Toledo Talk

You can't soak the rich

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%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.

The data show that the tax yield has been independent of marginal tax rates over this period, but 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. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.

created by babbleman on Jun 17, 2008 at 08:30:26 am     Comments: 16

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Comments ... #

I'll begin by admitting that I am not an economist...Still, the chart you provide is a vast oversimplification. Not to mention that it does not provide data on how the tax structure changed in relation to the highest tax bracket over this same period.

Maybe economists do agree that tax hikes will reduce GDP, but you do not provide any information to support your assertion. Further, you do not provide any evidence that Hauser's "Law" operates in real life as it is theorized.

I chose my blog moniker for a reason. This post is no more informative than any of the thousands of political speeches given every year. It sounds important, and I might be willing to listen to the argument, but not if the argument is based on nothing more than a simple chart and a summarization of an economic theory.

posted by MoreThanRhetoric on Jun 17, 2008 at 09:43:29 am     #  

MoreThan, who are you talking to? David Ranson, the author of the WSJ article or Kurt Hauser the economist?

If you are talking to me then, FYI, I am only posting a link to bring an idea to people's attention. Collecting additional information or finding comprehensive studies are up to you. There are 377,000 results on Google for 'Hauser's Law'.

posted by babbleman on Jun 17, 2008 at 10:39:17 am     #  

What does Hauser say about if the rich pay more that the poor might pay less?

posted by prime3end on Jun 17, 2008 at 02:18:55 pm     #  

This is essentially saying the same thing that Laffer (who was recently in Toledo BTW) graphically illustrated with his famous "curve." As tax rates rise there is an ever decreasing incentive to work and increase productivity.

For example:
Let's say a computer programmer freelances and makes $200/hour writing code. The moment he crosses into a higher tax bracket his take-home pay drops, and at a point he realizes that he no longer makes $200/hour but rather $110/hour. He may decide to stop working at that point becaues he would rather play golf or watch tv or hang out with his wife. His income suddenly comes to a halt and so do his income tax payments. In this case the government would have been better served to have a lower tax rate that would have encourage the computer programmer to continue working.

Another example:
This one is personal because it is actually my life (or at least will be in a few years). In a 3 or 4 years I'll be a practicing physician no longer in training. I will also be married to a nurse. As such I will be blessed to be in a high marginal tax bracket. Because of that my wife's income will immediately be slashed by about 50% (including city, state, federal, and FICA). So instead of making $23/hour she'll effectively be making $12/hour. That's probably not going to be enough to motivate her to work full-time. She'll probably work a shift or two a week to prevent boredom from setting in, but she would rather stay at home with the kids for the other shifts she would normally work. When she cuts her shifts the government loses out on her income tax money. The hospital also loses out because they suddenly have unfilled nursing slots (that can't be filled because of the nursing shortage).

Of course, not every nurse or computer programmer will stop working at the same point. 30% tax rates may be enough for some people to stop working while others wouldn't stop working until they hit a 70% tax bracket if it existed. However, as tax rates increase the cummulative effects of people cutting back on hours begins to add up. While the people that continue to work will pay a higher percentage of their income, there will be fewer people working. As tax rates rise there are diminishing returns on the tax increase, and at some point a tax increase will actually result in less tax income from coming in (see how many people work if you tax them at 90%).

posted by HeyHey on Jun 17, 2008 at 05:23:20 pm     #  

This is the same thing I have been hearing since the Reagan era and look where it has got us. It is not so simple. We have been cutting taxes and services for two decades and America is sliding behind Europe economically, which according to these theories should not have a viable economy. It is not so simple like you say. I keep hearing that we should cut taxes and then there will be more jobs. We have been doing that for over two decades, and instead, there are less good paying jobs, more junk jobs, less benefits, longer hours, etc. All this because American companies are shipping jobs and production overseas so that Americans have to compete with slaves and children working in abominable conditions with no rights or benefits for pennies for every long hour they work. At the same time, CEO pay continues to climb through the rough while the ordinary American has to suck it up and pass onto his/her children more debt, less opportunity, and generally and inferior society compared to what we once had, all courtesy of the continuously repackaged economic snake oil that keeps being repackages year after year by Republicans and conservatives alike.

posted by ilovetoledo on Jun 18, 2008 at 08:27:26 am     #  

Here is an article to show you that tax cuts don't add up to increased revenue:

http://www.time.com/time/magazine/article/0,9171,1692027,00.html

posted by ilovetoledo on Jun 18, 2008 at 08:31:29 am     #  

Your talking wages?

Capital gains is where the real money is. People who work for a living are the ruling class's chumps.

But I'll stick to a worker for example:
You can be like Lee Iacocca made a dollar in wages a year and how much in capital appreciation/options? It's hard making self-aggrandizing commercials.

posted by charlatan on Jun 18, 2008 at 12:44:14 pm     #  

America is sliding behind Europe economically, which according to these theories should not have a viable economy.

Whoa! You really need to look up some facts. I've got some homework for you. Look up the unemployment rates in Europe (I'll give you a hint...Michigan looks good compared to much of Europe). Then look at GDP growth over the last 10 years. You're falling into the trap of not thinking for yourself by ignoring the facts. Up until the last couple years US economic growth was more than double that of Europe (remember all of those riots in France?) which is one of the primary reasons France has elected a conservative and multiple countries are voting against the EU constitution (whether or not the EU would help or hurt economically the perception is that it would hurt). We just had national unemployment absurdly low until the last year or so. We had income gains far outpacing inflation in all income brackets. The 90s is still considered one of, if not the best, economies in the history of the United States (and Clinton didn't do away with the Reagan tax cuts for the most part).

I assume since you said the tax policy of Reagan "failed" that you want to return to the liberal tax policy of the 60s and 70s. Of course, not even Obama is proposing that.

Also, look at the standard of living comparing the 70s to now. Look at home ownership, number of vehicles per family, the percentage of the poor that have at least one vehicle, have televisions, life expectancy, etc.

posted by HeyHey on Jun 18, 2008 at 10:59:06 pm     #  

It's "you're", I write in homophones sometimes to baffle you with BS.

Tax rates determine the valuation of assets and capital goods for everyone, much like interest rates and inflation.

In a healthy economy, you'd want wealth spread far and wide. It helps competition, entrepreneurialism, R&D, innovation, etc. Didn't Adam Smith say that?

But I think the 2 most important things to address are the historical wage/productivity gap (which is why you work harder for less) and war profiteering/military Keynesian economics for the owning class(which is why you work harder for less)...

posted by charlatan on Jun 18, 2008 at 10:59:06 pm     #  

Here's a paper that says cutting tax rates increases economic growth and, ultimately, increases the revenue per percentage tax rate.

BTW, the notion that the government should maximize tax revenue just for the sake of doing it is wrong. It should only charge a tax rate high enough to meet the needed demands of the government's core functions.

posted by HeyHey on Jun 18, 2008 at 11:04:24 pm     #  

Oops. Here's the link:
http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm

For every paper you cite I can cite one as well.

posted by HeyHey on Jun 18, 2008 at 11:04:55 pm     #  

Yep, it's still called Voodoo Economics. It's partially responsible for the largest deficits ever created. Because that was it's (let me paraphrase from soccer announcers)GOAL!!!!!!!1!!

posted by charlatan on Jun 20, 2008 at 06:48:29 pm     #  

Babs, when I first saw your Wainwright graph, the first thing I said was:

« Why doesn't the graph show GDP for all that period? »

I went looking and noted that there's something wrong with somebody's data, here. Either that, or your conclusion is wrong.

This link shows a graph of US GDP from 1947 to today:

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230

Here's the graph, which may not load due to being a temp or generated graph:

It shows a fairly steady increase in GDP from about $2T in 1950 to nearly $12T in 2008.

Yet your Wainwright graph shows revenue as a fraction of GDP remained constant around 18-19% during all the time. And THAT is when vast differences in tax rates took place.

So I question if raising GDP will result in your desired end. Either that, or somebody's data is wrong.

posted by GuestZero on Jun 20, 2008 at 08:57:05 pm     #  

Here's another handy graph over the same time period:

This shows modern "Conservative" leadership prefers to borrow-and-spend.

posted by GuestZero on Jun 20, 2008 at 09:04:02 pm     #  

I think the obvious problem with the conclusion that conservative presidents lead to higher deficits is that the real spending power lies with Congress. The President can't spend a dime without Congress first proposing it. For example, was the Clinton budget surplus caused primarily by him, the Republican Congress, or the booming economy? Truth be told, all three probably contributed to it to some degree. Likewise, at the same time Reagan was in office the Dems firmly held control of Congress. Given that tax revenues increased significantly during Reagan's term, it is apparent the problem wasn't revenues, but rather spending.

All it would take would be freezing spending at the current level for a year or two and the deficit would essnetially be wiped out. Once tax receipts catch up with tax spending then we can begin yearly inflationary budget increases.

posted by HeyHey on Jun 20, 2008 at 10:47:49 pm     #  

hey guest can you redo that graph showing which party held congress?

posted by Linecrosser on Jun 22, 2008 at 09:18:19 am     #