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Hauser’s law: you can’t soak the rich - Open Knowledge — LiveJournal

Jun. 16th, 2008

10:50 pm - Hauser’s law: you can’t soak the rich

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Via Wall Street Journal article: You can’t soak the rich. by David Ranson, May 20, 2008.

“…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.

The chart [above], updating the evidence to 2007, confirms 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.

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.”

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.”

Original: craschworks - comments

Comments:

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From:girlvinyl
Date:June 17th, 2008 05:55 am (UTC)
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I always enjoys bits of info like this. I saw it on reddit earlier too. Are there any data points or even theories about how thing would work under a different, non-income tax type system?
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From:visgoth
Date:June 17th, 2008 06:49 am (UTC)
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I wonder what a plot of GDP over that time would look like. Of course, some would then think that tax policy was the sole driver of GDP and draw faulty conclusions, so not including it was probably a good idea.
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From:fishsupreme
Date:June 17th, 2008 07:12 am (UTC)
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A plot of GDP over time pretty much goes up and to the right, with short periods of flatness or decline. This site will make graphs of it for you; use "real GDP" rather than "nominal GDP" or the Fed's inflation of our money supply will swamp the actual GDP growth from the 1920's onward.
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From:jasonecaesar
Date:June 17th, 2008 12:27 pm (UTC)

Huh...

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Interesting...
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From:hiro_antagonist
Date:June 17th, 2008 04:00 pm (UTC)
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If the GDP is growing, the only way to make tax revenue stay flay would be to increase the amount of total taxation to keep up with the rate that the GDP was growing at, no?
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From:elsewhereangel
Date:June 17th, 2008 04:58 pm (UTC)
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Really interesting. Thanks for posting.
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