Tax Revenues 15-20% of GDP, Regardless of Tax Increases or Cuts

December 1, 2011

Far-flung Fancies is talking about something I had never heard of until recently: “Hauser’s Law”.

As Mr. Hauser explains,

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). . . .

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.

The narrow band he refers to ranges roughly from 15 to 20% at the extremes (usually much narrower), as you can see for yourself in this table (historical, “Federal Government—Receipts and Outlays”, linked here) and this one (more recent years, “469 – Federal Budget—Receipts and Outlays”, linked here).  American Thinker has a beautifully illustrative graph of these data:

I think this is huge; I can’t believe I haven’t heard people talking about this more.  I wish I had known about this in conversations earlier this year about raising taxes.

Hat tip to Tax Prof Blog.

6 Responses to “Tax Revenues 15-20% of GDP, Regardless of Tax Increases or Cuts”

  1. Tevyeh Says:

    This happened, then this happened. Don’t get too excited over Mr. Hauser’s work; the degree of analytical rigor he displays is worthy of

    I’ve got a huge exam this Saturday; if you want, I can get more specific afterwards.

  2. If you’re referring to a larger body of “work”, I should clarify that I am totally unfamiliar with Mr. Hauser’s work more generally. But I feel pretty comfortable with what I said about the narrow factual claim that is the core of that WSJ piece: I think this is huge, and I can’t believe I haven’t heard people talking about this more.

    Certainly your excellent puncturings of various arguments that have been advanced in comments on this blog in the past (including links to Thinkprogress) come to mind, but I think this is different, even the opposite, in a very important respect:

    In those cases, someone finds a crude correlation between variable X and variable Y; he says, Therefore, if we change X in this way, surely it will cause Y to change in this way.

    In this case, someone has found that regardless of wild fluctuations in variable X (or, actually, very many variables), Y (well, the ratio of Y to Z) has stayed more or less constant for the better part of a century (since World War II). Unlike in the other cases, no one is oversimplifying by focusing on variable X and ignoring other potentially confounding variables; no matter what independent variables you look at, no matter how many thousands of factors may have contributed to the result, Y/Z has still stayed more or less constant.

    If you want to say that that doesn’t necessarily mean that that will continue to hold true in the future, I agree. But it seems likely that it will.

  3. Oh, and good luck in the exam on Saturday. Take your time; of course there’s no hurry. And of course you don’t have to have a rejoinder at all unless you want to.

  4. By the way, if you win on this point, I think my next fallback position is still a strong argument against raising taxes, as far as it goes: The argument would be that raising taxes will not necessarily raise tax revenue. This I suppose you would be more inclined to agree with; it would be using these same data, but to cast doubt on the relatively predictable, rigid correlation between tax rates and tax revenues that might otherwise be assumed. In other words, it would be an argument against extrapolation and against assuming we can predict the future, rather than an argument you make that argument against (as my first position is).

  5. Snoodickle Says:

    I must admit that the research done by Hauser is a legitimate set of data in favor of an argument against tax increases. But there are other explanations for the striking consistency of tax revenue vs. GDP over the years. The one that immediately comes to mind is the theory that government adjusts tax rates upward in times of economic boom, and downward in times of recession (I admittedly have not done the requisite research). The natural instinct of Congress and the President to adjust the tax rate to reflect the economic times is more than plausible. But it is an interesting debate.

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