Thursday, May 20, 2010

Hauser's Law Redux

It was exactly two years ago that David Ranson's editorial extolling Hauser's Law appeared in the Wall Street Journal (5/20/2008). And with Democrats talking recently, even more so than usual, about the need to raise taxes on the "rich" in order to increase revenues and reduce the deficit, I thought the timing was right to re-examine Hauser's remarkable observation.

That observation - that there is absolutely no correlation between the top marginal tax rate (TMTR) and revenue as a percentage of GDP - was made by economist W. Kurt Hauser in 1993. Coined Hauser's Law by Ranson, it is similar to, yet more powerful than (Arthur Laffer's) Laffer Curve since the former is based on actual empirical evidence.

Graphical Depiction of Hauser's Law

The Laffer Curve - Should probably be skewed toward the bottom - i.e. - Making the peak of the curve much closer to 0% than 100%.

What Hauser's Law recognizes is that revenue has consistently remained at roughly 19.5% of GDP whether the TMTR was greater than 90%, less than 30%, or anywhere in between. This fact makes it obvious, as Ranson points out, that to increase revenue, what needs bolstering is not tax rates, but GDP. And one sure way to raise GDP is by lowering tax rates. Ranson writes,

As 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.

Disregarding the available evidence, President Obama and Democratic leaders continue to promote tax increases for revenue enhancement. To be sure, there's ignorance and stupidity involved here, but more important is the ideological imperative. "Spreading the wealth" is the paramount goal, even if it results in less overall wealth, a weaker economy, lower revenue, higher unemployment and persistent poverty. The less well-off, who thoughtlessly submit their allegiance to the Democratic Party with its soothing and deceptive rhetoric, are those who are most shamefully exploited and harmed.

Ranson's WSJ op-ed as reprinted on the Hoover Institution website.

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