Posted by: Sanity Rules | May 28, 2008

An Inconvenient Truth: Increasing Taxes Doesn’t Increase Goverment Revenue.


I ran across an article written by David Ranson in the Wall Street Journal last week titled “You can’t soak the Rich”. I wanted to re-post it here, but don’t want to violate any copyright laws, I will just paraphrase in bold type and leave a link to the original article.

In short, Mr. Ranson wrote that 15 years ago Kurt Hauser published data about the Federal Tax System indicating that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.” Hauser’s data shows 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 re-distributive 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.

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.”

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.

Unfortunately, the mob mentality class that our current candidates pander to, cannot possibly appreciate this and I fear that our republic will soon disintegrate into economic chaos caused when the parasites overwhelm the host and bleed it to death.


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