Great article on taxation/tax cuts/tax increases...

[6SpeedTA95]

You Can't Soak the Rich

By DAVID RANSON

Kurt Hauser is a San Francisco investment economist who, 15 years ago, published fresh and eye-opening data about the federal tax system. His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues. I think his discovery deserves to be called Hauser's Law, because it is as central to the economics of taxation as Boyle's Law is to the physics of gases. Yet economists and policy makers are barely aware of it.

Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example.

The interactions among the myriad participants in a tax system are as impossible to unravel as are those of the molecules in a gas, and the effects of tax policies are speculative and highly contentious. Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?

Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

The chart nearby, updating the evidence to 2007, confirms Hauser's Law. The federal tax "yield" (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% to the present 35%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.

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. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich -- if they knew about it.

Although Hauser's Law sounds like a restatement of the Laffer Curve (and Mr. Hauser did cite Arthur Laffer in his original article), it has independent validity. Because Mr. Laffer's curve is a theoretical insight, theoreticians find it easy to quibble with. Test cases, where the economy responds to a tax change, always lend themselves to many alternative explanations. Conventional economists, despite immense publicity, have yet to swallow the Laffer Curve. When it is mentioned at all by critics, it is often as an object of scorn.

Because Mr. Hauser's horizontal straight line is a simple fact, it is ultimately far more compelling. It also presents a major opportunity. It seems likely that the tax system could maintain a 19.5% yield with a top bracket even lower than 35%.

What makes Hauser's Law work? For supply-siders there is no mystery. 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. And if this requires overturning existing doctrine, then so be it.

Presidential candidates, instead of disputing how much more tax to impose on whom, would be better advised to come up with plans for increasing GDP while ridding the tax system of its wearying complexity. That would be a formula for success.

http://www.wainwrighteconomics.com/p...ich-052008.htm



Guys I thought this was a pretty good and well thought out article. It's short and to the point and spot on. Although it does frame the debate in a different light. Basically putting a bit of a damper on people on both sides of this issue. While everyone republican and democrat agree the tax code needs to be simplified the focus is rarely on GDP output which is odd when you actually think about it. Regardless of what tax rates do, politicians should focus primarily on raising the GDP because along with GDP increases come standard of living increases (in most cases). It also shifts the focus away from rich vs poor and onto how the US can remain competitive on the world stage.

[David Octavius]

Economics...the wannabe science

We had our greatest peace time economic expansion at the same time we had the highest tax rates...not to say that its because of the rates but it flies in the face of supply siders. Taxes suck and so does most welfare but this article proves nothing, there are many other economic "analysis" that can disprove it.

[Phantom]

Originally Posted by David Octavius

Economics...the wannabe science

We had our greatest peace time economic expansion at the same time we had the highest tax rates...not to say that its because of the rates but it flies in the face of supply siders. Taxes suck and so does most welfare but this article proves nothing, there are many other economic "analysis" that can disprove it.

You suggest economics is a wannabe science and support that statement with a suggestion that because two variables do not move together they are not causally linked.

[WickedLou9]

I don't think this really answers any questions for us. It says that no matter how high we raise taxes we can never generate tax income in excess of about 20% of GDP. It only stands to reason that we can lower this rate, but if we try to increase it, GDP will simply decrease and leave the 20% ceiling intact. So then it becomes a social question about fairness or equity. Who should pay more and who should pay less? That has always been the crux of the tax question. Hausers Law does not help us answer this question.

[David Octavius]

Originally Posted by Phantom

You suggest economics is a wannabe science and support that statement with a suggestion that because two variables do not move together they are not causally linked.

I was not supporting that statement, I was simply stating a fact, our greatest peace time economic expansion was after WWII.

As for the separate statement I made about the wannabe science, that statement is well supported. If real science was as bad as economists we would not trust science at all! How many times have they've gotten shit wrong but never get called out on it, its pitiful.

[Phantom]

Originally Posted by David Octavius

I was not supporting that statement, I was simply stating a fact, our greatest peace time economic expansion was after WWII.

As for the separate statement I made about the wannabe science, that statement is well supported. If real science was as bad as economists we would not trust science at all! How many times have they've gotten shit wrong but never get called out on it, its pitiful.

How many drugs or treatments have been declared "safe" and then been found to be completely unsafe/useless for any medical uses. [lots]

Either all science is garbage, or you're missing something. I'm going with the latter.

Your suggestion that two variables moving together alone suggests causation is silly and simply indefensible.

[David Octavius]

Originally Posted by Phantom

Your suggestion that two variables moving together alone suggests causation is silly and simply indefensible.

Wrong

"We had our greatest peace time economic expansion at the same time we had the highest tax rates...not to say that its because of the rates but it flies in the face of supply siders"

I know there are other variables but this still stands as a big obstacle to supply side believers

You arguing from a wrong assumption so its futile to go on with this

[Phantom]

Originally Posted by David Octavius

its futile to go on with this

agreed

[David Octavius]

But it still doesn't take away from the fact that is it a dismal "science", sorry if you consider yourself an economist but its just like political "science" in that neither is actual science no matter that they put that after their disciplines or whatever fancy jargon they use

[Phantom]

Originally Posted by David Octavius

But it still doesn't take away from the fact that is it a dismal "science", sorry if you consider yourself an economist but its just like political "science" in that neither is actual science no matter that they put that after their disciplines or whatever fancy jargon they use

This is a good topic for another thread if you want to start it. You could point out the reasons why economics is not a science and I could show you how those same failures apply to the "hard sciences"

[6SpeedTA95]

Originally Posted by David Octavius

Economics...the wannabe science

We had our greatest peace time economic expansion at the same time we had the highest tax rates...not to say that its because of the rates but it flies in the face of supply siders. Taxes suck and so does most welfare but this article proves nothing, there are many other economic "analysis" that can disprove it.

Actually the biggest post war expansion was from 1982 to 1999...NOT even close to the highest tax rates. We also had another substantial boom from 1963 to 1969...right after...guess......tax cuts!

[6SpeedTA95]

Originally Posted by WickedLou9

I don't think this really answers any questions for us. It says that no matter how high we raise taxes we can never generate tax income in excess of about 20% of GDP. It only stands to reason that we can lower this rate, but if we try to increase it, GDP will simply decrease and leave the 20% ceiling intact. So then it becomes a social question about fairness or equity. Who should pay more and who should pay less? That has always been the crux of the tax question. Hausers Law does not help us answer this question.

Yeah thats true...I just thought it was nice to see someone frame the debate from a growth perspective instead of rich vs poor, tax increases vs tax cuts. That we are all too accustomed to hearing.

[DosEquis]

Originally Posted by 6SpeedTA95

Actually the biggest post war expansion was from 1982 to 1999...NOT even close to the highest tax rates.

When you say expansion, you are talking about our debt right? Or perhaps the expansion of the citizenry by 3.5 million with anmesty granted to illegals? The expansion of power we give the dictator who gassed his own people? Maybe the expansion of the afghanistan "freedom" fighter power? The beginning of business expanding their job sending over seas?

Forgive my sarcasm, but in the words of Ron "I do not recall" much expansion, at least for the middle class. I remember expanding layoffs, debts, and wars.

I guess my question is, what exactly expanded for us?

[6SpeedTA95]

Originally Posted by DosEquis

When you say expansion, you are talking about our debt right? Or perhaps the expansion of the citizenry by 3.5 million with anmesty granted to illegals? The expansion of power we give the dictator who gassed his own people? Maybe the expansion of the afghanistan "freedom" fighter power? The beginning of business expanding their job sending over seas?

Forgive my sarcasm, but in the words of Ron "I do not recall" much expansion, at least for the middle class. I remember expanding layoffs, debts, and wars.

I guess my question is, what exactly expanded for us?

Umm standards of living rose rapidly in the 80s and 90s and unemployment dropped sharply.




Incomes rose


Standards of living rose


*Sorry this is the furthest back I could find a SOL graph.

[David Octavius]

Originally Posted by Phantom

This is a good topic for another thread if you want to start it. You could point out the reasons why economics is not a science and I could show you how those same failures apply to the "hard sciences"

Oh I am sure you can, so can I, but the "hard sciences" have given us many breakthroughs from vaccines to communications...what utility has economics actually given us? Before it became an actual discipline people practiced economics all time, except we called it common sense, we didn't need it to trade or to make money.

In fact one can argue that since it became known as a science it has actually harmed us; communism claimed the science of its economics so have other ideologies.

Edit - theory is not utility - economists have been wrong much more than they've been right in trying to understand/predict/maximize the economy without sacrificing liberty

[JaJae]

Originally Posted by WickedLou9

I don't think this really answers any questions for us. It says that no matter how high we raise taxes we can never generate tax income in excess of about 20% of GDP. It only stands to reason that we can lower this rate, but if we try to increase it, GDP will simply decrease and leave the 20% ceiling intact. So then it becomes a social question about fairness or equity. Who should pay more and who should pay less? That has always been the crux of the tax question. Hausers Law does not help us answer this question.

I agree with this statement, but at the same time the article does point out the importance of including the GDP into our figures. If we lower our GDP it will have a negative effect on everyone, even the people whose taxes you just lowered. How much of that decline in GDP will hurt them in comparison to the benefits of the lower tax rates? And if we increase our GDP how many people would benefit more from having slightly higher tax rates?

It introduces a lot of questions. The the standard of living for the lower class in this country is better when the GDP is up. It adds an interesting variable.