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Hauser’s Law is Extremely Misleading

On November 29, 2010, in Uncategorized, by admin

A friend sent me a link to this Wall Street Journal opinion piece by W. Kurt Hauser. Who is he, you ask? Here’s what it says at the bottom of the article:

Mr. Hauser is chairman emeritus of the Hoover Institution at Stanford University and chairman of Wentworth, Hauser & Violich, a San Francisco investment management firm. He is the author of “Taxation and Economic Performance” (Hoover Press, 1996).

Before I go on, let me note that in this piece, Hauser masterfully demonstrates the Hoover Institution approach to data. The piece contains enough, er, material that I could write several posts on it. Maybe I will, but for now I want to focus on his key point. Here are the opening paragraphs of the essay modestly entitled “There’s No Escaping Hauser’s Law”:

Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this “Hauser’s Law.”

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

OK. So, Hauser’s point is clear – no matter what happens to taxes, the government only manages to collect about 19% of GDP. Presumably then, from a perspective of paying down debt, there’s no benefit to raising taxes and plenty of benefit to cutting taxes. (Later he goes on to argue that lower taxes = faster growth, which I’ve dispensed with in the past – latest example here. Still, if given time, I might come back and examine Hauser’s special way of reaching his conclusion. But that’s for another day.)

Now, they say a picture is worth a thousand words, so let me put up a graph. And for grins, let me embed a small table in that graph. The graph shows total federal receipts divided by GDP. However, it is color coded. In years when there is a cut in the top individual marginal tax rate, or when the most recent change in the top marginal tax rate was a tax cut rather than a tax hike, the area under the curve is colored gray. When there is a tax hike, or the most recent change was a tax hike, the same area is colored red. Here’s what it looks like:

Figure 1
Figure 1.
(If the figure appears incorrectly on your screen, click on it for a full screen shot.)

So there it is. There’s Hauser’s law. Notice the size of his narrow band – its width is over 5% of GDP! Now take a gander at the little table. In tax hike periods, the smallest amount collected was 18.3% of GDP. By contrast, the median collection in tax cut periods is 18.2%; in other words, in over half of the tax cut years, collections were less than the smallest amount ever brought in during the tax hike periods. Furthermore, both the median and average for the two series are a full percent of GDP apart. Hauser is essentially sweeping humongous differences under the table.

Think Hauser doesn’t know this? I don’t. He’s been staring at the data, and using it to make arguments for a very long time. He also writes extremely precisely. At no point does he make a false statement, but I for one reached all sorts of mis-impressions just from his opening paragraphs. Like I said, its a masterful example of the Hoover craft.

13 Responses to “Hauser’s Law is Extremely Misleading”

  1. [...] Hauser’s Law is Extremely MisleadingCross posted at the Presimetrics blog. [...]

  2. [...] This post was mentioned on Twitter by Carl Foster, comex. comex said: This is a fun post: http://www.presimetrics.com/blog/?p=241 [...]

  3. [...] examples include this look at the effect top federal marginal rates on various measures of growth, this look at the effect of top federal marginal rates on tax revenues, a different look at federal marginal rates and growth, and this look using state tax levels. [...]

  4. [...] interesting decomposition of the so-called Hauser’s Law, take a look at this write-up “Hauser’s Law is Extremely Misleading” by Mike Kimel at [...]

  5. [...] in the post, Sullivan goes on to inadvertently disrespect Hauser’s Law. Sullivan’s blog is not an “econ blog” but I think it has better economic [...]

  6. [...] in the post, Sullivan goes on to inadvertently disrespect Hauser’s Law. Sullivan’s blog is not an “econ blog” but I think it has better economic [...]

  7. Chad says:

    Hauser’s “law” cannot be a law because it is not applicable in the many other nations who collect more than 19% of GDP.

    Hauser’s law is in fact a manifestation of the following to phenomenon.

    1: Over the last five decades, we have generally cut income and corporate tax rates, and increased FICA rates. These have roughly cancelled.

    2: When we decrease marginal income tax rates, we often eliminate loopholes, or vice versa. Again, these partially cancel.

    Therefore, the cancellations prevent any large change being observed in our net tax income. There is nothing that indicates that we can’t increase tax revenues….we simply have to raise rates and cut loopholes without doing the opposite somewhere else in the tax code.

  8. [...] in the post, designer goes on to unknowingly substance Hauser’s Law. Sullivan’s journal is not an “econ blog” but I conceive it has meliorate scheme [...]

  9. [...] in the post, Sullivan goes on to inadvertently disrespect Hauser’s Law. Sullivan’s blog is not an “econ blog” but I think it has better economic [...]

  10. Jack E. Lope says:

    “tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate”

    Doesn’t this also mean that greater tax revenues will be accompanied by increased GDP?

    Raise taxes for prosperity!

  11. Visf says:

    The sampling data is wrong. Taxes were lowered in 1997.

  12. Mike Kimel says:

    Visf,

    One of the things that is truly humbling about this blog is the sheer number of people who know more about a given data set than the folks who generate that data. As is my usual practice, the data on top marginal tax rates came from the IRS, It is interesting that you manage to remember a cut in the top marginal tax rate (that is what the post is about) that the IRS failed to document both at the time and now. You won’t find any sane accountants who remember it either and 1997 wasn’t that long ago.

    My guess is that this command of the, er, “facts” makes you uniquely qualified to come up with a new and improved Hauser’s Law.

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