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Senior Contributor

Hauser's law

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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."

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

Why? Higher taxes discourage the "animal spirits" of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.

 

snip-This is explained once the relationship between taxes and GDP growth is understood. Under a tax increase, the denominator, GDP, will rise less than forecast, while the numerator, tax revenues, will advance less than anticipated. Therefore the quotient, the percentage of GDP collected in taxes, will remain the same. Nineteen percent of a larger GDP is preferable to 19% of a smaller GDP.

 

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It is generally accepted that if one taxes something, one gets less of it and if something is subsidized one gets more of it. The Obama administration is also proposing an increase in taxes on capital itself in the form of higher capital gains and dividend taxes.

The historical record is clear on this as well. In 1987 the capital gains tax rate was raised to 28% from 20%. Capital gains realizations as a percent of GDP fell to 3% in 1987 from about 8% of GDP in 1986 and continued to fall to below 2% over the next several years. Conversely, the capital gains tax rate was cut in 1997, to 20% from 28% and, at the time, the forecasts were for lower revenues over the ensuing two years.

In fact, tax revenues were about $84 billion above forecast and above the level collected at the higher and earlier rate. Similarly, the capital gains tax rate was cut in 2003 to 15% from 20%. The lower rate produced a higher level of revenue than in 2002 and twice the forecasted revenue in 2005.

 

http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html

41 Replies
Senior Contributor

Re: Hauser's law

great post and all true ---it will give the run away libs fits --because they hate facts and NEVER hear them from dums

Senior Advisor

Re: Hauser's law

so where are the capital formation and the jobs? Where are they? Where are they?

Senior Contributor

Re: Hauser's law

Waiting to see if their taxes are going to be raised. Unlike the government private business does not have unlimited funding. They will not invest their money, assume risk, if they see the reward will be confiscated by government. Tax profits and you will have less profits. They will shelter their money and wait for a more business friendly environment. Or move to one.

Veteran Advisor

Re: Hauser's law

Well, a better question for you is:  Where were they during the first 6 years of bush 2's era when the tax cut was firmly in place.  Also, why didn't they make them permanent then instead of making them expire now?  I know--that's two questions but you're good.

Senior Advisor

Re: Hauser's law

The point is the falsehood about the benefits of tax cuts. They are not performing as advertised. Your ads not mine. The fact is that businesses need customer even more than tax cuts. Tax cuts do nothing to promote job creation if the customer is not at the counter.

 

Tax cuts and job creation is merely a propaganda ploy to justify lower taxes for businesses and corps. The truth is that more more money in the pockets of consumers would benefit businesses more.

 Screw the tax cuts if you can't deliver the jobs!

 

Highlighted
Senior Contributor

Re: Hauser's law

Hello Schnurrbart? .....9/11, that messed our economy big time. Plus recessions are somewhat cyclical, we were due for a depression in 1990, the duct tape and baling wire that prevented that is now leaking like a sieve. Raising taxes would only exacerbate our problems.

Senior Contributor

Re: Hauser's law


@schnurrbart wrote:

Well, a better question for you is:  Where were they during the first 6 years of bush 2's era when the tax cut was firmly in place.  Also, why didn't they make them permanent then instead of making them expire now?  I know--that's two questions but you're good.


In fact, tax revenues were about $84 billion above forecast and above the level collected at the higher and earlier rate. Similarly, the capital gains tax rate was cut in 2003 to 15% from 20%. The lower rate produced a higher level of revenue than in 2002 and twice the forecasted revenue in 2005.

Senior Contributor

Re: selective recal

~You guys seem to forget that Bush was spending $1 billion dollars a month to fight in Iraq and other middle Eastern lands, and was sucking blood and treasure out of lthis country for oil sending it into a flat to negative growth rate as it was, so to grease up the US economy's wheels, he got the tax cuts thru Congress, and Thank God he did. I have to wonder if this depression wouldn't have been speeded up by about 3 years had he not got it passed.

~And as far as all the talk about raising taxes to the Bill Clinton years, fine, works for me, if  the government reduces all their spending to the same levels that Bill Clinton had. (approx 1/10 of where gov spending is today). **T!T** FOR TAT

~And lastly, thank Obama's economic friends Tim Geitner, Hank Paulson, and Ben Bernackie for running this economy into the ditch that we are in today. Their $trillions of spending bailing out their fat cat buddies on Wall Street 2  years ago, now comes to roost for us taxpayers to pay for. And what has Obama done to change his economic policies so this doesn't happen again?? NOTHING- Same old Geitner in charge. Talk about a slap in the face to tax payers.

Veteran Advisor

Re: selective recal

Again, two of the 3 you claim responsible for our mess are both bu**bleep**es.  The tax cuts did not produce more tax revenues so matter how you do the math.  They did not produce more jobs then and they won't now.  The only cutting anyone talks about is SENIOR CARE!  Cut the losses in the Middle east, put out that big stick the right keeps talking about with the cowboy reagan, pull the troops home and put all the national guard and reservists back to their old jobs and start paying off the China loans.  CUT the military spending, defend our borders and not Afghanistan's, go back to covert war waged by small groups against the nuke plants and other such things we suspect are out there.  Why do the powers think that they can cut seniors up into little bits?  Why?  Because they figure we will all be dead before we can do much!!