Hauser’s Law, Laugher Curves, and Why One Should Never Trust a WSJ Oped
David Ranson repackages one of the usual suspects from the bag of lies from the rightwing:
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.
Say what? Regular readers of this blog might have seen this silly claim made by certain rightwing trolls many times. I could demolish this line of nonsense by showing Federal revenue by source (individual income tax, corporate profits tax, and payroll tax) as a percent of GDP but Zubin Jelveh has already done so in his Lying with Charts:
Hmmm, corporate tax revenues have declined dramatically. Why, then haven’t overall tax revenues dropped? Well, we can primarily thank social insurance programs like Social Security for that. Here’s a chart showing social insurance program tax revenues
Zubin also charts individual income taxes as a percent of GDP showing that this ratio did rise after the 1993 tax increase while it fell after the 2001 tax cut. The claim made by Ranson has been made by many others – and it has been shown to be silly many times as well. But the WSJ oped page does seem to be on a mission to outdo the National Review for the dumbest rightwing rag with respect to economics.
Let’s all take a deep breath and a couple steps back. People all over the intertubes are drawing a lot of conclusions – some of them pretty wild – on a set of empirical observations based on the ratio of two numbers that are not independent of each other. I haven’t done a regression, but I have to believe that tax revenues and GDP are pretty closely correlated. So, of course the ratio is not going to have huge variation. This verges on tautology.
But that ration is not invariant. To suggest that it is, is either ignorance or sophistry. Clearly, tax revenues are a function of GDP. To suggest that they are not also a function of tax policy is nonsense. The ratio obscures tax revenue changes, which are considerable.
And if you take a real look at the tax revenue/GDP values – not on a graph that goes from 0 to 90%, which again obscures the changes, – you’ll notice values below 15% in ’49, ’50, and ’09, and a maximum of 20.6% in 2000.
The average over the period is 17.8%, with a Std Dev of 1.2%. (As an aside, 1.2% of 2009 GDP = $171 billion – not exactly chicken feed.) True, the annual values seldom go outside of a +/- 1 St Dev band. Still – you see a maximum at the end of every Democratic administration, and a rapid drop to below the mean in every succeding Rep admin. Hmmmm.
Hauser’s alleged law would have us believe that policy doesn’t matter. That is bunk, pure and simple. Taxes/GDP is a rather odd data artifact. If there is any reason to believe that it is determinative of anything, I’d like to hear about it. At best, it appears to be indicative, and what it indicates is that Dems are better at tax collection. But I think we all knew that. Does anyone have a more constructive narrative?
Regarding the Laffer curve, it may have some validity, at very high tax rates. Data presented here and other places that I’ve drawn inferences from suggest a possible peak somewhere between 50 and 70%. But we don’t really know. Laffer drew his curve on a cocktail napkin. It’s really just an abstract notion. But if it’s right, current tax policy if far, far below the peak for revenue collection.
Ranson’s silly article is typical WSJ hackery.
Here is the truth about tax revenues.
Clearly there is a point of negative returns on taxes. Raising tax rates to 100% would clearly lead to no one working (in a reportable fashion) and taxes would plummet toward zero. So there is in fact, some point where ax rates change behavior and are counter productive. The question is where, exactly does that occur. Even if Obama and the boys can maximize taxes, we clearly ahve an overspending problem. At 100% tax rate, we have 2 trillion in income against a 4 trillion budget. The error i see in most analyses offered is the assumption that txes can be raised without causing a change in behavior, in spending/investing/saving. Thank goodness we don’t get all the government we pay for.
The criticism of the swings in the graph are valid. However, over time, it does strongly suggest that the marginal rates in the past were in fact useless for revenue as a % of GDP. Certainly, when the marginal rates were in the 90’s down to the 70’s, the “effective” rates were lower, maybe about 50%. But still, it doesn’t weaken the chart data, that there is clear incentive effects on marginal rates, at least above 40%, in a tax scheme where there aren’t excessive deductions.
This is not only an American phenomenom, it is a world phenomenon and it is why most income tax systems are fairly flat, while consumption taxes flatten the curve, ie, the effective rate becomes flat (gross-total tax= net income).
The problem is, for most states, we are already at a 40-47% top marginal rate!
When I mean “flat,” I mean, gross income-total tax = net income,
total tax/net income = proportional percentage, not progressive.
There is only one study I know that has attempted to calculate this for the US, and the “all-in” marinal rate is about 40%. But due to negative taxation and welfare, the effective net total tax ranges from 0% at 20 grand for a couple to 40% at 500 grand for a couple.
At a top 35% bracket, coupled with state income taxes, we may have reached the limit, all else equal, unless we cut government spending. From surveying European countries, all else equal, you must double consumption taxes and lower the top bracket to about 95 grand, thus compressing the brackets and flattening the curve.