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

Elections

What Do Republican Voters Want?

The latest entry in the post-Trump conservatism sweepstakes was Marco Rubio’s speech at the Catholic University of America in early November. The Florida senator made the case for a “common-good capitalism” that looks on markets in the light of Catholic social thought. “We must remember that our nation ... Read More
Books

The Houellebecqian Moment

We are living in the imagination of Michel Houellebecq. The bête noire of French literature has spent decades deploring the erosion of Western mores that he believes resulted from the sexual revolution of the 1960s. His last novel, Submission, revolved around the election of a theocratic Muslim to the French ... Read More
Culture

‘Epstein Didn’t Kill Himself’

It was just one more segment to fill out the hour, and thereby fill the long 24 hours of Saturday’s cable news on November 2. Or so it seemed. Navy SEAL Mike Ritland was on the Fox News program Watters World to talk to Jesse Watters about trained German shepherds like the one used in the raid that found ... Read More
Sports

The Kaepernick Saga Drags On . . . off the Field

Colin Kaepernick’s workout for NFL teams in Atlanta this weekend did not run smoothly. The league announced an invitation to scouts from every team to watch Kaepernick work out and demonstrate that he was still ready to play. (As noted last week, the workout is oddly timed; the NFL season is just a bit past its ... Read More