, unless groups percentiles are defined differently / changed.