You cannot raise taxes by raising tax rates (!)

Here is a message I sent to Daniel Henninger of The Wall Street Journal, just prior to the 2008 election.  This is an interesting one in which, in effect, I forecast McCain’s defeat.  The argument is pertinent to this day, because the Dems have kept the Republicans (and the public and the press in general) sufficiently confused by this subject that no one even tries to think understand it any more.

When are McCain and the Republicans going to take off the gloves and challenge directly the entire premise of the Democrats’ supposed superiority on economic matters?  In particular, when will the GOP take the trouble to explain “Hauser’s Law,” the startlingly simple but inarguable body of data that explains why an increase in tax RATES does not lead to an increase in tax REVENUES.  Hauser’s Law, which was first explained by a San Francisco economist 15 years ago and was further elucidated by the Wall Street Journal in May of this year, shows that federal tax revenues are always about 19.5% of GDP, regardless of whether tax rates are low, high, or in-between.  In fact, while increasing the tax rates applicable to the “rich” might satisfy someone’s desire to punish Wall Street or the rich or to impose one’s views of fairness or social responsibility, it does nothing to advance the fundamental purpose of the tax laws, which is to maximize revenues.  Indeed, “tax increases” (increases in tax rates) tend to have exactly the opposite effect:  when tax rates go up, that tends to take money out of the hands of consumers and businesses and to alter behavior in a negative way, which tends to shrink GDP and, per Hauser’s Law, to shrink overall tax revenues rather than increasing them.  Accordingly, such concepts as “Pay Go” are exposed as mere rationalizations for social agendas; tax-cuts do not need to be “paid for,” because their net overall effect is not to reduce revenue, but to enhance it.

It is extremely frustrating to hear McCain and the conservatives try to refute Obamanomics by merely reciting the familiar mantra that tax cuts are good for business, because, while that is indeed correct, the public has tuned out the whole concept because they associate it with the adverse economic conditions in the country today.  Unless the public can be made to understand that Obamanomics cannot possibly cause anything but harm, the Republicans are going to lose the economic argument, in which case they will lose the election.

[Posted @ on 12 Feb 2012]

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