According to the Washington Post, Democrats are continuing to push for an increase in marginal rates, but only on the very rich.
A faction of congressional Democrats is making a push to persuade President Obama to consider a compromise on tax policy that would leave only the nation’s 315,000 richest households facing higher taxes in January.
That’s because these Democrats still think they will be able to raise more revenue by letting marginal rates go up. But that ignores the fact that the federal government has never been able to get much more than 19 percent of GDP in tax revenues, and sustain that level for very long, no matter how high the top marginal tax rate goes. Consider this chart:
It shows the historical path of federal taxation as a percentage of GDP (using the earliest records available from the OMB) alongside top-marginal-tax-rate data from the Tax Policy Center. From 1930 to 2010, tax-revenue collection in the United States has never topped 20.9 percent, averaging 16.5 percent of GDP over 80 years. This despite the drastic historical fluctuation in tax rates on the wealthiest Americans.
This reality is called Hauser’s Law, after Standford University professor Kurt Hauser, who had a very good piece in the Wall Street Journal this weekend:
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.
If you are interested, I recently made the same case (that lawmakers shouldn’t count on increases in revenue to address our debt problem) on Bloomberg TV.
However, Hauser’s Law also implies that Republicans shouldn’t count of growth alone to get us out of this mess. They, too, need to get serious about cutting spending.
The other side of the coin is that at the higher rates, the GDP you are getting 19.5% of is lower over the longer term, due to slower growth. So tax policy should stress a rate structure that is most conducive to growth in order to maximize the absolute $$ realized by the 19.5% of GDP collected.
Reply to this commentLinkReport AbuseWhat's the opposite of Hauser's Law?
Meaning, if 19% is the highest one can go and still collect taxes, what's the lowest one can go? If the supply-side argument says lower taxes generate more revenue, that's great, but at a certain point, lower taxes simply must generate lower revenue, no? Where's the sweet spot?
Reply to this commentLinkReport AbuseHauser's Law is an interesting empirical observation, but I'm not sure it would hold for different methods of taxation. For example, European countries seem to raise more than 19% of GDP with a VAT.
I'd like to see two principles in any tax reform effort:
1. Everybody pays - if you're above the poverty line you should contribute something. It can be a low rate and we can debate whether payroll taxes count the same as income taxes, but large numbers of voters with no skin in the game is unhealthy.
2. Everybody changes in the same direction. If you raise taxes then everybody pays more. If you cut them everybody pays less. Playing some groups of taxpayers off against others in also unhealthy for the body politic.
Would probably need constitutional ammendment to make it stick.
Reply to this commentLinkReport AbuseDave, who knows?! We haven't had taxes low enough in a hundred years to find out where that would actually be. :-)
Reply to this commentLinkReport Abuse@Dave.
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Reply to this commentLinkReport AbuseThe above should be pointed out by every single Republican to show that government growth can be no more than 18-19%. If we returned spending to pre 2008 levels, and then froze it, we would be out of a great deal of trouble. Of course, we still have the issue of SS and medicare, but either privatizing or raising the eligibility bar would help on those. Our situation is not insolvable. But anyone who brings up that we need to raise taxes (ummexchequer!) needs to examine closely the above - and perhaps spend a year under Ms. de Rugy's tuterlage.
It would be interesting to see the above, with the second y axis showing growth. The growth factor (not included) answers the point made about Europeans having higher tax rate with the VAT - (a) growth will be lower and (b) unlike our income, VAT is basically a consumption tax, meaning that there is no where to hide. IF you want something, you must pay the tax. Hauser's law is based on the premise that you are free to do what you want with your money.
Reply to this commentLinkReport AbuseThis analysis is beyond appalling. Ms. de Rugy and her compatriot Mr. Hauser pretend that the top income tax rate is the only variable in generating federal tax revenues. This is foolish. If the authors wanted to be intellectually honest, they would test the correlation between the rates examined above and the revenue drawn from _that bracket only_. If they wanted to be truly thorough, they would do the same for all other sources of federal income (other income brackets, payroll taxes, corporate income tax, and the rest). Otherwise, the data shown above are meaningless.
Reply to this commentLinkReport AbuseFor an alternative take on Ms. de Rudy's chart, see Jonathan Chait's post on TNR:
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Reply to this commentLinkReport AbuseClinton's presidency is always cited as a period where income taxes were increased and revenues also increased. Democrats claim this the norm. It is not. It is an outliar (my spelling). Never mentioned during that time is the once in a lifetime boom precipitated by the creation and expansion of the internet, and the "peace dividend" from the collapse of the Soviet Union. The combined forces were so powerul as to overwhelm the drag from higher rates. Clinton, of course, was in the right place at the right time. It figures he would have the luck of the devil.
Reply to this commentLinkReport AbuseI don't believe Mr. Hauser is a professor at Stanford. I believe he is affiliated with the Hoover Institute.
Reply to this commentLinkReport AbuseForget the obvious problem with the graph (it's slid out to 100% of the entire $14 trillion dollar per year GDP for a reason, and it's silly). See how it still climbs and falls with the top marginal rate? Notice why the qualifier "for long" is included?. Further notice why this is left as some sort of mysterious "law", instead of because lawmakers cut taxes? Even more mysterious, why bother even *caring* what the top marginal tax rate is? It's just always an effective 19% if this wasn't nonsense on stilts, right?
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