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  • The Futility of Tax Hikes in Pictures

    In light of the impending Obama Tax Hikes, Mercatus Center senior research fellow Veronique de Rugy created the chart to the right illustrating Hauser’s Law which Standford University professor Kurt Hauser recapped in this weekend’s Wall Street Journal:

    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.”

    Ms. de Rugy’s chart comparing the top marginal personal income tax rates to tax revenues as a percentage of GDP over the past 80 years is very similar to one we produced earlier this year here. And here is another chart that tells the same story but with the corporate tax:

    Professor Hauser explains the behavior behind the data shown in these charts:

    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.

    Why? Higher taxes discourage the “animal spirits” of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.

    Our federal deficit problem can not be solved by raising taxes. The expected revenues will never materialize. Cutting spending, shrinking government, and allowing for more economic growth is the only way we can climb out of the hole we are in.

    Posted in Economics [slideshow_deploy]

    20 Responses to The Futility of Tax Hikes in Pictures

    1. Kevin H, College Par says:

      What an incredibly misguided and, frankly, ridiculous post. You state the the deficit problem can not be solved by raising taxes. Has to be one of the worst statements you have made. I thought they had economists at Heritage?

      You can make all the misguided statements you want, but hard to argue against fact and numbers. The tax rates next year will revert back to what they were under Clinton – the last time we have had a projected balanced budget. For 4 straight years in early 90s, we had a balanced budget (keep in mind no republicans voted for the omnibus that dems used to balance the budget) and look what happened – greatest economic growth in history of country, greatest increase in jobs in history of our country, everything was booming. Then along comes the Repubs and their policies and look what happened.

      I know it's your job and the job of repubs to fight for the very wealthy that pay you to lobby, but this post is just silly.

    2. Craig, SO, NJ says:

      Stop giving Clinton credit for the Dot Com bubble, then blaming Republicans for it bursting. That would have happened no matter who was in charge.

    3. Scott M, Bloomington says:

      I wonder what is happening to GDP over this same stretch of time? It would be interesting to plot the GDP with the axis in billions or trillions on the right, so that one could see the effect of the top marginal rate on overall GDP. I'd expect there to be either no correlation or an anti-correlation.

    4. Gary P , Delmont, PA says:

      It is interesting that Dems like Kevin H Just don’t acknowledge facts and always fall back on cliches like Republicans fight for the ver wealthy. They just don’t get it.

    5. Cincinnati OH says:

      The left continues blame Bush for things happening today but want to give Clinton credit for the boom that occurred under his watch. Liberals also never factor the negative economic impact that 911 and Katrina had on the economy during Bush's term. So far, the only disaster the Obama administration has had to deal with is the Obama administration.

      Clinton's boom was the result of 12 years of Reagan policy (8 years w/ Reagan and 4 years w/ Bush) and Gingrich holding his feet to the fire. Clinton only deserves credit for recognizing a good deal and not screwing it up (Hillary tried but Gingrich stopped her). Changes in policy that effect businesses take years and often decades to "trickle" into the economy. Programs that impact society (welfare, medicaid, eduction, etc) take generations. Hence the gradual degradation of the family unit since the passage of Johnson's wondrous social programs.

      The first rule of holes states that when you find yourself in one, stop digging. The second rule of holes states that it always take longer to climb out of a hole than it did to fall in. Therefore, nothing we do today will help us tomorrow. Since the SOBs in Washington can't think past the next election cycle the US is in serious trouble. Our country is in need for real leadership. Thankfully, history shows that when America needs leadership the most it is available.

    6. TJS, FL says:

      Hauser's Law looks pretty good. I second the notion of plotting GDP to look for correlation of tax rate to economic growth rate.

      We need to cut the federal government spending back to 19% of GDP or less, to match revenues. Right now it is 25% of GDP and growing. The federal government is borrowing almost half its "budget" (we no longer have a budget).

      We now have Europe-sized government, and will have high unemployment and very slow growth until we chop government back down to size. I recommend cutting all government spending and regulation in half. That would double the income of the private sector.

      Just as damaging to the economy is the amount of regulation, now about 10% of GDP at the federal level, and skyrocketing because of health "reform", FinReg, EPA CO2 rules, etc. State and local regulation total another 10% of GDP.

      Government spending and regulation total about 63% of our economy. The situation is plainly insane.

    7. Dave says:

      comparing the tax rate in the 90's under Clinton, and republican congress mainly, to the economic expansion doesn't make much sense to me. The numbers show no more percent of revenue regardless. The main difference I see is the dot.com facticious value that eventually turned into a bubble burst. The value was never really there, although it showed it on paper, so using the numbers from then sound good but were highly inflated due to the overvalue on paper. Reality has proved otherwise as was shown shortly after Clinton left office.

    8. TiltedTalkDomagoy - says:

      Kevin H needs to stop drinking the Cool Aid. First off we NEVER had a balanced budget (this is according to economists at the Brookings Institution). They clearly point out how much surplus social security, medicare and veterans affairs money was taken to create this fake surplus. Once you take that into account, we NEVER had a surplus. We had a deficit every single year. Furthermore, it was Rep. John Kasich who wrote those budgets, not Clinton. Clinton wanted more spending. And the current mess we're in is because of the stupid "affordable housing" idea that was pushed by both parties, but far more by Dems.

      Your line of thinking would lead one to think that once the USC Trojans football team starts its winning ways again, the economy will boom. As USC had 6-5 records, we were in the recession after the dot com bubble burst. We had 50+ months of positive job growth (a record) while USC was winning national championships. Then, when USC football started to decline, the housing bubble burst and the economy tanked. Your logic would lead you to blame USC football for our woes. I take it you weren't fighting tooth and nail as the sanctions because of Reggie Bush (great for you, another Bush to blame our woes which means you don't even have to change any of your slogans, or bumper stickers or talking points) were coming down on USC.

    9. John D. Mathews, Hor says:

      This is so obvious to all but the morons in the democratic party. Reducing the marginal tax rates reduces unemployment and increases the number of taxpayers thereby increasing the total revenue collected by the government. Has any democrat ever taken a ciourse in economics??? Hopefully this is the last time we elect a community organizer to any position of responsibility.

    10. Homer N. Jethro; Gra says:

      Kevin you seem to view the economy as a line of men who march in step. In reality the economy is more like a long freight train. The engine and other cars may bet several hundred yards ahead before the caboose starts to move. Please review your notes on sectors in the economy (some slow and some advance)and "bubbles" in the economy. This may help you understand why Bush tax cuts helped stimulate the economy during the Clinton years.

    11. Houston, TX says:

      I am so tired of everybody blaming Bush. He is not my friend, nor his family or anybody in his circle are my friends. I am just a young woman who is sick and tired of being lied to by this administration.

      I am tired of sitting here while I witness the destruction from within of one of the greatest countries in history. We will be a subject in a History class in the future and they will read about us, just as we study the Roman Empire and its falling. Great Britain, France, Persia, Egypt, the Incas, and Mayas. This just because they don't teach History in schools anymore. I was told by a principal that History was not part of TAAS (14 years ago), and I should not waste time teaching my fifth grade students History. I told her to stay out of my classroom, I went to another school the following year.

      As long as the handouts exist and teachers don't teach, because of the unions, there is not hope for this country.

      Americans need to be proud again of being Americans, they need to learn history and obviously economy. They need to care about politics and international affairs. Americans must get their heads out of the sand, and start getting informed about everything this administration is doing.

      I have been told by my friends that I am not politically correct, that I am too agressive, that they would NOT get dirty as libs do. They will not fight like them. I cannot believe it. I just cannot believe that people are sooo afraid to speak up that they will just take it.

      The impostor in the White House and all his thieves must go. Why there is not more information about what the Supreme Court is doing regarding the president?

      Americans cannot ignore the problem anymore. Unfortunately, the generation of the brave and the free are too old to fight. Unfortunately, the bad guys are now fighting harder knowing there is NOBODY stopping them.

      Maybe pelosi and hillary gatthered enough information on Congressmen/women to blackmale them. Maybe that's why they are still in power. And Americans?? They just are nice and polite, letting TSA agents touch their children ……

    12. Larry, Calif. says:

      I note that conspicuously absent from Kevin H's comments is any analysis whatever regarding the author's fundamental premise, and the data over many decades which appears to support it. I doubt that was a mere oversight. More likely, as with most liberals, he simply hasn't the foggiest idea what the author is saying.

    13. Don, New York City says:

      Dear Kevin H. You have to understand that Clinton never balanced a budget. Facing a possible one term presidency after the '94 election, he embarked on a program to juice the economy to help his reelection. He set in motion the expansion of Fannie Mae and Freddie Mac at a better than 22% compounded rate of growth. If you add all Fannie and Freddie debt to the Treasury debt when Clinton entered office, back out the positive Social Security receipts for those years and you will see that he expanded the Federal debt about 50%. This was more than twice the growth of GDP during his terms. He knew easy mortgages were the surest way to expand near term GDP. I am sure Bob Rubin assured him that Goldman Sachs would be there to assist him. As to the long term ramifications? Who cares. They don't call him "Slick Willie" for nothing. The numbers are public. Please look them up. We need everyone to turn away from politicians who squander tax-payer money to get votes.

    14. Kevin H, College Par says:

      Homer – it's these comments that show how little some fo the far right knows. You say the Bush tax cuts helped the Clinton economy. Could be the worst statement i've ever seen on ths blog. It may be helpful to learn that Bush was in office after Clinton. More nonesense from the right, but not surpised people believe it.

      Tilted and all the others who say Clinton and Dems never balanced the budget. Time for you to actually look at the numbers and learn history and stop buying all that is being fed to you from foxnews and glenn beckers. Heritage itself speaks of the suplus in at the end of the 90s. Go back and look at the Heritage pieces arguing from the 2001 and 2003 tax cuts. They all talk abotu havign this huge projected suplus, 6 trillion worth, and how cutting taxes would do not harm. How did that work out? There was absolutely 4 years os balanced budget after the Dems passed the 1993 omnibus bill. You may not believe it, but it is fact. Go and do the research. Not a single republcian voted for it, said it was a job killer, yet 4 striaght years of balanced budget and 22 million jobs were created under Clinton. 1 million under Bush and his lower tax rates – which would you say worked better?

      Amazing how some commentators just don't understand what is happeneing in congress. Saying the good guys don't have power to stop the good guys? What congress have you been watchign the last 12 months? Obviously not looking at the source for information (CSPAN), but instead looking to cable 'news'.

      The very same people who say stimulus is a failure. To say the stimulus is a failure is an absolute joke – not one single real economist would call it a failure.

      • nearablackhole says:

        The Hauser point is that increasing taxes very well may not result in increased revenue as expected/scored. This has to be taken into account when designing policy. A more reasoned approach would be to target taxes and expenditures to 19% GDP. Although there is no reason to plan to tax more than is needed, at this point we need to balance expenditures and revenues to get our credit and house in order.

    15. Tim Chappell Pittsbu says:

      The graph is very good, but if you could add a line depicting the rate of GDP Growth with a scale on the right hand side to the individual taxpayer graph it could tell the entire story on the current debate. Higher taxes do not bring in more overall revenue as a percent of GDP, but the do slow the rate of growth of GDP.

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