[Congressional Record Volume 154, Number 83 (Tuesday, May 20, 2008)]
[Senate]
[Pages S4428-S4429]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                               TAX POLICY

  Mr. KYL. Mr. President, every now and then there is an article or an 
op-ed in the newspaper that you find compelling by its clear logic and 
you want to share it with your colleagues. I wish to do that today and 
at the conclusion of my remarks put the full text of this op-ed in the 
record.
  Today's Wall Street Journal carried an op-ed by David Ranson called 
``You Can't Soak the Rich.'' I find it compelling because of the 
proposals by some that we should raise the marginal income tax rates 
and thereby theoretically increase revenues to the Treasury. What 
Ranson points out is it is essentially a law of economics that raising 
tax rates not only does not bring in more revenue to the Treasury based 
on the historic record, but it can have precisely the opposite effect 
because it can harm the economy and, in fact, it is the growth in the 
economy that produces more revenue to the Federal Treasury.
  Let me quote a couple of comments from his op-ed. He said:

       No matter what the tax rates have been, in postwar America 
     tax revenues have remained at about 19.5 percent of GDP.

  Now, there is another measure. If you go back somewhat less distance, 
the measure is about 1 percent less than that as a percentage of GDP, 
but the ratio remains the same and the point he is making remains the 
same, which is that raising tax rates does not raise revenue. In fact, 
raising tax rates can hurt the economy, which then reduces tax revenue.
  There is a chart in this op-ed that makes the point. The Federal tax 
yield, which is revenues divided by the gross domestic product, has 
remained close to 19.5 percent, even as the top tax bracket was brought 
down from 91 percent to the present 35 percent. One would think that 
the difference between a 91-percent top marginal rate and 35 percent 
would represent a dramatic difference in revenues collected. In point 
of fact, it has not been. He points out why a little bit later in his 
op-ed. He says:

       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.

  In other words, the strength of the economy.
  He goes on:

       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--

  The law he is citing here--

     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.

  He goes on to answer the question I posed earlier: What makes this 
law work? I am quoting now:

       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 point he is making is that if you are wealthy, you have the 
ability to move your income around, to hire accountants and tax lawyers 
to find ways to shield your income, and the bottom line is the 
Government never gets any more of it than if the rate remained at a 
lower level.
  In fact, he points out that revenue collections by the Government 
have remained almost constant over this 40-year period and that their 
ratio to the GDP has remained almost constant; the point being that the 
revenue collected by the Government is most in relation to the state of 
the economy. It is mostly dependent upon the economy. As the economy 
grows, revenues to the Federal Treasury grow. As the economy slows, tax 
revenues slow, and that is exactly what we are seeing right now.
  So we should take two important lessons from this. No. 1, in a time 
of economic downturn, which is what we are in right now, the last thing 
you would want to do is to raise tax rates because you are going to 
hurt the economy and you are not going to bring in any additional 
revenue. Secondly, this speaks to the point my colleague from Arizona, 
Senator McCain, has been making, which is that, in the long term, what 
you want to do is reduce tax rates if you can--at least leave them 
where they are but not raise them--if you want to be fair both to the 
American family and help the economy grow and get us out of this 
economic downturn. Incidentally, that is what will produce the most 
revenue for the Federal Treasury to pay for all that the Congress and 
the President end up passing in legislation and passing on to American 
taxpayers.
  So I ask unanimous consent to place this op-ed in the Record at this 
point.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

              [From the Wall Street Journal, May 20, 2008]

                        You Can't Soak the Rich

                           (By David Ranson)

       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,

[[Page S4429]]

     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.
       The chart, updating the evidence to 2007, confirms Hauser's 
     Law. The federal tax ``yield'' (revenues divided by GDP) has 
     remained close to 19.5%, even as the top tax bracket was 
     brought down from 91% to the present 35%. This is what 
     scientists call an ``independence theorem,'' and it cuts the 
     Gordian Knot of tax policy debate.
       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.
       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.
       Presidential candidates, instead of disputing how much more 
     tax to impose on whom, would be better advised to come up 
     with plans for increasing GDP while ridding the tax system of 
     its wearying complexity. That would be a formula for success.

  Mr. KYL. Mr. President, I urge my colleagues to review the op-ed and 
apply it to the lessons we have today. In fact, the legislation we will 
be taking up today increases taxes--increases the tax rate--by applying 
a 0.5-cent surcharge or surtax on the top marginal rate. This is going 
to be very destructive. Over 80 percent of the people who report that 
top marginal rate, report small business income. So we are going to be 
hurting the small businesses of this country, not the big businesses or 
the wealthy that the surcharge is intended to hit, and we will end up 
not increasing Federal revenues but actually decreasing them and 
hurting the economy in the process.
  I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from Utah is 
recognized.

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