View Mobile Site

Ask the Expert

Signal Photos


Increasing taxes won’t rescue economy

It's Your Money

Posted: September 17, 2008 8:25 p.m.
Updated: November 19, 2008 5:00 a.m.

With the presidential election approaching, we find one candidate wanting to redistribute the wealth from the rich to the poor by raising taxes on the “rich,” with the other candidate wanting to lower taxes across the board. As you may have surmised, I do have more financially conservative leanings. I did vote for George Bush and now feel betrayed by his spendthrift policies.

Let’s take a look at the results of an interesting study on taxation in general:  Hauser’s Law or “you can’t soak the rich.”

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. For years, efforts have been made to identify the effect that changing tax policies have had on the economy and tax revenues. Most of those efforts have been highly speculative and contentious. Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears?

Hauser uncovered the means to answer these questions definitively. In a column in the Wall Street Journal back in 1993, he stated, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of Gross Domestic Product.” This is now called “Hauser’s Law.”  Hauser has since updated his time line through 2007 with the same results. He presents a graph with the vertical axis being marginal tax rates and tax revenues as a percentage of the GDP. Horizontal axis is time between 1950 and 2007. We see marginal tax rates declining significantly then rising again from the 1990s to now. We see tax revenues as percentage of GDP remaining flat through that entire time period from 1950 through 2007.

Given that GDP is the sum total of all goods and services produced in the United States for one year, a rising GDP means that our nation is getting more prosperous with greater personal incomes being realized, hence more taxes being paid.

We can draw some very interesting conclusions from Hauser’s study:
n Tax revenue raised is independent of marginal tax rates and changes in marginal tax rates. Looking back over 57 years (1950 through 2007) marginal tax rates ranged from a high of 91 percent to the current 35 percent (President Reagan did get the marginal tax rate lowered temporarily to 28 percent in the 1980s, bless his heart). With the significant highest marginal tax rates varying so greatly, tax revenues as a percentage of GDP barely budged.
n Tax revenue is directly proportional to GDP over the same 57 year period at 19.5 percent. So if we want to increase tax revenue, all we have to do is increase our GDP. In other words, have our citizens become more prosperous.
What happens if we instead raise tax rates? David Rason, head of research at H.C. Wainwright & Co. Economics, Inc., said: “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 revenues.

That’s a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice ... Because Mr. Hauser’s horizontal straight line is simple fact, it is ultimately very compelling. It seems likely that the tax system could maintain a 19.5 percent yield with a top tax bracket even lower than 35 percent.”

What makes Hauser’s Law work?  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.”

So much for increasing tax revenues by increasing marginal tax rates.

If what certain politicians are saying is true, we should see that the percent of total tax revenues paid by the top 1 percent of U.S. taxpayers has declined over the years as a result of “top tier” beneficial tax legislation. From the Tax Foundation, IRS we read: “The top 1 percent of US taxpayers is responsible for the payment of 40 percent of all federal income tax. Ten years ago, the top 1 percent of taxpayers paid 35 percent of all federal income tax. Twenty years ago, the top 1 percent of taxpayers paid 28 percent of all federal income tax.”

So who has benefited more from recent tax legislation? I wouldn’t say the rich have, would you?

D. Frank Norton is a money manager and financial planner in Santa Clarita. His column represents his own views, and not necessarily those of The Signal. “It’s Your Money” appears Thursdays and rotates between a handful of the Santa Clarita Valley’s financial professionals.


Most Popular Articles

There are no articles at this time.
Commenting not available.
Commenting is not available.


Powered By
Morris Technology
Please wait ...