Hauser's law is one of the stranger phenomenons in economic data. It was originally proposed by Kurt Hauser, who observed back in 1993 that:
No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.
We decided to put Hauser's Law to the test to see if it holds up. To do that, we turned to the National Taxpayers Union, which maintains a table showing the level of the topmost marginal income tax rates for individuals from 1913 through the present. Looking just at the postwar period, we find that the marginal tax rate that applies for the U.S.' uppermost income tax bracket has ranged from a high of 92% in 1953 and 1954 to a low of 28% from 1988 through 1990. The current top rate is 35%, which is scheduled to increase after 2010 to 39.6% when the tax cuts of the 2003 Jobs and Growth Tax Relief Reconciliation Act expire.
We next turned to the Table 1.2 Summary of Receipts, Outlays, and Surpluses or Deficits as Percentages of GDP: 1930-2014, which is produced by the White House's Office of Management and Budget, since this Excel spreadsheet contains both the amount of total federal government tax revenues (aka "receipts") and the value of GDP for each of our years of interest, including forecasts for these values from 2009 through 2014.
But that's not all. It occurred to us that those total tax receipts include money from a lot more tax sources than just personal income taxes. Things like Social Security taxes, Medicare taxes, corporate income taxes, capital gains and excise taxes all contribute to the governments total tax collections. We wanted to also see how changing the individual income tax rates affected personal income tax collections, so we extracted the historic data on personal income tax collections provided by the Center on Budget and Policy Priorities through 2003, updated with data from the IRS for 2004, 2005 and 2006, the most recent year for which we could obtain the data and calculate the corresponding percentage share of GDP.
The results of what we found in doing this are graphically presented in the double chart (click for a larger image), where we've also indicated periods of recession.
What we find in looking at the lower chart is that the federal government's tax collections from both personal income taxes and all sources of tax revenue are remarkably stable over time as a percentage share of annual GDP, regardless of the level to which marginal personal income tax rates have been set.
We also find that both total and personal income tax receipts appear to follow a normal distribution with respect to time. We calculate that personal income tax collections as a percentage share of GDP from 1946 through 2006 has a mean of 8.0%, with a standard deviation of 0.8%, which we've indicated by the horizontal orange band on the chart. We would expect that annual personal income tax collections would fall within the range indicated by the orange band some 68.2% of the time. We've also indicated upper and lower limits for personal income tax receipts, which correspond to the mean value we observe plus or minus three standard deviations, as we would expect personal income tax collections in any given year to fall within this range some 99.6% of the time.
Likewise, we see a similar pattern in total tax receipts. Here, we observe that total tax collections as a percentage share of annual GDP over the historic and forecast period have a mean value of 17.8% with a standard deviation of 1.2%.
We also observe that the three periods in which the federal government's tax receipts have risen above the orange bands marking a one-standard deviation difference from the mean value, each of which coincide with unusual circumstances, which we've indicated in the double chart with the light green vertical bands:
- In 1968, the Democratic U.S. Congress and President Lyndon Johnson passed a 10% income surtax that took effect in mid-year, which suddenly raised the top tax rate from 70% to 77% (which increased the amount collected from top income tax earners by 10%.) Coupled with a spike in inflation, for which personal income taxes were not adjusted to compensate, this tax hike led to outsize income tax collections in that year.
- The sustained high inflation of 1978 (7.62%), 1979 (11.22%), 1980 (13.58%) and 1981 (10.35%) led to higher tax collections through bracket creep, as income tax brackets in the U.S. were not adjusted for inflation until 1985 as part of President Ronald Reagan's first term Economic Recovery Tax Act.
- Beginning in April 1997, the Dot Com Stock Market Bubble created an excessive number of new millionaires as investors swarmed to participate in Internet and "tech" company initial public offerings or private capital ventures, which in turn, inflated personal income tax collections. Unfortunately, like the vaporware produced by many of the companies that sprang up to exploit the investor buying frenzy, the illusion of prosperity could not be sustained and tax collections crashed with the incomes of the Internet titans in the bursting of the bubble, leading to the recession that followed.
Now, what about those other taxes? Zubin Jelveh looked at the data back in 2008 and found that as corporate income taxes have declined over time, social insurance taxes (the payroll taxes collected to support Social Security and Medicare) have increased to sustain the margin between personal income tax receipts and total tax receipts. This makes sense given the matching taxes paid by employers to these programs, as these taxes have largely offset a good portion of corporate income taxes as a source of tax revenue from U.S. businesses. We also note that federal excise taxes have risen from 1946 through the present, which also has contributed to filling the gap and keeping the overall level of tax receipts as a percentage share of GDP stable over time.
More practically, Hauser's Law provides a method we can use to anticipate the likely range for how much money the U.S. government will collect in any given year, from just personal income taxes or in total, given that year's level of GDP.