The Corner

Hauser’s Law: This Reality Isn’t Negotiable

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 that under the current tax code 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.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

Most Popular

White House

The Mueller Report Should Shock Our Conscience

I've finished reading the entire Mueller report, and I must confess that even as a longtime, quite open critic of Donald Trump, I was surprised at the sheer scope, scale, and brazenness of the lies, falsehoods, and misdirections detailed by the Special Counsel's Office. We've become accustomed to Trump making up ... Read More
World

What’s So Great about Western Civilization

EDITOR’S NOTE: The following is Jonah Goldberg’s weekly “news”letter, the G-File. Subscribe here to get the G-File delivered to your inbox on Fridays. Dear Reader (Redacted: Harm to Ongoing Matter), One of the things I tell new parents is something that was told to me when my daughter still had that ... Read More
White House

The Problem with the Mueller Report

So much for collusion. The media conversation has now officially moved on from the obsession of the last two years to obstruction of justice. That’s because the first volume of the voluminous Mueller report, the half devoted to what was supposed to be the underlying crime of a Trump conspiracy with Russia, ... Read More
Sports

Screw York Yankees

You are dead to me. You are a collection of Fredos. The cock has crowed, you pathetic sniveling jerks. The team I have rooted for since 1965, when I first visited the House that Ruth Built, where I hawked peanuts and ice cream a lifetime ago, watched countless games (Guidry striking out 18!), has gotten so ... Read More
Politics & Policy

Trump Can’t Cry ‘No Fair’

If I may jump in, I take Charlie’s point and I think he’s largely correct. I also think David is correct. There’s not that much of a contradiction in that because I think to some extent they’re talking about different things. And this reflects a larger frustration I have with many of the ... Read More