Wednesday, August 25, 2010

Hauser's Law

Here is a recent posting from the National Center for Policy Analysis. Obamanomics won’t work. It’s time for a change!

The Limit Of Tax Revenues

"Hauser's Law" (named after W. Kurt Hauser of the Hoover Institution) states that there has been a close proportionality between revenue and gross domestic product (GDP) since World War II, despite big changes in marginal tax rates in both directions. The law states that there is a kind of capacity ceiling for federal tax receipts of about 19 percent of GDP.

In short, Hauser's Law provides a simple basis for testing the validity of any government's revenue projections, says David Ranson, president and director of research of H.C. Wainwright & Co. Economics:

· Today, since the U.S. economy already suffers from a large output gap that is expected to take many years to close, 18.3 percent must be a realistic upper limit on the ratio of budget revenues to GDP for years to come.

· Any major tax increase will reduce GDP and therefore revenues too.
How long does it take to fire up the economy once capital is more readily available? The answer is: Longer than it takes to close it down.

According to Congressional Budget Office (CBO) projections based on the current budget:

· The revenue-to-GDP ratio could reach 18.3 percent as early as 2013 and rise to 19.6 percent in 2020.

· Such numbers implicitly assume that the U.S. labor market will get back to sustainable "full employment" by 2013 and that GDP will exceed its potential thereafter.
However, when the projections are tempered by the constraints of Hauser's Law, it is clear that deficit spending will grow faster than the official estimates show, says Ranson.

For budget planning, it is wiser and safer to assume that tax receipts will remain at a historically realistic ratio to GDP no matter how tax rates are manipulated. That leads to the conclusion that current projections of federal revenue are, once again, unrealistically high, says Ranson.

1 comment:

  1. Any way you figure it, the present huge deficit spending policies of this administration are a disaster. The national debt is so huge, no one can fathom the amount; unemployment is huge - probably around 17% when you factor in those whose benefits have run out and are no longer looking; economic growth of small businesses are stymied by high taxes. Where is the growth going to come from? The only business sector that is adding jobs is the Federal Government. What is wrong with this picture? It is time to turn this speeding freight train to bankruptcy around. Tax and spend has never worked. It is time to move back to fiscal conservative principles as espoused by the Republican Party. I look forward to November and a good "House" cleaning, not to mention the Senate also.