Posts Tagged ‘Hauser law’

will higher tax rates bring more money?

December 16, 2009

This week the Greek prime minister produced an array of measures to cut the deficit over the next year or so. Most of them amount to either direct tax increases (a progressive tax rate with a maximum up to 50%, a tax or millage levy on large properties, the re-introduction of inheritance tax, 90% tax on bank bonuses) or indirect taxation (freeze of civil servant salaries beyond a EUR2,000 threshold, no bonuses in government run organisations). The question is of course whether or not these measures will bring more money in the depleted state coffers.

What is the evidence? Kurt Hauser in 1993 observed that “no matter what the tax rate has been, the post-war tax revenues in America have been stable and around 19.5%”. This observation became known as “Hauser’s law”. Taxation is not ‘static’, as economic agents will have an increasing incentive to use accounting techniques to shift or hide their tax exposure. In addition, increasing tax rates will have an adverse impact on the GDP and thus increasing taxes will reduce the actual Euro amount that comes in the government coffers.

This article in the WSJ revived Hauser’s law in 2008, and the 15 years of new data also confirm its validity.

Tax receipts and rate

Greek tax receipts (blue) and the tax rate (red). Dotted line for projected values. Source: Eurostat

But what is the evidence for Greece? Unfortunately the statistical data are scarce and not overly reliable, but I managed to dig some information from the EuroStat website from 1995 onwards. The effective tax rate for a family of two full-time working individuals with two children has risen from 18% in 1995 to about 24% in 2000, 25% in 2004 and 27% today. On the other hand the tax receipts as a percentage of GDP have remained without a clear trend at about… errrr 20%.

For that allow me to be sceptical on the effectiveness of these measures.

PS: The data I managed to dig are as follows (P denotes a projection, otherwise known as a wish :–) (a) tax rate 96-08: 17.9, 18.2, 18.5, 17.8, 23.9, 23.7, 24.6, 23.2, 25.5, 26.1, 27.8, 27.6, 27.2; (b) tax receipts 95-04 projected to 07: 19.0, 19.1, 20.0, 21.6, 22.6, 23.5, 22.1, 21.7, 20.0, 19.8, P20.3, P20.3, P20.3