A reoccurring theme in many of my posts is that rich people pretty much can plan the amount they will pay in taxes. If income tax rates are too high, rich people have the option of lowering current taxable income while still accumulating wealth and living lavishly. An economist Kurt Huser shows that tax revenues collected as a percentage of GDP pretty much remains constant regardless of tax rates. What happens is that when tax rates are lower GDP grows at a faster rate, hence everyone wins.
What this means is that the worst thing Democrats could do for the average working American is roll back Bush's tax cuts.
Quote:
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. 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.
Although Hauser's Law sounds like a restatement of the Laffer Curve (and Mr. Hauser did cite Arthur Laffer in his original article), it has independent validity. Because Mr. Laffer's curve is a theoretical insight, theoreticians find it easy to quibble with. Test cases, where the economy responds to a tax change, always lend themselves to many alternative explanations. Conventional economists, despite immense publicity, have yet to swallow the Laffer Curve. When it is mentioned at all by critics, it is often as an object of scorn.
Because Mr. Hauser's horizontal straight line is a simple fact, it is ultimately far more compelling. It also presents a major opportunity. It seems likely that the tax system could maintain a 19.5% yield with a top bracket even lower than 35%.
What makes Hauser's Law work? For supply-siders there is no mystery. 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.
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http://online.wsj.com/article/SB1211...n_commentaries
If the folks in Washington would take note of the above graphic, perhaps they could learn to keep federal spending within the range of less than 20% of GDP. Given their unwillingness to do this, they have amassed a massive national debt.