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Can Liberals Learn?

May 23, 2010

In economics, Hauser’s Law is an empirical observation that, in the United States, federal tax revenues since World War II have always been equal to approximately 19.5% of GDP, regardless of wide fluctuations in the top marginal tax rate. [1]

[edit] History wikipedia

The theory was first suggested in 1993 by W. Kurt Hauser, a San Francisco investment economist, who wrote at the time, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”[2]

In a May 20, 2008 editorial by David Ranson, the Wall St. Journal published a graph showing that even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had indeed constantly remained at about 19.5% of GDP.[3]

The editorial went on to say, “His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues… Like science, economics advances as verifiable patterns are recognized and codified… 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… 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. The economics of taxation will be moribund until economists accept and explain Hauser’s Law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge.” [4]

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