Tax Policy and "Hauser's Law"

Via this diary at the Forvm , we have a recent WSJ Article on tax policy.

The article goes into some well-discussed and common issues on tax policy that we've all heard and talked about and surly have our own opinions on.

First, the author of the article, David Ranson, makes what I think is a pretty accurate statement that does a better job than I did at explaining the use of economics as a science. It fits in pretty well with a brief exchange from yesterday on the matter .

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?

The last question lies at the very epicenter of the Left/Right socio-economic debate. Personally, I'm not very interested in Laffer Curves or trying to find an "optimal rate" for the relationship between maximum tax revenue and economic growth...simply because I don't consider bringing in the most revenue possible for government to be the priority. People having the most possible in their pocket and getting the best possible purchasing power with that money is far more important. Watching people get taxed into neediness or into a lower economic condition on any level is one of the most irritating things I can possibly observe. Knowing that a variety of compounded policies can make things more expensive than they could be in a natural state or make anyone have less money and thus need existence of some kind is simply maddening. I guess that's why waiting tables remains a popular full time job for many people who avoid office jobs or a lucrative part time job for many people who live well on the net pay....the taxes are virtually non-existent and the pay per hour is competitive with some lower level professional jobs if you're in a good place.

Well, David Ranson says he has found the answer to that question and that it's been with us for 15 years:

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.

See article for chart.

The research shows regardless of tax rates on the top percent of earnings, revenues have stayed near or at 19.5% of GDP since WW2.

Hanson's conclusion?

You want more tax revenue over the long haul? Raise GDP. That's it.
You want less tax revenue over the long haul? Raise taxes and GDP growth will slow, incentives will change and you'll end up back at around 19.5%-20%....maybe not the following year but you will.

He calls this "a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice.

He also says that today's presidential candidates would it a very unpopular thing to reveal to voters..."if they knew about it".

Some may say that it's just a repackaged way of explaining the Laffer Curve. Hanson says: not so fast..."it's more compelling".

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."

Yes, it does sound like well-covered supply-side/Laffer mantras. But is the logic flawed? Is what Hauser says wrong?

It doesn't seem wrong. I dunno. Maybe there's more to it than Hanson is leading on.

But Hanson then closes with some advice for the candidates that I'm sure will get nowhere:

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.

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