Hauser's Law
Encyclopedia
Hauser's law is the proposition that, in the United States
, federal tax revenues since World War II have always been approximately equal to 19.5% of GDP, regardless of wide fluctuations in the marginal tax rate.
averaged 17.9%, with a range from 14.4% to 20.9%.
Hauser cited Arthur Laffer
's concept of the Laffer curve
in his original article. While the two concepts are similar, Hauser's law was put forward as an empirical
observation whereas the Laffer curve
was thought of theoretically
.
In a May 20, 2008 editorial by David Ranson, the Wall St. Journal published a graph showing that even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had remained close to 19.5% of GDP. The editorial went on to say, "The economics of taxation will be moribund until economists accept and explain Hauser's law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge."
However, 2009 tax collections, at 15% of GDP, were the lowest level of the past 50 years and 4.5 percentage points lower than Hauser's law suggests. The Heritage Foundation has stated that the recent world economic recession
pushed receipts to a level significantly below the historical average.
trust fund, revenue that is not earmarked for pension checks has actually fallen over the last 50 years. Jelveh points out that the main reason for this decline is a dramatic decline in corporate tax revenues, from more than 5% of GDP to less than 2%. Jelveh uses these facts to critique editorialist David Ranson's use of Hauser's Law. Ranson believes that because tax revenues remain constant over time, raising tax rates on the rich will be ineffective at raising revenue.
Forbes.com columnist Daniel J. Mitchell
has argued that Hauser's Law has been observed due to the fact that the U.S. does not have a national sales tax
and instead collects taxes in a federalist
system, in contrast to many other Western nations. He also stated that the U.S. has an inherently more progressive system as well. Thus, he concluded that the Law represents a socio-political policy trend rather than a true economic law and that the trend could change rapidly if value-added taxes are imposed at the federal level.
Economist Mike Kimel, writing for the Angry Bear website, writes that Hauser's Law is misleading as it sweeps large differences under the table. He states that tax revenue is higher in the years following a tax increase and lower in the years following a tax cut. He defines the time periods 1951-1953, 1967-1968, and 1991-2001 as "tax hike eras", and 1953-1967, 1969-1991, 2001-2010 as "tax cut eras", and argues that tax revenues increase in "tax hike eras" and that tax cuts do not lead to higher revenue.
Journalist Jonathan Chait
has written in The New Republic
that "swings are fairly dramatic" through U.S. history for tax receipts as a percent of GDP. He stated that the George H. W. Bush and Bill Clinton administration
s received "massive" extra revenues as the result of tax increases while the George W. Bush administration tax cuts lead to a "massive" drop in revenues. He labeled the idea of static, flat revenues as a "scam".
The difference between the high point of the range (around 20%) and the low point of the range (around 15%) would have been sufficient to cover the entire federal deficit in all but 11 years from 1946 to 2010.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, federal tax revenues since World War II have always been approximately equal to 19.5% of GDP, regardless of wide fluctuations in the marginal tax rate.
Historic tax revenues
From fiscal year 1946 to fiscal year 2007, federal tax receipts as a percentage of gross domestic productGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
averaged 17.9%, with a range from 14.4% to 20.9%.
History of Hauser's law
The proposition was first put forward in 1993 by William Kurt Hauser, a San Francisco investment economist, who wrote, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP."Hauser cited Arthur Laffer
Arthur Laffer
Arthur Betz Laffer is an American economist who first gained prominence during the Reagan administration as a member of Reagan's Economic Policy Advisory Board . Laffer is best known for the Laffer curve, an illustration of the theory that there exists some tax rate between 0% and 100% that will...
's concept of the Laffer curve
Laffer curve
In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
in his original article. While the two concepts are similar, Hauser's law was put forward as an empirical
Empirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....
observation whereas the Laffer curve
Laffer curve
In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
was thought of theoretically
Theoretically
Theoretically is an album by Tim Berne and Bill Frisell which was released on the Empire label in 1984. It features four compositions by Berne, two by Frisell, and one joint composition.-Reception:...
.
In a May 20, 2008 editorial by David Ranson, the Wall St. Journal published a graph showing that even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had remained close to 19.5% of GDP. The editorial went on to say, "The economics of taxation will be moribund until economists accept and explain Hauser's law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge."
However, 2009 tax collections, at 15% of GDP, were the lowest level of the past 50 years and 4.5 percentage points lower than Hauser's law suggests. The Heritage Foundation has stated that the recent world economic recession
Late 2000s recession
The late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...
pushed receipts to a level significantly below the historical average.
Commentary and criticism
Zubin Jelveh, writing for Portfolio.com, criticized the Wall Street Journal editorial for failing to adequately separate social insurance taxes from other types of tax revenues (such as income tax and corporate tax revenue). Because social insurance taxes go directly into the Social SecuritySocial Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
trust fund, revenue that is not earmarked for pension checks has actually fallen over the last 50 years. Jelveh points out that the main reason for this decline is a dramatic decline in corporate tax revenues, from more than 5% of GDP to less than 2%. Jelveh uses these facts to critique editorialist David Ranson's use of Hauser's Law. Ranson believes that because tax revenues remain constant over time, raising tax rates on the rich will be ineffective at raising revenue.
Forbes.com columnist Daniel J. Mitchell
Daniel J. Mitchell
Daniel J. "Dan" Mitchell is a libertarian economist, senior fellow at the Cato Institute. He is a proponent of the flat tax and tax competition, financial privacy, and fiscal sovereignty-Personal life:...
has argued that Hauser's Law has been observed due to the fact that the U.S. does not have a national sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
and instead collects taxes in a federalist
Federalist
The term federalist describes several political beliefs around the world. Also, it may refer to the concept of federalism or the type of government called a federation...
system, in contrast to many other Western nations. He also stated that the U.S. has an inherently more progressive system as well. Thus, he concluded that the Law represents a socio-political policy trend rather than a true economic law and that the trend could change rapidly if value-added taxes are imposed at the federal level.
Economist Mike Kimel, writing for the Angry Bear website, writes that Hauser's Law is misleading as it sweeps large differences under the table. He states that tax revenue is higher in the years following a tax increase and lower in the years following a tax cut. He defines the time periods 1951-1953, 1967-1968, and 1991-2001 as "tax hike eras", and 1953-1967, 1969-1991, 2001-2010 as "tax cut eras", and argues that tax revenues increase in "tax hike eras" and that tax cuts do not lead to higher revenue.
Journalist Jonathan Chait
Jonathan Chait
Jonathan Chait is a writer for New York magazine. He was previously a senior editor at The New Republic and a former assistant editor of The American Prospect. He also writes a periodic column in the Los Angeles Times.- Personal life :...
has written in The New Republic
The New Republic
The magazine has also published two articles concerning income inequality, largely criticizing conservative economists for their attempts to deny the existence or negative effect increasing income inequality is having on the United States...
that "swings are fairly dramatic" through U.S. history for tax receipts as a percent of GDP. He stated that the George H. W. Bush and Bill Clinton administration
Presidency of Bill Clinton
The United States Presidency of Bill Clinton, also known as the Clinton Administration, was the executive branch of the federal government of the United States from January 20, 1993 to January 20, 2001. Clinton was the first Democratic president since Franklin D. Roosevelt to win a second full term...
s received "massive" extra revenues as the result of tax increases while the George W. Bush administration tax cuts lead to a "massive" drop in revenues. He labeled the idea of static, flat revenues as a "scam".
The difference between the high point of the range (around 20%) and the low point of the range (around 15%) would have been sufficient to cover the entire federal deficit in all but 11 years from 1946 to 2010.
See also
- Taxation history of the United StatesTaxation history of the United StatesThe history of taxation in the United States began when it was composed of colonies ruled by the British Empire, French Empire, and Spanish Empire. After independence from Europe the United States collected poll taxes, tariffs, and excise taxes...
- List of countries by tax revenue as percentage of GDP
- List of eponymous laws
- Laffer curveLaffer curveIn economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
See also
- List of countries by tax revenue as percentage of GDP
- List of eponymous laws
- National debt by U.S. presidential termsNational debt by U.S. presidential termsIn the United States, national debt is money borrowed by the federal government of the United States. Debt burden is usually measured as a ratio of public debt to gross domestic product; the U.S. debt/GDP ratio reached a maximum during World War II near the beginning of President Harry Truman's...