May 21, 2008


You Can't Soak the Rich (DAVID RANSON, May 20, 2008, Wall Street Journal)

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. [...]

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 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.'s just a matter of where we want that fifth to come from. Taxing income, investment and savings seems especially silly.

Posted by Orrin Judd at May 21, 2008 9:23 AM

Taxing income, investment and savings seems especially silly.

Which is why taxing estates

Posted by: Reg Jones at May 21, 2008 11:46 AM

Taxing income, investment and savings seems especially silly.

Which is why taxing estates below $10M is also especially silly.

Posted by: Reg Jones at May 21, 2008 11:58 AM

What's silly about taxing dead people? It could hardly be more republican.

Posted by: oj at May 21, 2008 2:01 PM

It's destructive of family solidarity and thereby promotes atomization of society and dependence on the state. It's a drag on wealth creation by the middle class, especially owners of small businesses and farms. It causes massive deadweight costs in avoidance and enforcement (see article above re: rich citizens being tax-intolerant), for an amount of revenue that's negligible compared to enforcement costs and dwarfed by avoidance costs. If the threshold is set low enough, "taxing the dead" literally means taking food out of the mouths of orphans and depriving widows of comfort in their old age. And abolition of inheritance is the third point in Marx's Communist Manifesto. It's "republican" in the sense that revolutionary France was "republican."

Posted by: Random Lawyer at May 21, 2008 3:42 PM

Auh, it is the size of the fifth that is the question.

Great post Random.

Posted by: Perry at May 21, 2008 6:15 PM

Exactly. The revenue is trivial. Too few people are as rich as the tax targets. The point is to destroy that family solidarity.

Republics depend on the balance of power. Aristocrats are powers. Inheritance taxes prevent an aristocracy. They don't prevent inheritance.

Posted by: oj at May 21, 2008 7:22 PM

A $3,000,000 family farm or small business is not aristocratic. Nor is it a "power".

Posted by: jim hamlen at May 21, 2008 10:20 PM

Not anymore it isn't.

Posted by: oj at May 22, 2008 6:17 AM

No, it isn't. The size changes every year.

Posted by: oj at May 22, 2008 6:19 AM