Guest Post: A Look at U.S. Taxes and Hauser's Law

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes

Frequent contributor Jim S. recently submitted a collection of charts on U.S. corporate taxes and Hauser's law, which contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set.

Hauser's observation is more a socio-political trend than a law per se, but the point is that total tax revenues are remarkably stable despite changes to the mix of revenue sources and tax rates.

Clearly, Hauser's observation applies only to U.S. Federal taxes, as many European nations collect total tax revenues around 40% of GDP. Furthermore, total taxes (including state and property taxes) exceed 40% of household income in many U.S. locales.

The subject of taxes arouses all sorts of emotions and critiques, and one reason it is difficult to compare apples to apples in national tax revenues is that nation-states have extraordinarily different (and often convoluted) tax structures.

France, for instance, has a television tax. Japan sends tax collectors door to door to wheedle the national NHK network tax from households. Here in the U.S., a large percentage of total taxes paid by households in some states is in the form of property taxes. Using myself as an example, Federal tax paid in 2011 was $15,000, California state income tax was about $3,000, and local property taxes were almost $13,000.

California sales tax (which varies due to county tax add-ons) is 8.75%, but it does not apply to food or services such as dentistry. Hawaii's sales tax (for the majority of residents) is 4.5% but it applies to virtually everything and so it represents a very significant percentage of total taxes paid by households.

As a result, it makes no sense to isolate Federal tax and make all sorts of broad assumptions from that basis when in places such as California, Hawaii, Illinois, New York, etc., state and local taxes might easily exceed total Federal taxes paid.

What the central government provides varies as widely as tax revenues. If you paid a 40% tax rate in Denmark, for example, what you get in the way of entitlements is quite a bit different from what you get in the U.S.

In the U.S., the government will guarantee student loans that give you semi-permanent status as a debt-serf. (Some Federal grants are also distributed that do not have to be paid back, but these rarely cover all college costs.) In Denmark, tuition and other major expenses are paid in full by the government, and qualified students receive a stipend to live on while attending university.

In the U.S., you must be over 65 years of age or qualify as a low-income household to receive government-paid healthcare services. Everyone else pays insane sums for private healthcare insurance, or their employer pays insane sums for private insurance. In Denmark, everyone gets basic healthcare coverage paid by the government.

We pay $13,000 annually for bare-bones healthcare coverage for two adults. If we want to compare apples to apples in the tax rates for the U.S. and Denmark, shouldn't we add what households pay for healthcare insurance to the U.S. total? If we add up all the many layers of taxes our household pays, including healthcare insurance, dental bills, etc. that would be covered by taxes in Denmark, our total equivalent taxes paid is $15,000 (Federal), $3,000 (state income taxes), $13,000 property taxes, $4,000 sales taxes/junk fees and $15,000 in healthcare insurance (and related costs that would be paid by taxes in Denmark): $50,000 which is roughly 50% of our income.

The Real-World Middle Class Tax Rate: 75% (July 5, 2012)

Some people object that Social Security taxes shouldn't be included in Federal tax revenues because they are are not income taxes. Fine, but then you have to remove all the equivalent tax revenues collected in other nations when you compare tax rates. It all boils down to two simple concepts:

1. The only tax total that matters is the total of all taxes paid to all layers of government.

2. You get what you pay for. If one nation pays higher taxes to fund a national healthcare plan, then that nation's tax rate cannot be compared to one where the government only pays healthcare costs for a small percentage of its residents.

So please don't talk about "low-tax America": taxpayers in the U.S. should get T-shirts that read "I paid taxes in the U.S. and all I got was this lousy Empire."

Into this mess comes the emotional hot-button of corporate taxes. Let's look at some charts to establish some context:

Here's a chart that inflames almost everyone: corporate profits are rising while corporate taxes are declining: arrgghh!

As corporate taxes are declined, individual income taxes paid rose. Double-arrgghh! Once your blood pressure drops to normal, note that both individual and corporate tax revenues have meandered within a fairly narrow range for the past 30+ years.

While the GDP has expanded, corporate taxes paid have remained flat-lined.

Meanwhile, the nominal U.S. corporate tax rate remains one of the highest in the world.

Despite the supposedly different nominal corporate tax rates of various nations, corporate tax revenue as a percentage of GDP is about the same for Canada, the U.S., France and Japan. The lowest corporate tax revenue as a percentage of GDP is export powerhouse Germany.

States such as the U.K., Sweden, Korea and Denmark have corporate tax revenues that are only modestly above those of the U.S. when measured as a percentage of GDP.

Clearly, nominal rates have little to do with the actual tax collected. They also have little to do with the total taxes paid by global corporations. For example, "Exxon Mobil conducts the majority of its business outside the U.S. and paid $28.8 billion in taxes to foreign governments, but only owed and paid $1.5 billion to the U.S. government." (source: Top Companies Paid 9% U.S. Tax Rate)

10 Most Profitable U.S. Corporations Paid Average Tax Rate Of Just 9 Percent Last Year.

It is not realistic to compare corporate tax rates in a unipolar world (circa 1950) when the U.S. economy represented roughly half of global GDP to today's global economy. Those who enthusiastically demand a return to high corporate tax rates forget that U.S. global corporations are not bound to the nation-state of the U.S.A. Push them into an anti-competitive tax situation and they will transfer their operations elsewhere.

Even worse in terms of fairness, high corporate tax rates punish those companies that do not have the elaborate tax avoidance scams of global companies. Some U.S. companies pay close to the nominal rate while the average pay roughly one-fourth of the official rate. Ours is a blatantly unfair system where corporate capture of the political machinery offers a well-greased back-door method of lowering taxes for those able to buy political influence.

A much better tax collection strategy, and a much fairer one, is a flat corporate tax of 8% that aligns the U.S. nominal rate with the rate actually collected. Actual tax revenues collected would be about the same or perhaps even rise as gaming the system is no longer rewarded, and all the wasted motion of tax avoidance would go by the wayside.

Non-U.S. corporations doing business in the U.S. should pay the same 8%. Currently, many non-U.S. corporations selling billions of dollars of goods and services here pay negligible Federal corporate tax.

The point that many miss is the mix of taxes is a social/cultural decision. In general, corporate taxes are low in Germany and individual taxes are high, while in France business taxes are high and individual tax rates are (relative to its EU peers) generally low. The total tax revenue collected as a percentage of GDP ends up being about the same.

What this suggests is some tradeoffs are necessary. Better to have flat rates that are actually collected than byzantine tax codes and high nominal tax rates that incentivize gaming the system and result in unfairly disparate real tax rates.

Despite changing the nominal rates on corporate taxes, payroll taxes and individual income taxes, total Federal tax revenues have remained close to 20% of GDP for decades.

Federal tax revenues swing between 15% and 20% of GDP. In a $15 trillion economy, that 5% is a significant chunk of cash: $750 billion.

The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Those in the higher tax brackets will lobby the political class for lower tax rates. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero.

In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion.

That leaves a $1.3 trillion deficit that is filled with borrowed money.

Taxes are zero-sum to the taxpayer: collect another $500 billion in Federal taxes and that's $500 billion taxpayers don't have to spend, save or invest in the economy. So policy-makers fear raising taxes will trigger a recession, yet running deficits that are 35% of Federal expenditures is not sustainable.

Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.

Spoiled Teenager Syndrome (January 3, 2013)
Is masking risk, cost and consequence a strategy that leads to success? No; it is a pathway to catastrophic failure.

Roundtable discussion with CHS, Gordon T. Long and Bill Laggner: China, Japan & Central Banking (25 Minutes, 34 Slides)

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Banksters's picture




formadesika3's picture

Hauser's Law...

Is every economic tendency given a name and called a "law"?

formadesika3's picture

You better write a paper on that before someone else claims the credit.

Sokhmate's picture

I'd recommend calling it Miletus's Law. More ring to it.

Stuck on Zero's picture

Spot on.  And don't forget the huge sums we pay because government grants monopolies to privilieged entities: lawyers, doctors, unions, telcos, etc.

MachoMan's picture

I'm really curious as to how taxpayers pay an incredible amount of money because the practice of law requires a license...  First, the practice of law is inevitable given humans have yet to devise a system of government without inherent inefficiencies (maybe this is the actual target of your post).  Second, everyone is free to represent themselves, so I see no way that requiring people to get a license if they want to represent others creates a burden on taxpayers...  you can always represent yourself, though you might have a fool for a client.

Now, doctors is a bit of a hybrid given government subsidized healthcare...  it certainly increases the price for healthcare... but, at the same time, that licensing requirement tends to help consumers identify the real doctors from the guys who ram coathangers up lady parts (HELLO EVERYBODY!  I'm Dr. Nick!).  Obviously this can create a false sense of security in that many are quacks, but that's besides the point.

Unions, telcos, et al...  certainly...  without capability of reasonable dispute.

PS, an entity is separate and apart from an individual human... 

Ghordius's picture

All I got is this lousy empire? Are you serious? I think you can't even imagine how life would be for you if the US would lose it's hegemony

Momauguin Joe's picture

In the world I see - you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You'll wear leather clothes that will last you the rest of your life. You'll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you'll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway.

otto skorzeny's picture

it's Willis Tower now- that colored kid from Different Strokes bought it

LasVegasDave's picture

Id keep my head on a swivel during the collapse, Otto

There's lots of Yids practicing with .308 Winchester.

Paybacks been a long time coming

Momauguin Joe's picture

Better to have no tax. Lets evolve, man.

Ghordius's picture

by that you mean "let's have only the inflation tax"? that has a name: hyperinflation

Ghordius's picture

oh, now I understand: you mean "let's have no government, and so no taxes", right?

Momauguin Joe's picture

By that I mean lawyer's digging irrigation ditchs, bankster's cornering the market on village knife sharpening, in exchange for eggs and milk. People doing productive work, for the first time on their lives.

espirit's picture

I've gotten my federal witholding down to a pittance along with property taxes.  Pay no state income tax, and shop the cheapest black markets to avoid all but inescapable sales taxes.

Guess I'm a turnip. Molon Labe.

Ghordius's picture

"What this suggests is some tradeoffs are necessary. Better to have flat rates that are actually collected than byzantine tax codes and high nominal tax rates that incentivize gaming the system and result in unfairly disparate real tax rates."

Yes, of course. I believe to remember that this would make some 200'000 highly paid US tax lawyers immediately redundant, and would increase the tax burden of the "1%", which might or might not then decrease the amount they spend on electoral campaigns in order to further improve the tax code according to their needs... oh, I gave the thing away

q99x2's picture

Let Bernanke print the taxes this year. I refuse to pay gangsters. 

opencircle's picture

Obamacare is an upcoming tax which will take us formally over20% gdp threshold.

jjsilver's picture

Putting the legality of the income tax aside, all corporations pay zero tax. This guy is now a confirmed shill in my book

Hal n back's picture

let's not forget that this years tax revenues incl a large chunk related to Obamacare where the costs do not start till 1/1/14.


so all the discussio abut the deficit being reduced is kind of technically true. But come 1/1/14 we get hit in the face with Obamacare costs, and i doubt anybody really knows what that wil be except significant.

Hal n back's picture

I like the no tax idea-just let government print what ever it needs.


oops, it's already doing that.


QQQBall's picture


Cheaper to move to NV and ski more than keep funding the California insanity.

Vashta Nerada's picture

According to the feds, studies of fish mating behavior and similar ventures are too important to cut, so everybody who actually pays taxes will have to kick in an extra 55% on top of what you are paying now.

moonstears's picture

Ironically a system which shoves "survival of the fittest" as a hard "science" down every 7th grader's throat, in their public programming(school) system, also spends millions to save "unfit" species(like the fish in Cali), or sub species.

espirit's picture

"or sub species".


moonstears's picture

It occurs to me that the "political class" believes the "middle class" to be a sub species. I say it's the "virus killing the host". Wake up politicians, wake up middle class.

Hal n back's picture

you have to admire their chutzpah to defer paying fica taxes


Diogenes's picture

Professor Parkinson laid it all out in The Law and The Profits around 1960. You can collect 10% with nothing more than a little grumbling. Go to 20% or more and it becomes worthwhile to chisel on the taxes. So if the tax rate is 20% you never quite collect it. 50%, avoiding taxes pays better than working. Revenue drops off as workers turn down overtime, businesmen sit back with their feet on the desk. 80%, game over. Farmers abandon their farms, workers quit their jobs, shop keepers abandon their shops and everyone goes on welfare.

The government tries to keep things going by passing laws that everyone must go to work or else, wage and price controls, etc but nothing helps. Eventually the government collapses.

This was all based on historical research covering the tax policies of different countries and empires going back thousands of years.

NotApplicable's picture

Basically it's about just how tight a choke-hold one can apply without killing the victim.

JethroTull's picture

Those people who are withdrawing their labor should be forced to work longer hours. By not workign they are depriving a fellow citizen income.  Each to his ability each according to his need!  It's all the government's money. They own you bitchez!


Diogenes's picture

I think it is significant that Americans pay taxes as high as anywhere in the world, or higher, yet get NONE of the benefits the rest of the world takes for granted. Like health care, law enforcement, justice, protection from contaminated food, GMO food and other big business swindles.

Where is your money going?

NotApplicable's picture

Fake healthcare, law enforcement, justice, contaminated food, GMO food and other big business swindles.

BTW, if you think you're escaping this raping in your own little socialist paradise, well... your days are numbered. Like any other ponzi, it only works as long as there's new blood, and Europe has lost it's ability to transfer its woes onto Africa.

Anusocracy's picture

A police state for the inmates living in America and a police state for the rest of the world.

earleflorida's picture

excellent read!... CHS

SmittyinLA's picture

Its true, I just did a cost benefit analysis determined I was wasting my time working and paying taxes, and could make more NOT working and NOT payign taxes, and now I am applying for permanent disability, I am placing a "call" bet on the Socialist government.

I want to surf the Socialist wave of prosperity, theft and govt goonery. 

Its on like Donkey Kong.

C deK's picture

Sounds like a call to removing income and corporate taxes and instituting a sales tax.  Let me keep my property (income I earned through hard work) and pay taxes with what I purchase.

Vashta Nerada's picture

A sales tax replacing income tax is a great idea.

1. It is nobody's business how much I make, other than my employer and myself.

2. It is not regressive, unless the Kennedys start eating beans and cornbread and driving  Chevys.

3. Drug dealers, hookers, and the troika of A/C repairmen, plumbers, and lawn care providers will then actually be paying tax.

Atlantis Consigliore's picture

Can you imagine the fraud, front running, counterfeit, gangsters, regulators, media swindles, bernies and johns when

Bamascam Care eats 20% of GDP.  thats $ 300 B; fraud, corruption id theft, russians, hf req data mining, id theft, etc.

couple that with a 5% NOMINAL  inflation/  govt t rate you get  $ 800 b deficit there,

thats $ 1.1 trillion added a year now deficit is $ 2 Trillion.

anyone want any stocks, bonds,  US Dollies?  LOL giggle

underground economy here we all go. 

Bicycle Repairman's picture

"I paid taxes in the U.S. and all I got was this lousy Empire."

I don't want to be too Kissinger-like, but from a completely realpolitik standpoint, the empire offers the average American absolutely nothing.