Sunday, May 25, 2008

Taxing the rich has no effect on revenues?

One of the ongoing debates in American politics is whether the rich pay their fair share. Republicans tend towards supply-side economics which says by freeing up the money of the rich, you ensure they have an incentive to reinvest in the economy which creates jobs for poor, middle class, and rich. Democrats tend to go the other way by saying by taxing the rich you free up additional money for the government to use in helping the poor. An interesting article on WSJ.Com claims that both sides are missing the point and no matter what the tax rate, the amount of money gathered by the IRS has stayed at about the same level.

Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated...The data show 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 redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice.
What does this mean for the next President? Perhaps that they need to rethink the standard politics of tax policy.

Edited 4:22 PM on 5/26 to correct spelling of "IRS" as per Ron's note.


quizwedge said...

Go flat tax!

Sean said...

i'm reading a book right now where the author shows that despite the west's efforts to create equality among people, the amount of equality has actually decreased. it's quite interesting. i'm not sure what the solution is, but i tend to think that the more money rich people have, the more they'll spend and the more the non-rich will be able to get. but then i'm just a narrow sighted elitist republican.

Nomad said...

How does the author define "equality"? Wealth? Opportunity? Hierachical structures? I am interested to see how she bases the argument.