David Ranson, head of research at Wainwright Economics, has an amazing op-ed piece in Tuesday’s Wall Street Journal. Most of us have heard of the Laffer Curve, which is based on the unarguable proposition that the government will collect no revenue when tax rates are 0% or 100%, and that revenue peaks somewhere in the middle. When tax rates are to the right of the peak, tax cuts make money and tax hikes lose money.
The question has always been, where on the Laffer Curve are we? Clearly there is no sense in tax rates that are past the revenue peak. Moreover, (lest it be forgotten) the government’s purpose is not to maximize tax revenue. If taxes are discouraging economic activity so much that we are even close to the peak, taxes are much too high. The problem is that the Laffer Curve is not really a fixed function that we can plot; it’s very difficult to determine what the result of a change in tax rates will be.
Enter Kurt Hauser, who made a remarkable discovery in 1993 that, even more remarkably, has not been well publicized. As Ranson explains in his op-ed, over the last half century, revenues have remained roughly constant at 19.5% of GDP despite wildly varying tax rates. He calls this Hauser’s Law, and shows that it has continued to operate in the years since Hauser discovered it.
Hauser’s Law is more compelling than the Laffer Curve it part because it is empirical (the Laffer Curve posits a theoretical relationship, but does not spell out the actual shape of the curve), and in part because it is so shockingly simple (a horizontal line). And it’s lesson is clear:
Forget about generating more revenue through tax hikes; it won’t work. Clinton’s big tax increase isn’t even visible on the revenue graph, and neither are Kennedy’s and Reagan’s massive tax cuts. If you want more government revenue, the only way to do it is to grow the economy, which is what supply-siders have been saying all along.
UPDATE (3/24/2010): Hauser’s report is on-line here.