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Pluto
Joined: 19 Dec 2006
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 Posted: Tue May 20, 2008 11:20 am Post subject: The Economics of Taxation |
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You Can't Soak theRich
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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.
[You Can't Soak the Rich]
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.
Mr. Ranson is head of research at H.C. Wainwright & Co. Economics Inc. |
Simple lesson is if a government wants to increase its revenues, it should decrease taxes. Government revenue is related to the size of the economy not the tax rate. Increasing taxes leads to less investment, higher interest rates and less jobs, i.e. less opportunities to tax. |
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yawarakaijin
Joined: 08 Aug 2006
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| Posted: Tue May 20, 2008 3:29 pm Post subject: |
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I for one, as a Canadian, could never really quite figure out how losing 35% of my monthly income was either a.) good for me or b.) good for the economy.
That is 35% of my money that I am NOT spending at local pubs, eateries, sports events and so on.
That is 35% of my money that I am NOT directly investing into other Canadian businesses.
That is 35% of my money that is NOT in a Canadian bank, not being loaned to other Canadians wanting to take out a loan and start up a new business.
In my mind there should be a flat income tax levied on all individuals and businesses. Should be around 5-10%, regardless of how much money you earn. Of course those at the poverty level don't pay. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue May 20, 2008 4:10 pm Post subject: |
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35% is probably low as an aggregate estimate. Factor in the inflationary effects of taxes at every kink in the supply chain, plus gas taxes etc etc and the typical citizen is likely on the hook for around 50% or more of their total income. It is almost impossible to calculate the total tax burden as the exact extent to which prices are the result of layers of taxes is very difficult to figure out.
I agree with you. 5-10% as a flat tax seems totally reasonable. But when you have state without a clearly defined set of boundaries, we can't be surprised when the state expands and expands into every aspect of our lives -- especially our wallets. |
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Pluto
Joined: 19 Dec 2006
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| Posted: Tue May 20, 2008 4:33 pm Post subject: |
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| This year's US federal budget is somewhere around 3.2 trillion dollars. That's a little more than $10,100 for every man, woman and child in the US. Although when you factor in the debt/deficit and inflation the likely burden is likely to be A LOT higher. Keep in mind this is just the federal level so don't forget about your state/provincial and local taxes too. If governments are serious about increasing revenues and staying somewhat solvent, they should pursue pro-growth strategies instead of just simply raising taxes. |
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yawarakaijin
Joined: 08 Aug 2006
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| Posted: Tue May 20, 2008 4:36 pm Post subject: |
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Yeah, the 35% was just the average. I didn't have the intestinal fortitude to calculate in all the other ways we get hit. Provincial sales taxes, inflation, still getting dinged 85$ a month for medicare (in B.C) even after paying for our so called "free" healthcare, Unemployment Insurance.
And yet, I still get told by my friends in Canada to come back to the "real" world. LOL. No thanks.  |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue May 20, 2008 4:37 pm Post subject: |
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| The Bear Sterns bailout was around 1k per family. It never ends. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue May 20, 2008 5:10 pm Post subject: |
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| mises wrote: |
| The Bear Sterns bailout was around 1k per family. It never ends. |
Actually, I'm wrong.
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The mortgage bill has a tab that could be as much as $300 billion. That's a $1000 liability of per every man, woman, and child. That's on top of the $1500 in contingent liabilities taken on by the Fed to bail out the banking industry, which is also in part to shore up the mortgage markets. |
http://www.nakedcapitalism.com/2008/05/bail-out-housing-to-salve-damaged.html |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue May 20, 2008 5:32 pm Post subject: |
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| yawarakaijin wrote: |
still getting dinged 85$ a month for medicare (in B.C) even after paying for our so called "free" healthcare
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1k/yr for a single person will buy good medical insurance in the US. Unless you're an obese smoker. It is your own damn fault then anyways. |
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yawarakaijin
Joined: 08 Aug 2006
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| Posted: Tue May 20, 2008 5:33 pm Post subject: |
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| mises wrote: |
| yawarakaijin wrote: |
still getting dinged 85$ a month for medicare (in B.C) even after paying for our so called "free" healthcare
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1k/yr for a single person will buy good medical insurance in the US. Unless you're an obese smoker. It is your own damn fault then anyways. |
1k a year plus a huge kick in the teeth when it comes to file your taxes at the end of the year. Sucks when you are totally healthy, never smoked a cigarette in your life and hardly ever drink and yet pay the same "premiums" ie taxes, as that 345 pound lardass who also drinks a two four every weekend. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue May 20, 2008 5:46 pm Post subject: |
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| yawarakaijin wrote: |
| mises wrote: |
| yawarakaijin wrote: |
still getting dinged 85$ a month for medicare (in B.C) even after paying for our so called "free" healthcare
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1k/yr for a single person will buy good medical insurance in the US. Unless you're an obese smoker. It is your own damn fault then anyways. |
1k a year plus a huge kick in the teeth when it comes to file your taxes at the end of the year. :wink: Sucks when you are totally healthy, never smoked a cigarette in your life and hardly ever drink and yet pay the same "premiums" ie taxes, as that 345 pound lardass who also drinks a two four every weekend. |
Socialized medicine is a subsidy from healthy people to those people who treat their bodies the worst. In a sane world, it would only cover catastrophic accidents, sick kids and general public health stuff. Oh, and free birth control that can be had at any convience store.
If you get in a car accident, we'll help. If your kid has cancer, we'll help. If you are poor and preggers, we'll help.
If you smoke like a chimney, drink like a fish, breed like a rabbit and eat like a pig you can pay your own way when these things eventually kick you in your far arse. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Tue May 20, 2008 5:47 pm Post subject: |
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| Simple lesson is if a government wants to increase its revenues, it should decrease taxes. |
The Hauser theorem does not support supply-side economics so much as it shows how ineffective marginal personal income tax rates are on revenues.
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| If governments are serious about increasing revenues and staying somewhat solvent, they should pursue pro-growth strategies instead of just simply raising taxes. |
That's right. Government spending needs to be focused on education, health care, and infrastructure. |
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Pluto
Joined: 19 Dec 2006
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| Posted: Wed May 21, 2008 8:36 am Post subject: |
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| Actually, Hauser's line represents total government revenue per GDP. The marginal income tax rate is mentioned but it should be the total tax rate if it could be shown.. (It's already been shown that if you lower the cap gains tax, gov't revenue increases) As alluded to above in the article and by Mises and Yawarakaijin, there is no real way to figure out how much we actually pay in taxes. The best we can do is look at the various budgets and average it out over the whole economy. The real lesson is that capital will travel where it can travel more freely making the government's ability to collect revenues more difficult. The nature of capital is that it will avoid anywhere it is treated the harshest, i.e. taxed the most. |
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Cheonmunka
Joined: 04 Jun 2004
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| Posted: Wed May 21, 2008 2:36 pm Post subject: |
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What I don't like about tax is that it is made with every transaction. Every time you give $100 to someone they earn it so pay tax on it, then pay for something themselves and the next person pays tax on the very same money and so on and so on. It's a huge money spinner.
I don't liike that my tax pays for some fat politicians/lobbyists/PR people to live and eat well - such as business travel, free daily restaurants at parliament and luxury away from home apartments - all on the people's tab.
An past friend of mine worked as a junior in an embassy here and was given 4.5 milllion won month as a basic housing allowance plus had a maid to clean the 60 pyong luxury apartment that he chose.
Damn - people in my country are going hungry and losing their very means of living yet others live on the state wealth and have very dainty lives. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Wed May 21, 2008 3:13 pm Post subject: |
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Flat tax.
End of the day rich people can move. If you try to tax them out of their ass they'll move their ass. |
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Pluto
Joined: 19 Dec 2006
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| Posted: Fri May 23, 2008 7:51 am Post subject: |
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| Cheonmunka wrote: |
What I don't like about tax is that it is made with every transaction. Every time you give $100 to someone they earn it so pay tax on it, then pay for something themselves and the next person pays tax on the very same money and so on and so on. It's a huge money spinner.
I don't liike that my tax pays for some fat politicians/lobbyists/PR people to live and eat well - such as business travel, free daily restaurants at parliament and luxury away from home apartments - all on the people's tab.
An past friend of mine worked as a junior in an embassy here and was given 4.5 milllion won month as a basic housing allowance plus had a maid to clean the 60 pyong luxury apartment that he chose.
Damn - people in my country are going hungry and losing their very means of living yet others live on the state wealth and have very dainty lives. |
Yeah, well, politicians, particularly on the left though conservatives by no means have clean hands either, like to make a lot of popular promises. All they ever end up doing is hiking taxes so they can support themselves, their friends and provide a few 'programs' on the side.
At any rate, it's good to see people are starting to see how taxes provide less incentives for creating or providing wealth. Meaning the less wealthy the people in an economy are, the less wealthy a government is. |
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