Monday, November 29, 2010

There's No Escaping Hauser's Law

From the Wall Street Journal - There's No Escaping Hauser's Law
Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."
Here's a picture of what he's talking about.

The red line represents the top marginal tax rate for individuals in the federal tax code; the blue line represents federal tax revenues as a percentage of GDP. Obviously, there are a lot of details and interactions that this doesn't reveal, but it's informative that the government has changed the top marginal rate between 28 and 92 without significantly increasing tax revenues as a percentage of GDP1.

This is all worth keeping in mind as the Obama administration fights to raise taxes on upper income Americans.  The storyline is "extension of the Bush tax cuts," but the real event in question is "imposition of the Obama tax increases."  No one's getting a tax cut.  The "Bush tax cuts," enacted in 2001, contained sunset provisions, because the Democrats were unwilling to make them permanent.  If Congress does not extend them before the end of the year, everyone gets a wonderful tax hike next year.  The administration is willing to extend some, but not all, not those on individuals (and small business owners) making $250,000 or more.  So the correct characterization is that the Obama administration is fighting for tax increases that the Republicans (and many congressional Democrats) are fighting against.

In any event, if history is any guide, Mr. Obama's desired tax cuts would have little to no impact on federal tax revenues as a percentage of GDP.  Given that they are also likely to decrease that GDP, it's obvious that there is no good economic reason for those tax increases.  There are reasons, of course, or he wouldn't be fighting for them, but, as poor as the economic knowledge displayed by this administration has been, the reasons are not fundamentally economic.  They are moral, as Obama thinks that those people "have made enough" and that the government should "spread the wealth around."  If you could prove to Barack Obama that raising taxes on high income Americans would hurt low income Americans, with lower economic growth and fewer jobs, he'd still be in favor of raising those taxes, because he believes in "social justice" and that it would just be more "fair."

And I'll give the last word to Mr. Hauser...
The Obama administration and members of Congress should study the record on how the economy reacts to changes in the tax code. The president's economic team has launched a three-pronged attack on capital: They are attacking the income group that is the most responsible for capital formation and jobs in the private sector, and then attacking the investment returns on capital formation in the form of dividends and capital gains. The out-year projections on revenues from these tax increases will prove to be phantom.

(H/T:  TaxProfBlog, via Instapundit)

1 - It's also worth noting how much the federal government's bite of the nation's economic output increased during the 30's and Roosevelt's New Deal...

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