OPINION
You Can't Soak the Rich
By DAVID RANSON
Source: http://online.wsj.com/public/article_print/SB121124460502305693.html
May 20, 2008; Page A23
Kurt Hauser is a San Francisco investment economist who, 15 years ago, published fresh and eye-opening data about the federal tax system. His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues. I think his discovery deserves to be called Hauser's Law, because it is as central to the economics of taxation as Boyle's Law is to the physics of gases. Yet economists and policy makers are barely aware of it.
Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example.
The interactions among the myriad participants in a tax system are as impossible to unravel as are those of the molecules in a gas, and the effects of tax policies are speculative and highly contentious. Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?
Mr. Hauser uncovered the means to answer these questions definitively.
On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated....
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.
The economics of taxation will be moribund until economists accept and explain Hauser's Law. For progress to be made, they will have to face up to it, reconcile it with other facts, and incorporate it within the body of accepted knowledge. And if this requires overturning existing doctrine, then so be it.
I wrote the following remarks to a friend who sent me this article: "Thank you for this most informative article about "Hauser's Law." Money is like a great river that flows around the world at not less than one revolution per day, sometimes faster, nourishing whatever it touches. But certain policies can affect that flow. If you have a command economy like North Korea, the channel will flow around your entire country, leaving it high and dry. If war breaks out (as during the civil war in Lebanon), money can flee at an awesome rate, and the country that used to be the "Switzerland of the Middle East" suddenly became poor and struggling. If taxes are too high, tax evasion becomes an art form (as in Italy), and much of that river of money plunges into underground channels. The underground economy of this country may already be larger than the total GDP of entire nations, and it will be expected to grow if the Democrats have their way and raise our taxes again. Rich Democrats who push for higher taxes don't expect it to apply to them - that's why they have lawyers, legislators, and accountants on their payroll to create and exploit loopholes."
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