This sign I photographed is so appropriate especially with respect to Senator Obama if he ends up becoming the formal nominee of the Dems. This is so especially with respect to his foreign policy and his tax policy. So I offer you some random writings today. First I offer you a great quote from Senator Joe Lieberman on today’s Democratic party:
A great Democratic secretary of state, Dean Acheson, once warned “no people in history have ever survived, who thought they could protect their freedom by making themselves inoffensive to their enemies.” This is a lesson that today’s Democratic Party leaders need to relearn.
As Sen. Joe noted in an earlier speech and in today’s WSJ despite Clinton’s attempt to bring the party back to the center, the San Francisco Dems have taken the party back to the left blame America way of thought. Ironic huh? That the lefties now have excommunicated Sen. Joe, their own VP candidate 8 years ago. And they are doing the same to Hillary who is a liberal, but who appears conservative in the presence of the Moveon.org/Michael Moore/Air America crowd.
Of course the biggest fallacy in the Democratic mindset is their false mantra that by raising taxes, more revenues are generated. Hogwash. As shown in this article about Kurt Hauser, a San Francisco investment economist, who did a comprehensive study of the tax system noted that higher revenue is directly proportional to GDP. And thus by increasing tax rates which Obama will do (no doubt about it and don’t be fooled otherwise since the Bush tax cuts will sunset and thereby raise taxes across the board). Moreover, Obama has been most clear that he’s for higher income taxes, social security taxes, investment taxes, and corporate taxes, as well as massive new domestic spending. He has also proposed raising the capital gains tax and lifting the cap on the payroll tax, which would hurt middle-income workers and small businesses across the country. Clearly Obama doesn’t understand that raising taxes during tough economic times will only hurt our economy.In fact, as this article notes, Obama’s tax policy will have an inverse reaction to GDP and therefore less revenue will be collected, to wit:
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.
The chart nearby, 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.