Posted by
john on Thursday, November 20, 2008 11:46:30 AM
Today's economics lesson addresses a tax policy phenomenon known as Hauser's Law. Hauser's Law is named for San Francisco-based investment manager Kurt Hauser, whose research into tax policy uncovered a very weak correlation between changes in income tax rates, and changes in income tax revenues as a percentage of GDP. In other words, even if you raise income tax rates substantially, it would be a mistake to expect income tax revenues, as a percentage of GDP, to increase meaningfully, if at all. Conversely, by lowering income tax rates, one should not expect that income tax revenues, as a percentage of GDP, would decline.
What's our takeaway here, you ask? Achieving the goal of increasing income tax revenues is, for all practical purposes, a function of increasing GDP, not increasing tax rates. Thus, in order to fatten government coffers to achieve fiscal goals such as deficit reduction, or building out a "social safety net", the solution is growing GDP, not raising tax rates. How do you grow GDP? Incentives. Provide incentives for the hardworking, innovative, and frugal to direct their considerable energies (and capital) toward economic best uses.
So ask yourself, does a particular policy provide such incentives? Does it unleash "animal spirits", or cage them? What do you think would be the effect on GDP growth of increasing taxes on income (aka, work), or throwing billions at Detroit? Hauser's Law, I think, explains it all.