Politicians—the Washington gang, including the House, Senate and President—are forever talking about raising or lowering the income tax rate. It’s election time. Really, the silly season for floating “what’s-best-for-the-country income tax rate ideas.” And once in a while the same politicians will babble a bit as to how we should change, kill or modify the estate tax law.
Let’s take ‘em one at a time. Maybe we can help these seemingly helpless elected officials get it right. First, the income tax. The logical reason for tinkering with the income tax rate is simple: raise more revenue. But during the election, the real reason is, “What will get me (the candidate) the most votes?”
Raising the tax rate will mean more revenue, right? So claim the politicians pushing for a higher rate. No, no, says the other side: Lowering the income tax rate will increase the tax base, resulting in more revenues.
Simple logic tells you there’s no way both sides can be right. So let me offer some fresh new evidence, and then you decide who’s right. My information comes from “You Can’t Soak the Rich,” an article by David Ranson in the May 20, 2008 issue of The Wall Street Journal.
The article introduces “Hauser’s Law,” coined by Burt Hauser, an economist who published some eye-opening data about the federal tax system in 1993. It says: “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of Gross Domestic Product (GDP).”
The article explains the law using a chart showing that the top individual tax bracket from 1950–2007 is all over the map, ranging from 30–90%. A second part of the chart that compares revenue as a percentage of GDP is almost a straight line, though, holding steady at about 19.5%—the federal income tax yield divided by GDP.
You don’t have to be a rocket scientist to see what Hauser’s Law means: Raising tax rates lowers GDP. “Higher taxes reduce the incentive to work, produce, invest and save, thereby dampening overall economic activity and job creation,” says Hauser.
The most interesting thing about Hauser’s Law is that it is fact, not theory. A fact that has given specific, consistent and proven results with 57 years of easy-to-verify data. So let’s state the obvious conclusions: 1) Raising taxes reduces GDP. The result is lower yield (tax revenues). 2) Lowering the income tax rate increases GDP, as well as tax revenues. Want more details? Go to The Wall Street Journal Web site and read the entire article.
Now, let’s take a quick look at the estate tax. In 2008 there’s no tax on the first $2 million of your estate, rising to $3.5 million in 2009. Then absolute stupidity takes over: No tax —nada—in 2010, and finally, in 2011 only the first $1 million is tax free. So the top estate tax rates are 45% for 2008 and 2009, zero for 2010, and for 2011and thereafter the insane rate of 55%.
The “2010-no-estate tax law” can’t survive—it’s too risky politically. Neither candidate for president has expressed an interest in killing the estate tax (which is what Washington should really do). Since I know in my heart the estate tax will survive at least the next four-year administration, here are my suggestions to Congress and the new president: 1) Make the freebie $3.5 million, which means a married couple with $7 million of net worth could easily eliminate the estate tax; 2) Lower the top estate tax rate to 35%. (Of course, whatever the President and Congress finally do about the estate tax, the readers of this column know that a system exists that can eliminate the estate tax!)
Finally, here’s our advice to the two presidential candidates and members of Congress. Concerning the income tax: Keep your eyes on the real ball— GDP. Stop chasing higher or lower tax rates. Your job is to govern in such a way as to increase GDP. Hauser’s Law gives you sure-fire proof that increased income tax revenues always follow.