NCPA - National Center for Policy Analysis


May 4, 2009

President Obama has said that he will repeal or sunset many of the Bush tax-rate cuts for upper-income families and small businesses, yet, in the end, the new administration is really looking forward to higher, not lower, marginal tax rates, says Investor's Business Daily (IBD). 

Even though the tax provisions of the new law may relieve some economic suffering. The new tax law is just another form of deficit spending in disguise.  But this does not mean that tax policy is wholly unable to stimulate the economy, says IBD.  Obama would simply have to adopt a very different approach that is tragically unpalatable to most politicians: He would have to reduce tax rates and simplify the tax system. 

For example:

  • Budget deficits resulting from handouts are an economic painkiller, but without real stimulus they can never pay for themselves.
  • In contrast, under clearly defined conditions, reductions in tax rates can.
  • The basis for this is not merely supply-side ideology; it resides in a simple empirical relationship called Hauser's Law which says that no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of gross domestic product (GDP).

This checks out despite huge changes in marginal rates, the federal tax "yield" (revenues divided by GDP) has varied little, usually within the range of 17.5 percent to 20 percent, says IBD.  From 1952 to the present the top individual income-tax bracket has been brought down from 92 percent to the present 35 percent, and the bottom bracket from 22 percent to 10 percent.

Over the same period there has been a steady increase in the standard rate of payroll tax, from 3 percent to 15.3 percent, if you combine the employer's and the employee's contributions.

Source: David Ranson, "Obama Vowed To Bring Change, And Real Tax Cuts Would Qualify," Investor's Business Daily, April 29, 2009.


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