Neil Reynolds’ latest Globe column promotes the myth of costless tax cuts by replicating Kurt Hauser’s month-old Wall Street Journal op-ed. “Hauser’s Law” is the notion that American federal tax revenues have consistently been about 19% of GDP since World War II despite significant changes in statutory tax rates.
The implication is that higher tax rates simply prompt more tax avoidance and evasion, which also reduce GDP. The government might as well cut taxes and collect 19% of a larger GDP.
But Hauser’s Law has been debunked. US tax cuts have significantly reduced revenue relative to GDP.
Reynolds’ only original material is the second-last paragraph, which asserts that Hauser’s Law applies to Canada:
On average, we remit to the federal government only 16.6 per cent of GDP in taxes regardless of rates. In the 1960s, it was 15.9 per cent of GDP. In the 1970s, 17.3 per cent. In the 1980s, 15.5 per cent. In the 1990s, 17.7 per cent. (From 2001 through 2009, reflecting a serious recession, revenue from all tax sources fell to 14.3 per cent.)
Is he suggesting that Canada was in recession for a decade? In fact, the recession was only in 2008 and 2009.
But federal revenue was lower relative to GDP throughout the 2001-2009 period because the federal government cut tax rates. So, Reynolds’ own numbers disprove his presentation of tax cuts as a free lunch.
He also manages to add another error in attempting to paraphrase Hauser’s op-ed: “. . . the [US] capital-gains tax rate was increased to 28 per cent from 20 per cent in 1987. Capital gains tax revenues, as a percentage of GDP, fell to 3 per cent from 8 per cent.”
Of course, capital-gains tax revenues have never been 8% of GDP. If so, they alone would have comprised more than one-third of US federal revenues.
Here is what Hauser had written: “Capital gains realizations as a percent of GDP fell to 3% in 1987 from about 8% of GDP in 1986.” (Capital gains are realized when an owner sells stocks, property or other assets for a higher price than he or she had paid. Realizations are the total base to which capital-gains taxes apply.)
Finally, it is dubious to suggest that a higher capital-gains tax rate caused realizations – and hence tax revenues – to fall in 1987. Black Monday, the largest one-day decline in stock-market history, presumably accounts for at least some of that year’s decrease in capital-gains realizations.
