Once upon a time, long, long ago, when Jimmy Carter ruled the land, the WSJ op-ed page editors dreamed up the implausible theory of supply-side economics: cut tax rates, they said, and tax revenue would go up!! Reagan conducted the first experiments based on this theory and left office eight years later apologizing for the deficits.
Twenty years later Bush Junior tried the experiment once again. Again debt exploded. No one’s expecting an apology from The Decider, but here’s an interesting fact: Bush didn’t merely jabber about the economic benefits of tax cuts, he asked his own economists at the Treasury Department to prove it. After much research, their conclusion? Tax cuts would eventually increase economic growth, but only by a few hundredths of one percent. And then, only if they were paid for with spending reductions.
So, with all this experience and research behind us proving that tax cuts don’t pay for themselves and have almost no effect on economic growth, the WSJ must be slowly backing away from their pet theory, right?
Nope, they are elevating it to a scientific truth–now it’s Hauser’s Law.
In a recent column (most popular, according to their website) David Ranson of Wainwright Economics argues that taxes need to be cut, so that tax revenues can go up. If you want to read the tortured logic, please read it, but long story short—it seems that economist Kurt Hauser discovered years ago that tax revenue as a percent of GDP in the US is fairly constant even though the highest marginal tax rate has varied wildly. And its true, tax revenue has been around 18-20% of GDP for decades even though the highest marginal tax rate has varied from 28-90%.
From this observation it’s two easy steps to cutting taxes:
- Tax revenue is completely dependent on GDP; therefore tax rates are irrelevant the only way to increase tax revenue is to increase GDP
- GDP is dependent on tax rates, therefore tax rates are very important and raising rates will decrease GDP and therefore lower tax revenue.
Jeebus. Step 1 is tenuous at best, and Bush’s own economist don’t believe step 2. Hauser’s Law is more Hauser’s Wish. At least it’s a wish for those people who want to cut tax rates.
But, realistically, this has nothing to do with logical errors or mistaken economic theories. The WSJ editors simply want more money for themselves and their friends. One way to get it is to decrease income tax rates. If that screws the next generation or Social Security beneficiaries, tough shit.