We can’t tax our way to prosperity for all. Misery maybe, but not wealth. The choice seems so simple. And when you factor in which option allows for maximum personal liberty, it’s a no-brainer - encourage investment in economic growth and go easy on taxes. As the authors of the essay below call it, this is an inconvenient truth.
From the Wall Street Journal by way of the Hoover Institute - Excerpts from an essay on Hauser’s Law.
W. Kurt Hauser is a San Francisco investment economist who published fresh and eye-opening data about the federal tax system fifteen years ago. His findings imply that there are draconian constraints on the ability of higher taxes to generate fresh revenues. I think his discovery deserves to be called Hauser’s law, because it is as central to the economics of taxation as Boyle’s law is to the physics of gases. Yet economists and policy makers are barely aware of it.
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.
Hauser uncovered the means to answer these questions definitively. In a Wall Street Journal article in 1993, he stated that “no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of GDP.” What a pity that his discovery has not been more widely disseminated.
The data show that the tax yield has been independent of marginal tax rates during this period but that 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 increase would reduce GDP, in which case Hauser’s law says it would also lower tax revenue. That is 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.
The data show that the tax yield has been independent of marginal tax rates during this period but that 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 increase would reduce GDP, in which case Hauser’s law says it would also lower tax revenue. That is 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.
Putting it a different way, 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. They will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge. And if this requires overturning reigning doctrine, then so be it.
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 and ridding the tax system of its wearying complexity. That would be a formula for success.
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