Hauser's law

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What Is Hauser's Law?

Hauser's law is an empirical observation in economics suggesting that, in the United States, federal tax revenues have consistently remained at approximately 19.5% of the gross domestic product (GDP) since World War II, irrespective of significant changes in marginal tax rates. This observation falls within the broader category of fiscal policy and taxation, aiming to describe a stable relationship between the overall size of the economy and the federal government's tax collections. The law implies that policy adjustments to tax rates may have a limited impact on the total proportion of national output collected as tax revenue.

History and Origin

The concept of Hauser's law was first introduced in 1993 by William Kurt Hauser, a San Francisco investment analyst. In an op-ed for the Wall Street Journal, Hauser asserted that federal tax revenues, as a percentage of GDP, had remained remarkably stable around 19.5% in post-war America, despite numerous changes to the tax code.¹⁷ This observation garnered attention for its challenge to conventional wisdom regarding the direct relationship between tax rates and total revenue. Hauser's work suggests that there might be an underlying, almost inherent, limit to the proportion of GDP the federal government can collect through taxation.¹⁶

Key Takeaways

• Hauser's law posits that U.S. federal tax revenues tend to hover around 19.5% of GDP.
• This observation holds true despite significant variations in income tax rates over decades.¹⁵
• The law implies that changes in tax rates may not substantially alter the overall percentage of GDP collected as federal revenue.¹⁴
• Proponents suggest it highlights the importance of economic growth in increasing absolute tax revenue, rather than solely adjusting tax rates.¹³
• Critics argue that Hauser's law overlooks important nuances and may be misleading.¹²

Formula and Calculation

Hauser's law is an empirical observation rather than a strict mathematical formula used for calculation. It describes a historical ratio between two macroeconomic variables: federal tax revenue and Gross Domestic Product (GDP).

The relationship can be expressed as:

Where:

• Federal Tax Revenue represents the total amount of money collected by the federal government through various taxes.
• GDP (Gross Domestic Product) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

This approximate constancy suggests that if the economic activity (GDP) increases, the actual dollar amount of federal tax revenue would also tend to increase proportionally, even if tax rates remain constant. Conversely, if GDP declines, federal tax revenue would also tend to fall, maintaining the roughly 19.5% ratio.

Interpreting Hauser's Law

Interpreting Hauser's law involves understanding it as a broad historical trend rather than a precise economic predictor or rigid ceiling. The observation suggests that the American economy, over several decades, has generated federal tax revenue consistently within a relatively narrow range as a percentage of its total output. This implies that the factors influencing the tax base and overall economic growth might be more significant determinants of federal revenue than changes to statutory tax rates alone. While tax rates can influence individual and corporate behavior, Hauser's law suggests that these behavioral responses, coupled with broader economic dynamics, often lead to a stable proportion of GDP being collected.

Hypothetical Example

Consider a hypothetical country, "Econoland," which, like the U.S., has observed a similar phenomenon to Hauser's law, with federal tax revenues consistently around 20% of its GDP.

In Year 1, Econoland's GDP is $10 trillion. Based on the observation, its federal tax revenue would be approximately 20% of $10 trillion, which is $2 trillion.

Now, suppose the government of Econoland decides to significantly lower its top marginal tax rates in Year 2, hoping to stimulate economic activity. Simultaneously, through a combination of technological advancements and increased capital formation, Econoland experiences robust economic growth, and its GDP increases to $11 trillion in Year 2.

According to the principle of Hauser's law, even with lower tax rates, if the underlying economic structure leads to a similar revenue-to-GDP ratio, the federal tax revenue might still be around 20% of the new, larger GDP. In this case, 20% of $11 trillion would be $2.2 trillion.

This example illustrates that even with tax rate adjustments, if the overall proportion of economic output captured by federal taxation remains stable, an increase in the size of the economy would naturally lead to a higher absolute amount of tax revenue.

Practical Applications

Hauser's law, while an empirical observation, has implications for discussions around fiscal policy and government finance. It is often cited in debates concerning the effectiveness of tax cuts or increases in generating federal tax revenue. Proponents of supply-side economics sometimes reference Hauser's law to argue that focusing on policies that boost economic growth (thereby enlarging the gross domestic product) is a more reliable way to increase government receipts than merely adjusting tax rates.¹¹ For instance, the U.S. Department of the Treasury's Fiscal Data provides current and historical federal revenue trends, often in relation to GDP, offering a public view of these metrics.¹⁰ This perspective suggests that attempts to raise the tax take significantly above this historical average by only increasing tax rates might be met with diminishing returns, as taxpayers and the economy may adjust behavior in ways that limit additional collections.⁹

Limitations and Criticisms

Hauser's law is not without its critics, and several limitations have been identified. One primary critique is that while the federal tax revenue as a percentage of GDP appears stable over long periods, this "stability" can mask significant short-term fluctuations and the impact of specific policy changes.⁸ For example, some economists argue that tax revenue is indeed higher in years following a tax increase and lower after tax cuts, suggesting that Hauser's law "sweeps large differences under the table."⁷

Additionally, some economists contend that the law may represent a "socio-political policy trend" rather than an immutable economic law, suggesting that the trend could change if the U.S. were to adopt a national sales tax or other broad-based consumption taxes, which are common in many other developed nations.⁶ The composition of federal revenue has also shifted over time, with a decline in corporate tax revenues as a percentage of GDP being noted by some analysts. This suggests that the observed stability in the overall percentage might be a result of various offsetting changes within the tax code, rather than a fundamental limit. Furthermore, the observation is specific to the U.S. and its particular public finance system, and similar patterns are not consistently observed in other countries with different tax structures.⁵

Hauser's Law vs. Laffer Curve

Hauser's law and the Laffer Curve are both concepts related to taxation and government revenue, but they differ in their nature and implications.

While Hauser cited Arthur Laffer's work in his initial propositions, Hauser's law is presented as an empirical observation, whereas the Laffer Curve is a theoretical argument about the relationship between tax rates and revenue.

FAQs

What is the core idea behind Hauser's law?

The core idea of Hauser's law is that, historically in the United States, federal tax revenues have consistently amounted to approximately 19.5% of the total national output, or gross domestic product, irrespective of how high or low the statutory tax rates have been.

Does Hauser's law mean tax rates don't matter?

No, Hauser's law does not mean tax rates are irrelevant. Rather, it suggests that changes in marginal tax rates might have a limited effect on the proportion of the economy collected as federal tax revenue over the long term. This is because taxpayer behavior and broader economic activity can adjust in response to rate changes, influencing the overall tax base.

Is Hauser's law a universally accepted economic principle?

Hauser's law is an empirical observation that has generated debate among economists. While the historical data it references is verifiable, its interpretation and implications are contested. Some economists offer alternative explanations for the observed stability or highlight periods where federal revenues have deviated from the 19.5% average.¹

How does Hauser's law relate to government spending?

Hauser's law focuses on the revenue side of the government's ledger. It implies that if federal tax revenue tends to remain a relatively fixed percentage of GDP, then any increase in government spending that exceeds this percentage will likely contribute to a budget deficit unless there is substantial economic growth.