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Hauser’s Law of Taxation May 20, 2008

Posted by federalist in Economic Policy, Government, Taxation.
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David Ranson dusts off some econometric results that should be the basis of all discussions of tax policy. In 1993, Kurt Hauser found, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.” This invariance still holds true, and Ranson dubs it “Hauser’s Law.”

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.

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.

But perhaps we are too charitable with the tax-the-rich crowd’s intentions? It may be that they are not concerned with maximizing tax revenue but rather with using tax policy to minimize income inequality. And it may be that politicians are more concerned with acquiring the patronage of special interests through a byzantine tax code than simply maximizing the tax revenue at their disposal.

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