Wednesday, November 19, 2008

Hauser's Law and the Crier Curve

Hauser's Law posits that the U.S. government's revenue will always be around 19.5% of GDP, no matter what the marginal tax rate is. And, indeed, federal tax revenue as a percentage of GDP has been very flat even though marginal tax rates have varied widely. I believe that this represents the peak of the Crier curve, where the absolute amount of money retained by the private economy is maximized.

People and corporations want to optimize the money they retain. In a free and productive society like ours, the government's ability to tax is constrained. Corporations and industries will lobby to create loopholes and lower their effective rates; the people will vote out incumbents who raise taxes, especially if the economy sours. In the battle between the government trying to raise taxes, and the people trying to keep their money, the people will win as long as they control the government.

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