NCPA - National Center for Policy Analysis

There's No Escaping Hauser's Law

December 1, 2010

The Obama administration's budget projections claim that raising taxes on the top 2 percent 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, says W. Kurt Hauser, chairman emeritus of the Hoover Institution at Stanford University.

  • Over the past six decades, tax revenues as a percentage of gross domestic product (GDP) have averaged just under 19 percent regardless of the top marginal personal income tax rate.
  • The top marginal rate has been as high as 92 percent (1952-1953) and as low as 28 percent (1988-1990).
  • Over this period there have been more than 30 major changes in the tax code.
  • Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19 percent 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.  Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs, says Hauser.

The target of the Obama tax hike is the top 2 percent of taxpayers, but the burden of the tax is likely to fall on the remaining 98 percent.  The top 2 percent of income earners do not live in a vacuum.  Employees and employers, providers and users, consumers and savers and investors are all interdependent.

The Obama administration and members of Congress should study the record on how the economy reacts to changes in the tax code, says Hauser.

Source: W. Kurt Hauser, "There's No Escaping Hauser's Law," Wall Street Journal, November 26, 2010.

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