Hauser's law

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In economics, Hauser's Law is a theory that states that in the United States, federal tax revenues will always be equal to approximately 19.5% of GDP, regardless of what the top marginal tax rate is. It is not a theory in the formal sense but a macroeconomic observation informed by over 40 years of data, and, per WSJ 080520, verified by the next 15 years of data (up to 2007); like Okun's Law rather than, say, Snell's Law in optics.

The theory was first suggested in 1993 by Kurt Hauser, a San Francisco investment economist, who wrote at the time, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP."

In a May 20, 2008 editorial by David Ranson, the Wall St. Journal published a graph showing that even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had indeed constantly remained at about 19.5% of GDP. There may be some mild structure to the curve, slightly growing to the right.

The editorial went on to say, "His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues... Like science, economics advances as verifiable patterns are recognized and codified... 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... As Mr. Hauser said: 'Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.' Putting it a different way, capital migrates away from regimes in which it is treated harshly, and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax-intolerant. The economics of taxation will be moribund until economists accept and explain Hauser's Law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge." ^[1]

Zubin Jelveh, writing for the website of Condé Nast Portfolio, criticized the Wall Street Journal editorial for failing to adequately separate tax revenues from individuals from other types of tax revenues, such as corporate tax revenues and revenues from social insurance programs like Social Security.Jelveh argued that when these are separated, the percentage of GDP from tax revenues on individuals has been relatively stable but has increased somewhat, the percentage from corporate tax revenues has declined dramatically, and the percentage from tax revenues of social insurance programs has increased significantly.

Jelveh's critique is not aimed at Hauser's Law itself, but at editorialist David Ranson's assertion that the "Law" supports supply-side assertions that selectively raising taxes on the rich will be counter-productive.