All posts by Ironman

Hauser’s Law, Updated for 2019

Back in 2009, we wrote about Hauser's Law, which at the time, we described as "one of the stranger phenomenons in economic data". The law itself was proposed by W. Kurt Hauser in 1993, who observed:

No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.

In 2009, we found total tax collections the U.S. government averaged 17.8% of GDP in the years from 1946 through 2008, with a standard deviation of 1.2% of GDP. Hauser's Law had held up to scrutiny in principal, although the average was less than what Hauser originally documented in 1993 due to the nation's historic GDP having been revised higher during the intervening years.

We're revisiting the question now because some members of the new Democrat party-led majority in the House of Representatives has proposed increasing the nation's top marginal income tax rate up to 70%, nearly doubling today's 37% top federal income tax rate levied upon individuals. Since their stated purpose of increasing income tax rates to higher levels is to provide additional revenue to the U.S. Treasury to fund their "Green New Deal", if Hauser's Law continues to hold, they can expect to have their dreams of dramatically higher tax revenues to fund their political initiatives crushed on the rocks of reality.

Meanwhile, the U.S. Bureau of Economic Analysis completed a comprehensive revision to historic GDP figures in 2013, which significantly altered (increased) past estimates of the size of the nation's Gross Domestic Product.

The following chart shows what we found when we updated our analysis of Hauser's Law in action for the years from 1946 through 2018, where we're using preliminary estimates for the just-completed year's tax collections and GDP to make it as current as possible.

Hauser's Law in Action, 1946 - 2018

From 1946 through 2018, the top marginal income tax rate has ranged from a high of 92% (1952-1953) to a low of 28% (1988-1990), where in 2018, it has recently decreased from 39.6% to 37% because of the passage of the Tax Cuts and Jobs Act of 2017.

Despite all those changes, we find that the U.S. government's total tax collections have averaged 16.8% of GDP, with a standard deviation of 1.2% of GDP. Applying long-established techniques from the field of statistical process control, that gives us an expected range of 13.2% to 20.5% of GDP for where we should expect to see 99.7% of all the observations for tax collections as a percent share of GDP.

And that's exactly what we do see. The next chart zooms in on the total tax collections as a percent share of GDP data from the first chart, and adds the data for individual income tax collections as a percent share of GDP below it.

Total and Individual Income Tax Collections as Percent of GDP, 1946 - 2018

What we find 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. The biggest deviations we see from the mean trend to be associated with severe recessions, when tax collections have tended to decline somewhat more than the nation's GDP during periods of economic distress.

We also confirm that the variation in total and personal income tax receipts over time is well described by a normal distribution. We calculate that personal income tax collections as a percentage share of GDP from 1946 through 2018 has a mean of 7.6%, with a standard deviation of 0.8%.

For both levels of tax collections, if Hauser's Law holds, we would then expect any given year's tax collections as a percent of GDP to fall within one standard deviation of the mean 68% of the time, within two standard deviations 95% of the time, and within three standard deviations 99.7% of the time. And that is what we observe with the reported data from 1946 through 2018.

As for high tax revenue aspirations, we can find only three periods where tax collections rose more than one standard deviation above the mean level.

  1. 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.
  2. 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.
  3. Beginning in April 1997, the Dot Com Stock Market Bubble minted a large 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.

Looking at the preliminary data for 2018, which saw both personal and corporate income tax rates decline with the passage of the Tax Cuts and Jobs Act of 2017, we see that total tax receipts as a percent of GDP dipped below the mean, but still falls within one standard deviation of it, just as in over two-thirds of previous years. Tax receipts from individual income taxes however rose slightly, despite the income tax cuts that took effect in 2018, staying above the mean but still falling within one standard deviation of it.

Hauser's Law appears to have held up surprisingly well over time.

References

Bradford Tax Institute. History of Federal Income Tax Rates: 1913-2019. [Online Text]. Accessed 13 January 2019.

Tax Foundation. Federal Individual Income Tax Rates History. [PDF Document]. 17 October 2013.

U.S. Department of the Treasury. September 2018 Monthly Treasury Statement. [PDF Document]. 17 October 2018.

U.S. Bureau of Economic Analysis. National income and Product Accounts Tables. Table 1.1.5. Gross Domestic Product. [Online Database]. Last Revised: 21 December 2018. Accessed: 14 January 2019.

U.S. White House Office of Management and Budget. Budget of the United States Government. Historical Tables. Table 1.1. Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2023. Table 2.1. Receipts by Source: 1934-2023. [PDF Document]. 12 February 2018.

The Growth Rate of S&P 500 Dividends Per Share in the 21st Century

One of the most important and perhaps least well known metrics for the U.S. stock market is the growth rate of dividends for the S&P 500, which is why we started a new series to feature it last year.

The following chart visualizes the year over year growth rate of the S&P 500's trailing year dividends per share for each month of the 21st Century, starting from the beginning of the last year of the 20th Century and continuing through December 2018, with a bonus projection of the currently expected future for S&P 500 dividend growth through March 2020.

Year Over Year Growth Rate of S&P 500 Dividends Per Share in the 21st Century, 2000-Q1 through 2018-Q4, with Projected Future Through 2020-Q1

We've also indicated the National Bureau of Economic Research's official periods of recession in the 21st Century (so far!) on the chart.

As for how to best use this data, you really want to pay close attention to how fast the growth rate of dividends per share is changing, where negative accelerations for dividends generally coincide with falling stock prices, and positive accelerations tend to coincide with rising stock prices. Also, if you compare the projected future for 2018 with what actually happened for the S&P 500's dividend growth rate, 2018 was a year that mostly lived up to early expectations.

That's not always the case, where we've seen dramatic changes in those expectations in this century, particularly when the U.S. economy fell into recession. If there's one observation that you want to take away from the chart however, it is perhaps Tadas Viskanta's observation that "recessions are a dividend killer"!

Previously on Political Calculations

The S&P 500 and the First Lévy Flight Event of 2019

2019 is off to a rollicking start for the S&P 500 (Index: SPX), which appears to have launched into its first Lévy flight event in 2019.

If that's not a term you're readily familiar with, here's what that means. A Lévy flight is similar to a random walk for stock prices, but instead of the relatively small changes in stock prices that characterize a true random walk, it is characterized by the sudden emergence of comparatively large changes - more so than would be predicted by a normal distribution.

From our perspective, Lévy flight events can occur whenever investors shift how far forward in time they are looking into the future as they go about setting current day stock prices, where the differences in expectatations for the sustainable portion of future earnings associated with these different points of time drive these outsized changes in stock prices. For the first Lévy flight event of 2019, that shift appears to be from the distant future quarter of 2019-Q4 back to the current quarter of 2019-Q1.

Alternative Futures - S&P 500 - 2019Q1 - Standard Model with Annotated Redzone Forecast - Snapshot on 11 Jan 2019

It was even sort of predictable, where we described what would happen if investors acted to shift their forward-looking attention just as they appear to have, well before the market even opened last week.

  • If investors remain focused on the distant future quarters of 2019-Q3/2019-Q4, the S&P 500 can be expected to generally follow a downward trajectory throughout 2019-Q1, falling into a true bear market for the index.
  • If investors shift their attention toward 2019-Q1, the effect would be to boost stock prices higher, where they would largely move sideways during the quarter with respect to their current level.
  • Should investors shift their forward-looking focus to 2019-Q2, the market would see a significant rally above its current level.

Investors chose Door #2 in this real-life Monty Hall problem!

Meanwhile, because we've now entered the period of time where it will be relevant, we've redrawn our redzone forecast to correspond with this selection, anchoring its starting point with where the S&P 500 closed on Friday, 11 January 2019. If you want to know more about our assumptions in generating the forecast, we've incorporated them in the annotations on the chart.

With the Fed's future actions now fading into the background noise after dominating much of the market-related news headlines last week, we can perhaps look forward to investors sustaining their focus on 2019-Q1 as earnings season gets under way in the week ahead. That should mean the end of the first Lévy flight event of 2019, with smaller stock price movements from day to day, but this is also when a number of companies will change investor expectations for the future, which can change stock prices as investors rapidly absorb all new information.

Speaking of new information, here are the major market-moving headlines from the past week....

Monday, 7 January 2019
Tuesday, 8 January 2019
Wednesday, 9 January 2019
Thursday, 10 January 2019
Friday, 11 January 2019

Barry Ritholtz listed the week's positives and negatives in his weekly succinct summary of the major economics and market-related news, and deployed the word "stalement"! What does that mean? It's defined in the Urban Dictionary!...

Reversing 300 Million Years of Continental Drift

If you're a fan of the theory of dynamic plate tectonics (and really, who isn't?), you can spend a lot of time checking what that has meant for where you live by playing with Dinosaur Pictures' Ancient Earth Globe app, where you can plug in your address and see how the Earth where you're at has changed over tens and hundreds of millions of years!

We did that, where we plugged in a famous address in Washington D.C., which centered the globe in today's world on the Western Hemisphere. We then moved backwards in time, until we got to a point where the spot where Washington D.C. would eventually be located moved into the opposite hemisphere. The following animated image shows 300 million years worth of that continental drift in reverse....

Animation: Washington D.C. from Today Back to 300 Million Years Ago

We set up the animation so that each of the frames would be displayed for eight seconds, which should allow enough time to read some of the additional information that the app presents.

Do check it out - although we stopped at 300 million years, the app goes back some 750 million years.

Average Hourly Pay and Benefits in the United States

The Bureau of Labor Statistics has been tracking the average pay and benefits earned by American workers in all occupations and working in all industries since at least the first quarter of 2004 [1], where we now have nearly 15 years worth of data that indicates how much the average civilian employee in the U.S. has been compensated for their hours worked.

We've visualized the nominal data reported by the BLS in the following chart, where we've presented the average wage or salary and the total benefits earned per hour worked with the combined total compensation earned by civilian workers in the U.S. from 2004-Q1 through 2018-Q3. The data for 2018-Q4 won't be available until 19 March 2019.

Average Compensation per Hour for All Civilian Workers, All Occupations in All Industries, 2004-Q1 through 2018-Q3 title=

From 2004-Q1 to 2018-Q3, the cost to civilian employers in the U.S. of compensating their employees rose from $24.95 per hour to $36.63 per hour, an increase of 47%. Breaking that figure down into its components, hourly wages and salaries rose by 41% from $17.71 to $25.03 over that period, while the value of benefits paid to civilian employees as part of their total compensation rose by 60% from $7.23 to $11.60 per hour.

In our next chart, we're presenting the same quarterly information, but now adjusted for inflation to be in terms of constant 2018-Q3 U.S. dollars.

Inflation-Adjusted Compensation per Hour for All Civilian Workers, All Occupations in All Industries, 2004-Q1 through 2018-Q3 title=

After taking inflation into account, we find that hourly wages and salaries have risen by 5% from 2004-Q1 to 2018-Q3 and that their benefits have increased by 19%. Together, the inflation-adjsuted total compensation of civilian employees in the U.S. has increased by 9% from 2004-Q1 through 2018-Q3.

Both employers and employees have incentives to favor benefits over wages and salaries in considering how employees will be compensated for their labor, where in particular, the portion of employee compensation that goes toward paying the employer-provided benefit of health insurance is exempt from federal, state and local income taxes.

Notes

[1] On a quarterly basis, following the North American Industry Classification System (NAICS) for tracking costs across various industries. The BLS also has annual employee compensation data going back to 1986 that followed the older Standard Industry Classification (SIC) code system.

References

U.S. Bureau of Labor Statistics. Employment Cost Trends: Employer Cost for Employee Compensation. [Online Database]. Accessed 4 January 2018.

Organization for Economic Co-operation and Development. Main Economic Indicators: Consumer Price Index: Total All Items for the United States (Quarterly, Seasonally Adjusted). [Online Database]. Accessed 4 January 2018.