Hauser’s Law is Extremely Misleading
by Mike Kimel
Hauser’s Law is Extremely Misleading
Cross posted at the Presimetrics blog.
A friend sent me a link to this Wall Street Journal opinion piece by W. Kurt Hauser. Who is he, you ask? Here’s what it says at the bottom of the article:
Mr. Hauser is chairman emeritus of the Hoover Institution at Stanford University and chairman of Wentworth, Hauser & Violich, a San Francisco investment management firm. He is the author of “Taxation and Economic Performance” (Hoover Press, 1996).
Before I go on, let me note that in this piece, Hauser masterfully demonstrates the Hoover Institution approach to data. The piece contains enough, er, material that I could write several posts on it. Maybe I will, but for now I want to focus on his key point. Here are the opening paragraphs of the essay modestly entitled “There’s No Escaping Hauser’s Law”:
Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.
Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this “Hauser’s Law.”
Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.
OK. So, Hauser’s point is clear – no matter what happens to taxes, the government only manages to collect about 19% of GDP. Presumably then, from a perspective of paying down debt, there’s no benefit to raising taxes and plenty of benefit to cutting taxes. (Later he goes on to argue that lower taxes = faster growth, which I’ve dispensed with in the past – latest example here. Still, if given time, I might come back and examine Hauser’s special way of reaching his conclusion. But that’s for another day.)
Now, they say a picture is worth a thousand words, so let me put up a graph. And for grins, let me embed a small table in that graph. The graph shows total federal receipts divided by GDP. However, it is color coded. In years when there is a cut in the top individual marginal tax rate, or when the most recent change in the top marginal tax rate was a tax cut rather than a tax hike, the area under the curve is colored gray. When there is a tax hike, or the most recent change was a tax hike, the same area is colored red. Here’s what it looks like:
So there it is. There’s Hauser’s law. Notice the size of his narrow band – its width is over 5% of GDP! Now take a gander at the little table. In tax hike periods, the smallest amount collected was 18.3% of GDP. By contrast, the median collection in tax cut periods is 18.2%; in other words, in over half of the tax cut years, collections were less than the smallest amount ever brought in during the tax hike periods. Furthermore, both the median and average for the two series are a full percent of GDP apart. Hauser is essentially sweeping humongous differences under the table.
Think Hauser doesn’t know this? I don’t. He’s been staring at the data, and using it to make arguments for a very long time. He also writes extremely precisely. At no point does he make a false statement, but I for one reached all sorts of mis-impressions just from his opening paragraphs. Like I said, its a masterful example of the Hoover craft.
Doesn’t the fact that he’s aligned with the Hoover wing of Stanford, in sunny California, tell the tale? Isn’t this what they have been doing all the time? Yet, because he is of the Hoover, then he gets a free ride from the press, any press, to voice his take. Perhaps over snifters of good spitits @ the club, he has status, but in todays market, does he really think he can get away with this? Just wondering, though perhaps I’m too old to know better for posing the question!
I admit that he does a good job given the fact that he won’t just admit that the past 17 years of data prove that he is wrong. However, he made a plainly false claim “during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.” 21 is not under 19. His claim is false. Also 15.8 is not “just under 19.” He just won’t admit that his prediction is wrong and he won’t even rephrase it so that it is true.
To be clear, he claims that average revenue/GDP is under 19% for all top rates. The true claim is that a smoothed estimate is essentially flat. This is not the same claim. If one smooths enough one always gets a constant. Nowhere does he admit that he imposes a parametric model or a smoothing factor. therefore his claim is false. Note the Clinton tax increase was phased in, so all years with final Clinton era tax code have a ratio over 19%.
I think it might be marginally worth while to average income over periods with a constant top rate not years. so a table with all the top rates and the average ratio over periods when each rate applied. This will show that JHauser’s claim is technically false.
Looking at the graph, I see that his claim was a true claim about the past when he made it but that the prediction he made is totally false.
In fact there is no sign that revenues/GDP have an affinity for “just under 19%” since revenues following the Clinton tax increase surpassed projections based on disbelief in Huaser’s law and revenues following the Bush tax cuts fell short of predictions again based on disbelief. Finally revenues following the Obama tax cuts are below predictions made a third tie assuming his theory has exactly 0 relationship with reality.The CBO would have done better by moving their predictions in the opposite direction from that proposed by Hauser. His contribution to predicting is worse than worthless. This is true based on all data since he made his first prediction.
Oh rats my mistake the top rate was 39.6 from 93 through 2000. I thought it ramped up (something else ramped up I’m sure hence the gradual rise in the ratio after the bill passed but before the bubble absurdly pumped up capital gains tax revenues). Stil OK I’m sure that average revenues for top rate of 39.6 is over 19% (those were the only years with that rate and he didn’t say anything about smoothing or imposing a parametric specirication).
Thenn 2003-2008 the rate was 35% (also 2009 no ?). Again this is true of no older years, so avraging over those years is OK . The average will be far below 19%. This means that Hauser’s law is rejected by the two averages which can calculated since he stated his hypothesis. Oh and if narrow means “from lowest point since WWII to 19%” the ratio is out of the range for most years since he made his prediction.
I’m not sure that there is a law from which it is easier to escape, although insider trading laws might come close.
Is the tax receipt data adjusted for inflation like GDP? BEA table was not clear.
The graph only looks at marginal rates, what about Reagan’s payroll tax increase, or pretty significant 86 tax code changes? What about the dramatic capital gains tax cut during Clinton’s term? Why leave all that stuff out? I am not saying Hauser is correct, just trying to dig a little deeper and understand the data.
I’m not sure I remember Hauser’s original editorial, but I do remember an editorial from around that time in the WSJ which included a chart demonstrating the point that Hauser is making about the stability of revenues as a share of GDP, regardless of the tax rate. Maybe it was Hauser who presented the chart, maybe somebody else running with his claim.
Anyhow, the chart that was in the WSJ back then differed from Mike’s chart in a couple of ways. One is that, naturally, the dates were different. The other is that the WSJ chart used a scale from 0% to 100%, instead of0% to 24%. Y’all know what the effect was, right? By increasing the scale, the range was smashed down so much that it seemed to hardly wiggle at all. The presentation was aimed at hiding the variability of tax receipts as a share of GDP. I don’t see a similar chart in this OpEd, but the claim Hauser makes does the same work – pretending that tax rates don’t change revenue outcomes.
Whoa! Found it!
It WAS Hauser’s editorial that contained the massively dishonest chart. Here’s a link:
http://books.google.com/books?id=X7zLmIK1HgEC&pg=PA13&lpg=PA13&source=bl&ots=Gwf7fTg5vT&sig=0KkZ3ImfLCEDnGSp70Fh50Xhoak&hl=en&ei=AYPzS8bAKoOdlgf1ocT8DA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBcQ6AEwAA#v=onepage&q&f=false
This is a classic example of “how to lie with charts”.
Now, the real issue is not the level, but the range. When Hauser wrote, his average was right. His assertion that the range of results was narrow was not right. The fact that the average has risen since 1993 is evidence that the central tendency is not perfectly stable, which is also not good for the point he wants to make, but it is not wildly unstable, either. The trick to his presentation is that he offers a number in order to get his readers to fixate on the number. “Government is only gonna get 19%, no matter what, so higher tax rates are bad.” The fact is, government can get a lot less than 19%, if tax rates are too low. Hauser’s goal is to provide “authority” for those who want to argue for low tax rates, not to actually prove the truth. The Laffer argument is that you can reach a rate high enough to lower revenues. Hauser says rates don’t change revenues. I’ve heard both, so Hauser has succeeded in getting his lie into circulation.
There should be even less correlation between the top marginal individual rate and total tax receipts as individual tax receipts average about 50% of total receipts.
Hauser’s Law debunked when the top marginal individual rate has varied from 28% to 39.5% over the past 20 years.
Isn’t the real reason for the upper limit that it raises enough taxes to balance the budget to within the growth rate? More the result than than the cause?
Or Reagan era closing “tax expenditures” of the middle/lower class for interest deductions eliminated etc?
You should ask ‘does the fact that part of the revenues were excess payroll taxes collected for SS in anticipation of the boomers’ retiring make a difference, if it was all income taxes and SS was pay go would the collections and effects be different??’
Relating to GDP makes little sense, consistently the Hoover types also like the war mongers to get 5 to 15 % of GDP depending on how much they desire to rip off the lower classes is in play.
For consistency, both the gdp and receipts figures used in the post are nominal. The ratio would have been the same had both figures been real. Mike
(Mike sent me a note…his work filters blogger)
All he is saying is they take from the lower incomes levels and give tax breaks to the bagmen’s sponsor, QED the take from the economy is steady.
Otherwise, if you think all Hauser is saying is ‘stop the debate’ the money that bought congress will keep the status quo ante defined by the owners.
Shifting tax rates and ending tax expenditures is no more real than expecting short skirts to run up the NYSE.
Responding to a different WSJ article a while back . . .
http://online.wsj.com/article/SB10001424052748704094304575028930349664448.html
. . . I took a look at GDP growth and tax revenues.
The lie then was also that higher taxes impede GDP growth. I graphed Yr over Yr GDP growth along with Taxes/GDP. Interestingly, from WW II to the Reagan regime, the relationship was indeed contrary: Lower tax/GDP occurred with higher GDP growth. Then something changed. Since around 1990, tax/GDP and YoY GDP growth have similar motion, almost in lock-step.
http://jazzbumpa.blogspot.com/2010/02/republicans-all-wrong-all-time-pt-71.html
What changed? The biggest thing I can think of is tax policy. Marginal rates have been (almost) steadily lowered since then. Clinton raised rates, revenues (20%+ of GDP for 4 straight years), and GDP growth to well over 4%, all at the same time – a blazing refutation of Hauser and Lazear.
This also suggests an interesting hypothesis – that in high and low tax regimes – and the Reagan admin. is the turning point – the relationship of tax/GDP to revenues reverses, for whatever that might be worth.
Basically, though, Hauser’s law is an essentially meaningless data artifact that arises from both numerator and denominator being resultants of the same driver – the general state of the economy. Drawing bold conclusions and making policy recommendations based on this drivel is the triumph of ideology over facts, data, and common sense.
Note that 2009 blows the whole specious theory: Lowest tax rates in living memory (no matter how old you are), tax/GDP lowest since the early 50’s, and GDP in the sewer.
An idea like Hauser’s canard can only result from the kind of specious reasoning that must be used when conclusions drive data, not the other way around. (And that’s the kind of game you can play with ratios.)
But that is also the kind of reasoning that is in control these days.
WASF,
JzB
Presumably IF his claim was correct, then no matter how tax rates were set, the total take would be the same, so in that sense raising taxes on the rich, if not helpful for deficits, would also not be an economic problem.
But it would follow then that what matters in taxation is just who you took the money from. I can think of two reasons to tax the rich under such a scenario: First, if the rich pay tax disproportionately then the less well off have more money, and since they will spend more of it than the rich would the economy would be better off to that extent. Second, from a utilitarian point of view it’s better to get money from a small number of people who will still be fine after you take it than to get it from lots and lots of people who will be significantly hurt by losing the money. Thus, even in his silly scenario taxing the rich as opposed to everyone else would benefit both the economy and the polity.
What gets me is that by his logic there is no point in overall tax cuts . . . presumably he’s got a different set of logic when he wants to argue for those? Pay no attention to the argument I made in my previous column, or perhaps even a few paragraphs ago, it no longer serves my purposes . . . sheesh.
I thought JzB had it when he made this bold (for a liberal) statement: “Basically, though, Hauser’s law is an essentially meaningless data artifact that arises from both numerator and denominator being resultants of the same driver – the general state of the economy. Drawing bold conclusions and making policy recommendations based on this drivel is the triumph of ideology over facts, data, and common sense.“
But then he fell back on his dogma with his example: “Note that 2009 blows the whole specious theory: Lowest tax rates in living memory (no matter how old you are), tax/GDP lowest since the early 50’s, and GDP in the sewer.”
Why has no one stated the obvious? We raise taxes during economic growth periods and lower them during recessions to stimulate the economy.
Looking at Mike’s chart it really seems to work. Until Clinton, higher taxes were followed in short order by recessions (lower revenue ratios.) During the Clinton tax raise, an extended tecyhnology bubble occurred. It was exacerbated by the Y2K bug which caused even higher IT tech. investments. that bubble ended with the solution of Y2K and common sense entering into the “Dot.com” investment world.
At one time Mike admitted that Clinton may have just been luckier than others. His graph may actually prove it. You can certainly see where I stand.
Clinton, the exception that proves the rule.
JzB also speculates on this: “Then something changed. Since around 1990, tax/GDP and YoY GDP growth have similar motion, almost in lock-step.”
Could it be that who pays taxes changed dramatically during that period?? So, what could have changed? Could it be the Earned Income Tax Credit law? “The credit underwent significant expansions in 1990 and 1993.” From here: http://www.taxpolicycenter.org/taxtopics/encyclopedia/EITC.cfm
JzxB was so close to devining the cause(s) of revenue ratio shifts in “lock step” with the economy, but he just could not go that next step to look past the curtain of “fairness.” I have no value judgement re: “fairness”, I was just awe struck by the inability to go that next analytical step.
Minor nit: “If one smooths enough one always gets a constant.”
Smoothing “enough”, unless pathologically defined, does not even always produce a straight line, much less a constant. 🙂
What about Kaspar Hauser’s Law?
They’ll always get you in the end.
😉 I think.
CoRev –
There’s no reason to adress me in 3rd person. I’m not an abstraction. in fact, I’m right here.
You, sir, make no sense. How stating that the 2009 results blow the Houser theory means I “fell back on dogma” is really quite mysterious. Pray, tell me what dogma I fell back on.
Why has no one stated the obvious? We raise taxes during economic growth periods and lower them during recessions to stimulate the economy.
Because we have been lowering taxes almost continuously for decades, and the concurrent fact has been an almost continuous decline, and certainly significant trend line declines in GDP growth. This is the exact opposite of what I think you are implying. Data, not dogma.
http://jazzbumpa.blogspot.com/2010/10/us-economy-is-dying.html
You can certainly see where I stand.
Oh, yeah!
Could it be that who pays taxes changed dramatically during that period??
I suppose that’s possible. But you are suggesting that putting a lower (in fact, negative) tax burden on those with the lowest means is somehow contributing to a declining economy. What economic theory supports that point of view?
JzxB was so close to devining the cause(s) of revenue ratio shifts in “lock step” with the economy, but he just could not go that next step to look past the curtain of “fairness.” I have no value judgement re: “fairness”, I was just awe struck by the inability to go that next analytical step.
WTF?!? When did I say anything about fairness? Your ability to project is nothing short of stunning. All I did is point out a few things, viz: that now with extremely low tax rates
GDP growth sucks; and that in two different taxation regimes the Houser ratio behaves differently vis-a-vis GDP growth. The only value judgment I’m making is that drawing policy decisions from Hauser’s canard is bull shit.
Clinton might have been lucky. Alternatively, policy might matter. Clinton is at or near the top by any economic or social metric you can think of. That is really asking a hell of a lot of coincidence. But we’ve had that discussion here dozens of times.
Cheers!
JzB
PLG –
It all rests on this big lie, as stated in Lazears’ WSJ article i linkied above.
The recent growth in spending has been camouflaged by a focus on deficits. Budgets and proposed legislation, like that on health care, are being judged not by their impact on spending and taxation, but by their projected effect on the deficit. Equal increases in spending and taxes reduce economic growth, even if they do not alter the deficit.
Big steaming-pile-of-bullshit lie highlighted in red.
But if you believe it, then his whole point of view follows.
Cheers!
JzB
Mcwop,
Its left out because of his paragraph 2. Its his rules. That’s what got called Hauser’s law.
Yeah, I was going to use just personal receipts. But I tried a number of measures (current receipts, personal, etc.), and this was the item that came closest to his 19% figure.
First they told us defecits didn’t matter. Now it’s tax rates.
As you say: WASF
The line in the column that I like best of all is: “The president’s economic team has launched a three-pronged attack on capital: They are attacking the income group that is the most responsible for capital formation and jobs in the private sector, and then attacking the investment returns on capital formation in the form of dividends and capital gains.”
I added the bold type in order to highlight what seems an oputrageous statement. Isn’t unemployment currently at some historic high point? Isn’t this the eigth year of the Bush era tax cuts? Don’t those two facts seem to contradict Hauser’s claim? Regarding the italicized comment. How else then to psy the cost of governing? Are those two forms of earnings to be held as sacrosanct and not subject to taxation? What is the rationale for holding out some forms of income for preferential tax treatment beyond the fact that the weealthiest Americans earn nearly all of that preferenced income?
JzB said: “Because we have been lowering taxes almost continuously for decades, and the concurrent fact has been an almost continuous decline, and certainly significant trend line declines in GDP growth.” Go back and look at Mike’s chart. There are three periods of tax increases, followed almost immediatley with recession (lower revenue periods.)
He then goes back and makes claims that I never made: “But you are suggesting that putting a lower (in fact, negative) tax burden on those with the lowest means is somehow contributing to a declining economy.” No, that was Mike’s and your claim. I answered your question of what may have caused the “lock step” issue.
The rest is just JzB analysis, “that now with extremely low tax rates GDP growth sucks;” and “The only value judgment I’m making is that drawing policy decisions from Hauser’s canard is bull shit.” Tax rates, low or high, have limited affect on the economy. Raising and lowering them is more a reflection on economic growth. Policy? Who here, was making policy from Hauser’s law?
And finally, JzB claims: “Clinton is at or near the top by any economic or social metric you can think of.” I can only answer with a, sigh. Admitting he may have been lucky then implying he was responsible for the rating. Sorry, many others think otherwise, especially on the social scale.
Policy? Who here, was making policy from Hauser’s law?
Not here. In the WSJ articles by Hauser and Lazear. Remember? That is what I was talking about.
I can only answer with a, sigh. Admitting he may have been lucky then implying he was responsible for the rating.
Not the the first time, I have to question your reading comprehension. I presented an either-or. To avoid implication, and make it as clear as I can, I’ll state it bluntly as I have many times in the past: POLICY MATTERS. Until the election of B. Hoover Obama, Repug and Demo policies were different. Now, the big O is de facto a big R.
Go back and look at Mike’s chart. There are three periods of tax increases, followed almost immediatley with recession (lower revenue periods.)
You go back and look. See the red segments? See the gray segments? See what the legend says about tax changes? You’re either blinded by ideology, or have no ability to draw obvious conclusions from clearly presented data. I have more fruitful conversations with my 2-year-old grandson. Plus, he’s less stubborn, and a hell of a lot more fun to play with.
Further, as Jack points out below, taxes have never been ;ower, inj your life time or mine. After the Bush tax cuts of ’01 and ’03, and the Obama cut of ’09, the economy has been dragging for years, the mid-naughts quasi-recovery was jobless, and the current quasi-recovery is anemic and about to end.
Go ahead and troll my comments, CoRev, but don’t expect any more serious responses. You have repeatedly shown yourself to be immune to facts and data. In the future, unless you make some sort of sense, I’m going to try to remember to ignore you. You simply are not worth engaging.
Cheers!
JzB
Jack,
What is the rationale for holding out some forms of income for preferential tax treatment
A while ago AB had a post “Where do jobs come from?” The answer is, in most cases, they result from capital investment. That is why politicians from both parties have given capital gains and dividend preferential treatment – to encourage or incetivize capital investment.
A less well know issue is that the tax code, as it is, discourages capital investment because money spent on capital investment is not expensed in year 1, it is amortized for tax purposes for anywhere from 5 to 30 years. So the preferential treatment can be seen as offsetting this disincentive.
Sammy –
It’a a matter of (aproximately) matching maturies, which is responsible accounting. Big ticket items are usually financed over some Period of time. The business gets to amortize over time, plus deduct principle and interest payments, while generating profits immediately. If anything, this enhances profitability more quickly and realistically.
Further, the “discourages investment” idea is bull shit. Business is out for profit, and if investment leads to increased profit in a quantity and time frame consistent with the business plan, they’ll do it. Taxes are after the fact. Is there any emperical data to support the notion that changing corporate or capital gains taxe rates in the way you suggest yields the results you claim? I’d love to see it.
Plus, if you think about it, higher coprporate taxes encourage investment, since the value of the write-offs is greater.
Cheers!
JzB
Sigh! JzB thinks his responses have been serious. This is not the first time when challenged JzB has run off.
CoRev –
If you want to challenge me, then get into some sort of a point and counterpoint debate, or refute any one of my premises. But spare me the sighs, the innuendo, the “many people think otherwise” bull shit. You do this all the time, and it never advances the conversation. It is merely a distracting side show. That is what makes you a troll.
Pick any single point that I’ve made, bring whatever facts and data you can accumulate, do the math, and I’ll be happy to go toe to toe with you, either here or at my blog, I offer plenty of analysis there as well. If you can prove me wrong, then I’ll learn something and you’ll have done me a favor.
But I’m not going to hold my breath. And I’m not gong to entertain your trollish unwillingness to engage in rational debate. I’m not running off, I’m giving up in disgust.
That is what I meant by, “You have repeatedly shown yourself to be immune to facts and data. In the future, unless you make some sort of sense, I’m going to try to remember to ignore you. You simply are not worth engaging.“
So if you want be taken seriously, then start acting seriously. Making sense is the first necessary step.
And, BTW, if you can’t learn rational discourse, at least learn some manners. Addressing me in the 3rd person, as if I were dead or somehow incommunicado is exceedingly rude.
Cheers!
JzB
In addition to which we come back full circle to the question, if taxes aren’t collected who the devil os going to pay for all the fun things that the government does? You don’t think that the governmeent should be doing those things? Write to your congress person. The problem is that your congress person is going to be highly selective in dertermining which government expenses aren’t worthwhile. And that selectivity isn’t likely to take your needs into account. Unless, of course, you’ve been making those big donations to his/her cause.
But, we already knew where you stand. And we understand that no amount of evidence contrary to your position will change where you stand.
Again, here, you have made up a convenient story to validate your view, and suggested – but not shown – that the data support your view. The data are what they are, not what you’d like them to be.
In fact, Bush cut tax rates after the end of recession (as happens from time to time – and which is the argument for stronger automatic stabilizers) and we know the results were not good for the economy or for budget.
Well yeah, but the claim as near as I can make out isn’t that increasing taxes leads somehow to increased spending therefore keeping the deficit the same. The claim is that increased tax rates don’t increase the percentage of GDP taken in taxes–that this percentage stays the same no matter what, which is to say increased tax rates somehow fail to lead to increased tax revenues. Unless there’s someone in between taxpayers and government siphoning off a piece of the take, presumably that has to mean that increases in tax rates don’t lead to more taxes actually being paid (why? Dunno. It’s his ridiculous thesis. Presumably more loopholes, or more tax evasion, or other levels of government will reduce taxes if federal government increases them, or something). If no more taxes are being paid, then how can they reduce economic growth?
So it’s not just a lie, it’s a logical contradiction.
jazz,
Business is out for profit, and if investment leads to increased profit in a quantity and time frame consistent with the business plan, they’ll do it
This is the key point in your comment. The investment has to meet a necessary rate of return (at least the Cost of Capital). To the extent taxation reduces these returns, investment is discouraged.
Sigh. People, if you think about this concept a bit, it’s a pretty easy phenomenon to understand. Note that I don’t say it is correct, just that the causal mechanism by which it is supposed to work makes intuitive sense. People are simply responding to the incentives being presented to them – if you are going to find yourself taxed highly, why wouldn’t you try to find ways to avoid it? Simple enough. Marginal cost of taxation = marginal effort to avoid taxation. Now I think this argument falls apart if you change the tax regime with enough rigor, but that’s that.
Screams and yells about the scale being off are silly – if you blow up the scale and examine the pattern, there is indeed variation, but none of it endures and most of it falls within 15-23 or so. That’s the point – the long term trend is around 19% of GDP.
Am I the only one who thinks that it’s amazing that federal receipts are within a fairly narrow 6% band — 15% to 21% — regardless of whether the top marginal rate is 28% or 94%? While everyone argues over whether tax cuts or increases push tax receipts toward the high or low end of that range, it seems to me that the greater lesson from Hauser’s Law is that annual expenditures by the federal government totaling 25% of GDP is untenable. Why is nobody talking about that? Let’s get spending under 21% of GDP (and preferably lower) so that we know we could at least theoretically pay for that spending with current tax receipts, and then we can argue about how best to push tax receipts toward the higher end of that band. Until then, this debate strikes me as a clear example of missing the forest for the trees.
Changes to tax policy take time before their effects are seen, which completely discredits your theory. The problem isn’t revenue, it’s spending. In 2007, just prior to the recession, the government took in more revenue than at any time in history. How is that possible after two rounds of Bush tax cuts? The deficit came about due to spending, not revenue. We don’t need more taxes. Clinton raised taxes and ushered in a recesiion that started in mid-2000, just before he left office.
Brian,
Clinton raised taxes in 1993. That caused a recession 8 years later? And why did it generate rapid growth in the interim?
If you have tax cuts you get an average revenue to GDP ratio at 18.2 %
If you increase taxes you get an average revenue to GDP ratio of 19.3%
Hmm, that’s a miniscule difference. Only a 5-6% bigger government budget with huge increases in personal tax rates( some of which topped at 92%)???? That doesn’t make a lot of sense does it. I’m going with the tax cut route. Sounds way less tyrannical to me.
Well it seems a lot of people cite this analysis and its fundamentally flawed. Mike Kimel’s anlaysis seems valid on face value but if you uderstand tax history he is wrong.
Where is the 1997 tax cut??? Not there. Kimel attributes then entire 1990s to the 1993 tax hike and ignores the 1997 tax cut after which the lions share of the growth occurred.
And that isn’t the only one. Kimel seems to call the Tax Reform Act of 1969 a tax hike even though it lowered the maxim rate form 70% to 50%. Must think that the 10% ATM mattered more than a 20% drop in the top marginal rate. Well the truth is more obvious. Kimel needed to call that early 70s bump a tax hike so he decided to call the 1969 act a hike that somehow cut rates.
The 1986 tax reform act is missing.
And apparently “Read my Lips, I lied” in 1991 never happened.
Nope appellant since late 1940s there have only been only 6 tax acts. Who knew???
This analysis is ignorant junk. I cant believe people bought it.
Tom:
Welcome to AB. All first comments go to moderation to weed out spammers and junk mail. Ahhhh, you do know this post was from 2010?