Tax Hikes and Tax Cuts

Let’s get one thing straight.

We ALL agree that we ALL should pay SOME tax.

The government needs money to pay for things that governments do.

We can disagree about what a government should do and how much it costs that government to do it, but serious, we have to pay some form of tax.

That said, what we tax and how much we tax is a whole conversation that needs to be had.

Right now, we tax income.  Which, on the face of it, seems silly.

It is fact, sure as 2+2=4, that if you tax something you get less of that thing.  So, by taxing income, you , in some way, get less income.  Now, to be sure, it is the nature of people to want more and more, so at some point, the drive to earn more will overcome the drive to avoid taxes.  But, in some cases and in some instances, people will avoid income in order to avoid taxes.

Whatever.  It is what it is.

The current battle in Washington right now is the expiration of the Bush Tax Cuts.  It seems that everyone is in agreement that we should make them permanent for everyone EXCEPT the very rich.  And depending upon whom you are talking to, that means anyone making more than $250,000 or more a year OR anyone making more than $1 million a year.

My question is this:

“Why quibble?”

I don’t understand why the Democrats are fighting this fight.  It is a phenomenon of Federal Tax Code that no matter what the rate is on personal income, the receipts brought in by that tax is almost always 19.5% of GDP.  See Hauser’s Law:

In economics, Hauser’s Law is the proposition that, in the United States, federal tax revenues since World War II have always been approximately equal to 19.5% of GDP, regardless of wide fluctuations in the marginal tax rate.

What does this mean?

It means that if you are trying to manipulate the tax receipts for a given year or period, you don’t do it by raising–or lowering–the marginal tax rate.  You do it by doing something else.  In other words:

…even though the top marginal tax rate of federal income tax had varied between a low of 28% to a high of 91%, between 1950 and 2007, federal tax revenues had indeed constantly remained at about 19.5% of GDP.

Look at this graph from David Ranson:

However, from our observation above, if you tax something, you get LESS of it.  That is, when taxes are HIGHER economic progress contracts.  Conversely, when taxes are lower, economic progress is stimulated.   And how is economic progress measured?

GDP.

That’s right.  When taxes are lower, the economy takes off and that “take off-ness” is represented by a higher GDP.

And, via Hauser’s Law, tax receipts are virtually always 19.5% of GDP, tax receipts go—–UP!

The only way to increase tax receipts is to INCREASE GDP.  And the BEST way to increase GDP is to lower taxes.

This is why people say that lower taxes brings in more money.

So, why are the Democrats trying to raise taxes on the rich?

I don’t know–but it ain’t cause they wanna bring in more money.  There’s some other reason.