TeeJaw Blog

Hauser’s Law: Why Obama’s War On The “Rich” Won’t Help The Economy

Posted in Government and Politics by TeeJaw on Wednesday, December 8, 2010, 10: 15 AM

Data collected by Kurt Hauser of Stanford University shows that Government revenue from the income tax has hovered around 19% of GDP no matter what the tax rates happen to be. Raising the rates, especially the highest marginal rate, does not increase revenue but actually reduces it. That’s because GDP shrinks when taxes on the highest earners are raised. Nineteen percent of a smaller pie is simply less than 19% of a larger pie.

The chart at left shows that during various levels of the highest tax rate (red line) the amount of revenue as a percentage of GDP (green line) hardly changes.  It is GDP that changes, and since government revenue is a near constant percentage of GDP, that changes as well.  It goes up when the top tax rate is lowered and it goes down when the top tax rate is increased.  The explanation is simple:  people respond to incentives and change their behavior when government changes the rules of the game.

If the so-called “rich” work, save and invest less and when their tax rates are raised, causing GDP to shrink, what is the effect on the economy and especially on people who are not rich?  A reduction in GDP means low growth in the economy and fewer jobs.  Even if the non-rich like the idea of socking it to the rich, as Democrats believe, they probably wouldn’t like it so much if they realized that they are the ones most hurt economically.

But wait, you might say.  Doesn’t the government spend that money it takes from the rich and doesn’t that stimulate economic growth?  Wasn’t that the intent of the “Stimulus” that Obama and the Democrats (with help from some Republicans) passed in 2009?  That was called “The American Recovery and Reinvestment Act,” remember?  All those signs at highway construction sites carried the phrase, “Putting America back to work.”  Didn’t it work?

No.  The San Francisco Federal Reserve has discovered the net job growth as a result of the $814 Billion stimulus was … zero. The stimulus did create 2 million jobs, but those were temporary jobs costing an average of $400,000 per worker.  Those temporary jobs ended and by August of 2010 the net job growth was statistically zero.  Government spending does not create sustained economic growth, and even the temporary growth that results comes at a very high cost to taxpayers.

The net effect of the so-called “stimulus” was simply to add another trillion dollars to the deficit:

So why do politicians keep this up?  Don’t they know that trying to soak the rich with high taxes hurts the economy and government spending does not stimulate the economy?  Some, such as Senator Mary Landrieu,  or Colorado Rep. Diana DeGette , are probably too dense to understand any of this, but the majority do know it.  They simply don’t care.  Ideology trumps rationality every time.

Here is an excellent video (about 14 minutes) on this subject which goes into more depth with some distinguished guests.  Highly recommended.


One Response

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  1. Obama’s war against the rich | Political Cowardice said, on Saturday, May 7, 2011, 3: 09 PM at 3:09 PM

    […] Hauser’s Law: Why Obama’s War On The “Rich” Won’t Help The Economy […]

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