Reason #31,988 to lower taxes: Tax Revenues = 19% of GDP, Regardless of Tax Rates

from theblogprof by The blogprof


Reason #31,988 to lower taxes: Tax Revenues = 19% of GDP, Regardless of Tax Rates: "A graphic via American Thinker:

In that case, it makes the most sense to let consumers keep as much of their money as possible to keep the GDP high since consumer spending accounts for about 70% of GDP. From the Wall Street Journal (via taxprof via Instapundit): There's No Escaping Hauser's Law

Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.

Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.

Add to that this: Each $1 in Higher Taxes Results in $1.17 of New Spending

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.'

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.

What I see as the biggest problem with Democrat tax policy is they take an errant view on tax increases by assuming everything is static. That is, that a tax increase on a group of people will not change anything else, including behavior. Of course, it does. Jacking up taxes on the rich by $1 billion won't net $1 billion, but rather less than that, and it has a negative impact on the GDP.

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