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How to raise taxes on the rich

May 21, 2008

Ironically, it is a proven fact that you cannot increase revenues by increasing taxes. No I am not talking about the Laffer Curve (the theory that by lowering taxes you increase revenues), instead I am talking about Kurt Hauser and what is now called Hauser’s Law. Unlike a theory that considers what might happen given a set of future events or circumstances, a law looks backward and relies exclusively on verifiable evidence. David Ranson from the Wall Street Journal wrote about Hauser and coined the term ‘Hauser’s Law’ in an article titled, “You Can’t Soak the Rich.”

Hauser’s Law suggests, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.” See chart below:

This is an amazing discovery that should help policy makers understand what their goal should be. The act of raising taxes has ZERO effect on revenues, while GDP has everything to do with revenues. If you want to raise money you simply need to figure out how to raise GDP. If you can accept the historical fact that no matter what the tax rate is, our government can ONLY collect 19.5% of GDP, you can focus on the real game - raising GDP. So just to be clear, regardless of whether the top tax rate has been 91% or 35% (the current rate) we only collect 19.5% of GDP. Get it?

While Hauser’s Law is relatively new information (most policy makers have never heard of it), almost all economists agree that that higher tax rates reduce GDP and given Hauser’s Law, this will result in lower tax revenues. The ONLY way to raise more money from the rich is to grow GDP. Hauser explains, “Raising taxes encourages taxpayers to shift, hide and under report income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.”

My advice to Obama, as John F. Kennedy explained in 1963, “As they say on my own Cape Cod, a rising tide lifts all boats.” Figure out how to increase GDP instead of figuring out how to raise taxes and all of our boats will be lifted.

Written by Alexander Muse · Filed Under Blog, Politics 

Comments

3 Responses to “How to raise taxes on the rich”

  1. Cam Beck Says:
    May 21st, 2008 at 12:50 pm

    Amen. Thanks for posting.

  2. Christopher St. John Says:
    May 21st, 2008 at 12:52 pm

    Overall, OK, fair enough. But… there are some details that matter.

    Like the fact that the little tiny bumps in the graph translate into many billions of dollars of revenue. US GDP is about $13 trillion. A 1% change (less than one of those recent bumps on the graph) translates into $131 billion.

    Trying to massively bump up the revenue by increasing the maximum bracket is obviously a losing strategy, but that doesn’t imply that some fine tuning wouldn’t work. The tail end of the graph suggests that it is in fact possible to smooth out GDP variations by playing with the tax rate. I find that a little scary, actually.

    And in any case, the maximum bracket is only one part of the effective tax rate on most “rich” people. (Using the absurd “if you make $150k you’re rich rule, at least)

  3. Cam Beck Says:
    May 21st, 2008 at 3:12 pm

    Personally I favor the Fair Tax. The goal isn’t to maximize revenue, anyway but to maximize rightly-ordered freedom. Government isn’t a business. It’s a necessary evil.

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