The WSJ ran an opinion piece Tuesday by David Ranson, head of research at H.C. Wainwright & Co. Economics, on what he calls “Hauser’s Law”–the observation apparently made by “San Francisco investment economist Kurt Hauser” 15 years ago that:
No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.
The article is accompanied by a chart that shows both the top individual income tax bracket, which has gone from above 90% in the 1950s to 35% today, and federal tax revenue as a percentage of GDP. And that federal tax revenue line does indeed look awfully flat.
But the tax revenue line isn’t really flat; it just looks that way in comparison with the dramatic changes in income tax rates between the 1950s and the mid-1980s. When you chart it by itself, and separate out personal income taxes from other federal tax receipts, a few mountains and valleys emerge:
GRAPHIC BY FEILDING CAGE/TIME.COM
(More after the break.)
There are several lessons I can draw from this chart. One is that, as is clear from the sharply rising line in the early 1940s, it is certainly possible to dramatically increase the federal government’s take by increasing income taxes. The second is that Hauser appears to be right about the super-high tax rates faced by top earners until the early 1980s: They didn’t bring in piles more revenue than the much lower top rates that have prevailed since. It’s entirely possible that they brought in less revenue than lower rates would have.
Since Ronald Reagan’s tax-cutting successes in the 1980s, though, the debate has shifted. Politicians don’t argue about raising the top rate back to 70% or 90%. They argue about whether it should be 28% or 35% or 39.6%. And within that narrowish band there seems to be more evidence in the data for the contention that higher rates bring in more revenue than there is for Hauser’s purported law.
In Reagan’s first year in office, 1981, personal income tax receipts amounted to 9.4% of GDP. By the time his tax cuts were fully in effect and morning in America had arrived in 1984, receipts were down to 7.8% of GDP; after the tax reform of 1986, which lowered the top marginal rate to 28% but raised lots of other taxes (such as the capital gains tax), they held at just over 8% of GDP for a few years only to fall back into the high sevens during the slowdown of the early 1990s. During the Clinton years, which saw a substantial hike in the top marginal rate (to 39.6%) in 1993 and a capital gains tax cut (to 20%) in 1997, the percentage steadily rose, reaching an all-time high of 10.3% of GDP in 2000. That share began falling with the stock market in 2001 and fell further after the tax cuts of 2001 and 2003. In 2004 it hit 7%, its lowest level since the early 1950s. Then it began rising again as the economy and financial markets recovered. I would bet that it will fall this year and maybe next.
The data are noisy (and getting noisier), making it hard to draw firm conclusions. But take a look at the numbers from 2000 and 2007. The first was the peak year of a business cycle, the second is likely to be the peak of another cycle. So they offer an apples-to-apples, or at least apples-to-quinces, comparison. In 2000, personal income tax receipts amounted to 10.3% of GDP; in 2007 they added up to 8.5%. That 1.8% difference may not sound like a lot. But guess what the average federal deficit of the Bush era has been: 1.86% of GDP.
Now I realize there’s another whole set of arguments about whether the Bush tax cuts stimulated GDP growth enough to make up for that reduction in tax receipts as a share of GDP. (My take: it’s highly unlikely.) But what’s at issue here is a purported “law” of tax economics that, while it holds up reasonably well as a broad-brush description of the postwar American experience–and a warning against trying to go back to 90% tax rates–doesn’t seem to be much help in answering the political questions we actually face today. Such as: Should we let the Bush tax cuts expire or not?
I apologize to regular readers who may be sick of me harping on this stuff. It’s just that I’m uncertain about most things: I don’t know, for example, if the top income tax rate should be 28% or 35% or 39.6% (I’m pretty sure it shouldn’t be 100% or 0%). So when I come across one of those few issues where I’m certain that I’m right, or at least that others are demonstrably wrong, I tend to harp on it obsessively. I did this with stock-option accounting at Fortune in the late ’90s and early ’00s (and my side won that argument); nowadays what gets me sputtering is the claim that lowering tax rates will deliver the same or higher revenues than leaving rates alone or raising them would.
There is obviously some tax rate at which this is true; with personal income taxes in the U.S. it seems to have been true at 90% and 70%. But I can’t find any indication in the data that it applies when you’re talking about rates in the thirties or lower. If you claim that cuts in personal income tax rates from current levels would pay for themselves, or that the 2001 and 2003 tax cuts paid for themselves, you are basing that claim on faith. The data are not with you.
What I find so maddening about this continued faith that tax cuts can deliver miracles is that there are big questions about taxation that we ought to be debating: Would it be a good idea to raise taxes on consumption while lowering them on income? Would we be better off if taxes and spending ate up a much-smaller share of GDP? Should we really tax capital income at a much lower rate than other income? Should we use the tax code to more aggressively combat income inequality, or should we flatten and simplify it?
You can’t even begin to have an intelligent debate about such matters with people who fall back on the mantra that tax cuts will increase revenue. And here’s the thing: Serious, wonky people in Washington think tanks, college campuses, and even Republican administrations–no matter how fervently they believe that tax cuts are a good idea–do not make that claim. But there’s this weird conspiracy of Republican candidates and elected officials, WSJ editorialistas, Club for Growthers, and a few Wall Streeters who work overtime to keep the myth alive. And I can’t seem to help rising to the bait every time every time they do so.
One last thing: Sorry about using a different denominator (personal income, national income, and GDP) in each of the tax charts I’ve done over the past couple of days. It’s just a matter of which tables I got the data from; I don’t think it affects the trajectory of the charts in any significant way.
