Tuesday, May 20, 2008

Inconvenient Truth:Tax Rate Hikes Lower Revenue

The data show that the tax yield (revenues divided by GDP) has been independent of marginal tax rates from 1950 to 2007 (see chart above), 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. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.

"You Can't Soak the Rich" from today's WSJ

4 Comments:

At 5/20/2008 8:30 PM, Blogger Andy said...

Misleading.

 
At 5/20/2008 9:27 PM, Anonymous mr econotarian said...

this is a bit "bs" because the top income tax rate is not representative of per capita tax rates (including payroll taxes and corporate taxes, negative EITC, etc.) It also ignores the tremendous rise in state and local taxes and revenues over that time period. Plus we know the income tax system is non-linear and perverse (mortgage interest deduction etc.)

It would be better to chart per capita tax rates due to all government taxing versus per capita revenue over that time.

 
At 5/20/2008 10:07 PM, Blogger Ironman said...

Andy: Only somewhat misleading - Zubin Jelvah correctly noted that the mixing of top marginal tax rates and total tax collections from all sources is misleading. However, he didn't recognize that his chart showing the percentage of GDP represented by tax collections just from personal income taxes does in fact validate "Hauser's law". Here's a more detailed discussion illustrating the point.

Mr. Econotarian: By my back of the envelope estimates, all those distortions you refer to in the tax code result in a 31.7% loss of the potential tax collection that the government might realize if they didn't exist. Bear in mind however that people would alter their behavior accordingly if they though the government would actually go after those deduction driven distortions to collect more taxes.

 
At 5/21/2008 12:29 AM, Anonymous Anonymous said...

Andy: Thanks for the link. It was hilarious. By my eye, as well as a poster there, the fool bolstered Hauser's Law rather than detract from it.

 

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