Top Margin Income Tax Hikes Do Not Increase Revenue

by Ashley Muchow History has shown us that increasing the top margin personal income tax rate has done little to impact tax revenues. Indeed, over the past 60 years, tax revenues as a percentage of GDP have averaged just under 19.5 percent even when the top marginal tax rate has fluctuated from its 92% peak in...

by Ashley Muchow

History has shown us that increasing the top margin personal income tax rate has done little to impact tax revenues. Indeed, over the past 60 years, tax revenues as a percentage of GDP have averaged just under 19.5 percent even when the top marginal tax rate has fluctuated from its 92% peak in 1952-1953 to its 28% low in 1988-90.

This is Hauser’s Law, which finds federal tax revenues since World War II have been approximately equal to 19.5% of GDP, regardless of wide fluctuations in the marginal tax rate. 

In a recent WSJ article, Kurt Hauser reinforces his well-known “Hauser’s Law” and sheds light on the unfortunate short-sightedness of economists and politicians today that support claims suggesting raising taxes on the top 2 percent will increase revenues. Hauser writes:

The target of the Obama tax hike is the top 2% of taxpayers, but the burden of the tax is likely to fall on the remaining 98%. The top 2% of income earners do not live in a vacuum. Our economy and society are interwoven. Employees and employers, providers and users, consumers and savers and investors are all interdependent. The wealthy have the highest propensity to save and invest. The wealthy also run the lion’s share of small businesses. Most small business owners pay taxes at the personal income tax rate. Small businesses have created two-thirds of all new jobs during the past four decades and virtually all of the net new jobs from the early 1980s through the end of 2007, the beginning of the past recession.

Hauser’s Law could use some fresh focus now more than ever as the lame-duck Congress returns this week to determine the fate of the Bush-era tax cuts.