[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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