Same Oil, New Bottles

From WSJ:

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.

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.

To answer the rhetoric question of why Hauser’s “finding” as not been spread more widely: because it’s pure rubbish. Has tax revenue stayed around 19.5% of GDP over the postwar period? Yes. The real question is why. Simply put, it has nothing to with tax increases decreasing revenue. It has everything to do with the higher tax periods also being the periods of higher economic growth. Sounds illogical on the surface, but the numbers bear it out: higher tax rates in the past few decades are connected with economic growth. Carter cut taxes in 1978, economy gets worse. Reagan cuts taxes in 1981, which is followed by another recessionary period. Reagan raises taxes in 1982, and the economy grows rapidly in the aftermath. Ditto for Clinton and the 1993 increases.

The article then goes on to claim that:

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.

The small problem with the statement is that it’s measurably false. If increasing tax rates decreases revenue, than decreasing tax rates should increase revenue. This has never happened. The two most discussed and most analyzed tax cuts ever (1981 and 2001) both resulted in declining revenues. The downward revenue trend from the 1981 was later corrected by TEFRA, but the effect on revenues in the short time of the full cut was clear.

More research needs to be done on the counter-intuitive effects of the tax increases on the economy, but “Hauser’s Law”, which is should be more aptly called “Laffer Curve 2.0”, despite the the columnist’s claim to the contrary, does not add up.