Because most philosophies that frown on reproduction don't survive.

Tuesday, May 20, 2008

Steady State Taxation

Today's WSJ has an article discussing a study dating back to 1993 by economist Kurt Hauser. Hauser compared the top income tax rate to total tax revenues as a percentage of the US GDP. The result: despite the fact that the top tax rate (which at least as of now accounts for the lion's share of tax revenues collected, since we have a highly progressive income tax system) has varied from 91% to 35% over the last sixty years, total tax revenues are always at about 19.5% of GDP. Looking at the graph, the lack of correlation is truly startling.

The article's conclusion is that raising the taxes on "the rich" is not nearly as effective in raising total tax receipt dollars as pursuing policies that result in increased GDP. For reference, the GDP (in 2000 inflation adjusted dollars) for the same period is this:


Anonymous said...

The question is, which way does the causation go? Did cutting the top tax rate result in economic growth, or did economic growth enable the government to cut the top tax rate? Which is related to the question of where the Laffer Curve peaks.

Is this a political Rohrshach test?

Darwin said...

Is this a political Rohrshach test?

Probably. :-)

I would tend to be suspicious of the "they cut the rate because the GDP was going up" theory simply because it seems unlikely to me that the big tax rate cuts in the mid 60s and mid 80s were the result of congress thinking, "You know, we're getting more tax revenue than we need. We should give some back."

But that doesn't necessarily prove, especially to the skeptical, that cutting the rate resulted in the GDP growth.

One could also theorize that somehow 20% of GDP is the amount of taxation that American culture will bear, and that any attempt to raise rates to make it more than that results in people changing their behaviors to reduce the amount of taxes they owe. In that sense, the growth of GDP might be independant of the tax rate, but the total tax take would always be around the same percentage of GDP.

Anonymous said...

Would it surprise you to learn there is more here than is being let on? Highest marginal rate has some interest admittedly, but we don't know much unless we consider how many are in a given pool. This would be so bad if we always maintained 5 tax brackets, but there have been times we've only had 4 tax brackets. So in some circumstances, the pool was significantly increased by combining two brackets. For more fun with numbers, consider that the amount of income has not been constant at which the top marginal rate kicked in. A time series going back to 1913 is available here:

Anonymous said...

The data shows that increasing taxes does not HURT the economy as well as cutting taxes does not HELP the economy. It is then clear that tax promises are a political tool - do you pander to teh poor (via redistribution of wealth and taxing the rich)? Families (tax breaks for kids)? Rich/big buisness (lower tax rates)? etc... Tax philosphy shows a politicians true colours.

BTW... Vote Tory