A key to American competitiveness and growth over the centuries has been our friendly treatment of capital and labor. Relative to the world, we've mostly imposed lower tax rates on income and investment and reaped the rewards in terms of the largest economy -- and the largest tax base and most tax receipts.
Moreover, as we substantially reduced tax rates over the last 50 years, federal tax revenue remained basically constant at around 18.5% of GDP. It's an unambiguous argument for low tax rates, and in an article last fall, I called this phenomenon Reynolds' Law after the economist who first noted it, Alan Reynolds.
But not so fast! Today, David Ranson pens a brief article with a great little chart, highlighting the same phenomenon, but says we should call it Hauser's Law after San Francisco economist Kurt Hauser who noted the relationship in 1993.
No matter. The concept is so simple it has probably been noted by others, too. But as the world becomes more competitive with flat taxes flourishing in the former Communist world and tax cuts fueling global growth, from China and Singapore to Dubai and Ireland, American politicians should look at this simple chart that shows they cannot raise more revenue with higher tax rates -- and then shelve their silly high-tax plans.
Reynolds or Hauser, the revenue relationship remains. A tax-cut by any other name would smell as sweet.