Could Employing Tax Cuts Tax Employment?

Republicans have been incessant in their demands for the top income tax rate to remain at 35%, and are willing to allow the rate reductions on the middle class to expire rather than concede the top rate reset. Since the days of Ronald Reagan, the right has consistently maintained that reductions in tax rates, particularly on the wealthiest Americans, benefits us all. Even today, we hear from the right that a return of the top income tax rate to 39.6% will further increase unemployment. So I thought it would be interesting to look at correlations between the top income tax rate and employment.

I looked at the US Bureau of Labor Statistics employment data dating back to 1960, covering both private and public sector jobs; the overall results were the same whether I included or excluded the public sector. I then calculated the percentage growth in jobs year-over-year. One issue that creates noise in the percentage growth is the impact of population growth. So, to compensate for this, I calculated the mean job growth over the past 50 years (1.83%), and then calculated how much the year-over-year job growth differed from that mean. The results appear below:

 

Year

Total

Job Growth

Divergence from mean employment rate growth

1960

54,296

 

 

1961

54,105

-0.35%

-2.18%

1962

55,659

2.87%

1.04%

1963

56,764

1.99%

0.15%

1964

58,391

2.87%

1.04%

1965

60,874

4.25%

2.42%

1966

64,020

5.17%

3.34%

1967

65,931

2.99%

1.15%

1968

68,023

3.17%

1.34%

1969

70,512

3.66%

1.83%

1970

71,006

0.70%

-1.13%

1971

71,335

0.46%

-1.37%

1972

73,798

3.45%

1.62%

1973

76,912

4.22%

2.39%

1974

78,389

1.92%

0.09%

1975

77,069

-1.68%

-3.51%

1976

79,502

3.16%

1.33%

1977

82,593

3.89%

2.06%

1978

86,826

5.13%

3.29%

1979

89,932

3.58%

1.75%

1980

90,528

0.66%

-1.17%

1981

91,289

0.84%

-0.99%

1982

89,677

-1.77%

-3.60%

1983

90,280

0.67%

-1.16%

1984

94,530

4.71%

2.88%

1985

97,511

3.15%

1.32%

1986

99,474

2.01%

0.18%

1987

102,088

2.63%

0.80%

1988

105,345

3.19%

1.36%

1989

108,014

2.53%

0.70%

1990

109,487

1.36%

-0.47%

1991

108,375

-1.02%

-2.85%

1992

108,726

0.32%

-1.51%

1993

110,844

1.95%

0.12%

1994

114,291

3.11%

1.28%

1995

117,298

2.63%

0.80%

1996

119,708

2.05%

0.22%

1997

122,776

2.56%

0.73%

1998

125,930

2.57%

0.74%

1999

128,993

2.43%

0.60%

2000

131,785

2.16%

0.33%

2001

131,826

0.03%

-1.80%

2002

130,341

-1.13%

-2.96%

2003

129,999

-0.26%

-2.09%

2004

131,435

1.10%

-0.73%

2005

133,703

1.73%

-0.10%

2006

136,086

1.78%

-0.05%

2007

137,598

1.11%

-0.72%

2008

136,790

-0.59%

-2.42%

2009

130,920

-4.29%

-6.12%

 

The last column is a point divergence; that is, in 1961, job growth was 2.18 points below the mean.

I also plugged in the top tax rates during those same years. The top tax rate was raised four times, and lowered 10 times, in the past 50 years, ranging from a peak of 91% in the early 1960s to a low of 28% during the last years of the 1980s. Of particular interest to me was the years immediately following a tax rate change, since the claim of the right is that these changes have an inverse relationship to employment. First, I looked at the same year as the tax rate change, and established a correlation between the change in the top rate and the divergence of employment growth from the mean. A correlation of 1 would mean that a 1% decrease in the top income tax rate would correspond to employment growth one point higher than the mean.

Year

Top income tax rate

Change in top rate

Divergence from mean employment rate growth

Correlation

1964

77%

-14%

1.04%

          0.07

1965

70%

-7%

2.42%

          0.35

1968

75.25%

5.25%

1.34%

        (0.26)

1969

77%

2%

1.83%

        (1.04)

1970

71.75%

-5.25%

-1.13%

        (0.22)

1971

70%

-1.75%

-1.37%

        (0.78)

1982

50%

-20%

-3.60%

        (0.18)

1987

38.50%

-11.5%

0.80%

          0.07

1988

28%

-10.5%

1.36%

          0.13

1991

31%

3%

-2.85%

          0.95

1993

39.60%

9.6%

0.12%

        (0.01)

2001

39.10%

-0.5%

-1.80%

        (3.60)

2002

38.60%

-0.5%

-2.96%

        (5.91)

2003

35%

-3.6%

-2.09%

        (0.58)

The results don’t point to much of anything. But, then again, employment tends to be a lagging indicator, so it makes sense to shift the employment rates by a year or two. I tried a one-year shift and didn’t see any better results, but then I tried two years:

 

 

Year

Top income tax rate

Change in top rate

Divergence from mean employment rate growth

Correlation

1964

77%

-14%

3.34%

    0.24

1965

70%

-7%

1.15%

    0.16

1968

75.25%

5.25%

-1.13%

    0.22

1969

77%

2%

-1.37%

    0.78

1970

71.75%

-5.25%

1.62%

    0.31

1971

70%

-1.75%

2.39%

    1.37

1982

50%

-20%

2.88%

    0.14

1987

38.50%

-11.5%

0.70%

    0.06

1988

28%

-10.5%

-0.47%

  (0.04)

1991

31%

3%

0.12%

  (0.04)

1993

39.60%

9.6%

0.80%

  (0.09)

2001

39.10%

-0.5%

-2.09%

  (4.19)

2002

38.60%

-0.5%

-0.73%

  (1.45)

2003

35%

-3.6%

-0.10%

  (0.03)

Now this looks interesting. From 1964 to 1987, decreases in the top tax rate corresponded to better-than-average employment growth two years later, while increases in the top tax rate corresponded to worse-than-average employment growth two years later. Every single time. But the impact was very small in 1987’s tax rate change.

What’s even more intriguing is what happened after 1987. From 1988 to 2003 (the last year of a change in the top tax rate), decreases in the top tax rate corresponded to worse-than-average employment growth two years later, while increases corresponded to better-than-average employment growth. Again, every single time.

Why might this be? One element that jumps out is the points at which the correlation change from positive to negative. Rates above 50% corresponded to positive correlations, while rates below 50% corresponded to negative correlations. I don’t have any good explanation for this, but it is certainly worthy of contemplation.

I don’t claim based on these data to have proven that returning the top tax rate to 39.6% will necessarily lead to more jobs. However, I do claim that there is reason to believe that allowing the Bush tax cuts to sunset won’t be damaging to employment, and may in fact improve it.

 

 

 

 

 

 

 

 

 

 

 

 


About Michael Weiss

Michael is now located at http://www.logarchism.com, along with Monotreme, filistro, and dcpetterson. Please make note of the new location.
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30 Responses to Could Employing Tax Cuts Tax Employment?

  1. Monotreme says:

    I agree, this is interesting. I’m not an economist, so I’m not sure how to interpret the numbers, but they are provocative.Two questions:1) Is it possible that the causal arrow runs the other way?2) Is there any economic theory, other sources of data, or other measures (e.g. manufacturing, productivity) that would bolster your argument?

  2. Bart DePalma says:

    “Now this looks interesting. From 1964 to 1987, decreases in the top tax rate corresponded to better-than-average employment growth two years later, while increases in the top tax rate corresponded to worse-than-average employment growth two years later. Every single time. But the impact was very small in 1987’s tax rate change. What’s even more intriguing is what happened after 1987. From 1988 to 2003 (the last year of a change in the top tax rate), decreases in the top tax rate corresponded to worse-than-average employment growth two years later, while increases corresponded to better-than-average employment growth. Again, every single time. Why might this be?”***The 1964 and 1982-4 tax reforms were repairing recessionary or lagging economies while we were approaching full employment in 1989 and 2005.The last time we tried raising the top tax rates during a recession, the President’s names were Hoover and Roosevelt and we were stuck with high unemployment for years afterward.

  3. shrinkers says:

    Interesting that Bart admits factors in addition to top marginal tax rate might affect employment and GDP growth.This is a fascinating result, Michael. Could it be there is some taxation / employment equivalent to the Laffer curve? Your findings seem to indicate the peak for such a theoretical curve might be around 50%.This is far more interesting than the Laffer curve itself, for which there is no experimental or observational supporting data whatever (supply-side trickle-down is something that True Believers take on faith, like Creationism or the Rapture). Love the data. Good show!

  4. Realist says:

    @shrinkersThat’s an interesting thought. Maybe it is the Laffer curve we’re looking at.@BartI see where you’re going with this, but that doesn’t explain the 1991 value. Weren’t we in a recession at the time?

  5. Michael Weiss says:

    (quick note…the first table doesn’t show up correctly…there are two columns on the left missing)Yeah, I saw that 50% number and thought Laffer…nonetheless, I’m a little reluctant to push that theme very far.If you look at the numbers for a while, you’ll see a couple of other things pop out. First, that reducing taxes seems to have a more positive impact on employment when you’re dropping from the 70+% range. Second, that small changes (<1%) have a disproportionately large impact relative to the larger changes in tax rate.I’d love to know more about why this appears to be the case.

  6. shrinkers says:

    The last time we tried raising the top tax rates during a recession, the President’s names were Hoover and Roosevelt and we were stuck with high unemployment for years afterward.And the tax increases were the cause of that — not the depth of the recession that caused the crisis, nor the failures of the banks, nor the utter collapse of the worldwide economy. Please.Most of the reason the Great Depression lasted as long as it did was because Roosevelt started listening to the Republicans who insisted that he reduce public spending. The R’s have learned nothing since then.

  7. Bart DePalma says:

    Realist:The 1991 recession figures are two years after the Bush 41 tax increases. The last reduction of the top rate before 1991 was implemented by the 1987 tax reforms setting up the two tier system of 14 and 28% while eliminating many deductions and credits. That is where we need to get back to.

  8. shrinkers says:

    First, that reducing taxes seems to have a more positive impact on employment when you’re dropping from the 70+% range.This could mean that the sides of the theoretical “curve” are steep, but the top is fairly flat. It’s more a mesa than a bell. Second, that small changes (<1%) have a disproportionately large impact relative to the larger changes in tax rate.Perhaps what matters is the fact of a change more than the magnitude of it. Perhaps the nature of the effect is that the type of investments and expenditures adjust to the new tax structure, and that is what causes a change in employment. Once the nature of the economy has adjusted, the size of the tax change is relatively unimportant.

  9. Bart DePalma says:

    There were multiple tax increases prior to the Great Depression – the Smoot Hawley tariff, the Hoover Millionaires tax and the various Roosevelt tax increases. Smoot Hawly triggered a trade war and the Depression and the other tax increases made it worse.FDRs pro-union policies also spiked the cost of labor and kept employers from hiring even after growth returned.

  10. Realist says:

    @BartYou misunderstand. My point is that we were in a recession at the time of the tax increase, and yet two years later there was an above-average growth in employment.

  11. shrinkers says:

    And of course, another important factor, not taken into account here, is the nature of Federal expenditures. What is that tax money used for? Surely that has an impact on GDP growth, which industries benefit most, how much spending money consumers have, etc., and all that affects overall employment. Taking a singer factor (top marginal rate) and correlating it against a single other factor (employment) may or may not be meaningful in something as complex as a national economy.There are, however, statistical tools which usually indicate whether a correlation is likely to be a meaningful one, but I”m not enough of a statistician to be able to suggest anything.

  12. Bart DePalma says:

    Realist wrote: “You misunderstand. My point is that we were in a recession at the time of the tax increase, and yet two years later there was an above-average growth in employment.”Gotchya.Michael is averaging employment growth over a long period of time instead of in comparison to the same point at previous recessions. Employment should have been booming coming out of the 1991 recession and instead we had standard employment growth which was not putting the unemployed back to work. This is the first of the so called jobless recoveries.Compare this to the standard unemployment growth of around 5% or so after a standard cyclical recession or the monster employment growth after the Reagan tax reforms in 82-84.

  13. Michael Weiss says:

    @shrinkersThe nature of Federal expenditures is a topic I’m working on. It’s complex enough that I may have to break it up into multiple parts, because (like the HCR legislation) it has several big parts that go together, and aren’t that meaningful without the whole thing.To your other point, I do know enough about statistics to just pass the threshold from dangerous to useful. But only just. It’s hard to get really meaningful results from the mere 14 data points we have here, though.

  14. shiloh says:

    @BartlesThere was also monster employment growth in (1971) when the Top income tax rate was (((70%)))and monster employment growth in (1964) when the Top income tax rate was (((77%)))carry on

  15. Michael Weiss says:

    Bart, that’s an interesting idea. It gets us closer to ceteris paribus on one level. I’m unsure how to tease the cause and effect elements from each other, though. That is, to what degree would tax policy cause the recession? This, too, is a common claim of the right…that tax increases cause recessions.

  16. Mr. Universe says:

    Oops, didn’t see the missing columns. I’ll try to fix it but it may be incompatibility with the software and the tables Michael was using.

  17. Bart DePalma says:

    Michael:There are all kinds of variables that need to be taken into account in such an analysis. For example…1) What is the effective as opposed to the nominal marginal tax rate? In other words, the total of all nominal tax rates on the income stream (corporate, personal, ss, medicare, etc) less the deductions and credits folks are taking.2) How much tax is being evaded?3) At what point in the business cycle are we measuring?4) How do you exclude other variables such as financial panics, unionization and government interventions that affect capital and labor costs and thus hiring.Enjoy your quest for the Holy Grail of economics.;^)

  18. Jeff says:

    I’d love to see more posts like this one. My suspicion is that there are multiple factors at work. For example, my recollection is that in the late 80’s the Greenspan commission increased social security taxes significantly, which would have the same effect as a broadbased tax increase, especially when you remember that employers also paid the same increase. Also, the initial Reagan tax cuts were coupled with elimination of a lot of loopholes and deductions, then quickly followed with tax increases.Given the huge numbers of factors that affect employment, I’m not sure there is any way to capture the effect of changes in tax laws — even if you could identify all the changes in Federal, State, and local taxes. In addition, Fed action is huge, and could be contra-cyclical to tax policy.I do believe in the Laffer Curve — 100% taxes produce zero revenue and 0% taxes produce zero revenue, but who knows what the slope of the line between the two points looks like. There’s no real question that other things being equal, tax increases are economic depressants, and tax cuts are stimulants. The problem is that “other things” are rarely equal. And even if they were, there’s the question of the most efficient distribution of tax cuts. The lower your income, the more inclined you are to spend any additional money. The higher your income, the more apt you are to invest. Cutting high marginal tax rates *should* lead to more investment, while cutting taxes on lower-income people *should* promote consumption. And you can have economic and employment booms created by investment (China today) or by consumption (the USA, 1990-2008). In the short-term, consumption is the easy and faster route, but investment is the key to longer-term prosperity. The economic argument today is over the question of whether we’d be better off encouraging investment and longer-term increases in wealth (cut marginal rates, cut corporate taxes, reduce regulation, etc) or trying to jump-start the economy through increased consumption (stimulus programs).Unfortunately, the real kicker for the longer term is debt. The net savings rate for American households dropped from something like 10 or 15% in the 50’s, to negative shortly before the crash. Government went from primary surpluses to deficits. Long-term liabilities (social security, medicare, and defined-benefit pensions) went from fully funded to horribly underfunded, and governments at all levels cut investments in infrastructure in favor of current spending.There’s plenty of blame to go around, but the question now is how to get out of the box we’re in.

  19. Realist says:

    Translation of Bart’s comment:Economics is really complex, to the point where you can’t really tell causes and effects. Therefore, any economic claims anyone (including Bart) makes are pretty much meaningless.We now return you to your regularly scheduled blog already in progress.

  20. shiloh says:

    @RealistEconomics is really complex, to the point where you can’t really tell causes and effects. Therefore, any economic claims anyone (including Bart) makes are pretty much meaningless.~~~~~~~~~~but, but, but Reagan will always be a demigod to Bart! regardless ;)Just sayin’

  21. shrinkers says:

    And tax cuts always result in increased revenues for the gummint. And tax increases are always bad, particularly in a recession.Bart, do you ever get tired of spouting self-negating nonsense?Rhetorical question.

  22. Mr. Universe says:

    I concur with Michael’s conclusion regarding the Bush tax cuts. Keeping the upper tier tax cuts presumes that the wealthy will create more job opportunites. Yet it’s more likely than not that they are hoarding the money or purchasing high end goods and services.Off topic: since I will not give my personal information to the NYT, I have surrendered my ability to post commentary there. But in regards to Nate’s assertion that Andrew Cuomo’s reluctance to debate Paladino and just coast to election day, where have we heard that story before? An Attorney General with a big lead six weeks out who is reluctant to campaign; Hello Scott Brown, so long Martha Coakley.

  23. shortchain says:

    Shiloh, Realist,If you want to see Bart cut through the complexities of economics (and damn the uncontrolled variables!) you only need to look at the “how’s that tea party thing” thread.The difference between the economics in the cause of the meltdown and the current situation is, oh, I don’t know, maybe because he doesn’t like the conclusion?

  24. Bart DePalma says:

    Mr. Universe wrote: “I concur with Michael’s conclusion regarding the Bush tax cuts. Keeping the upper tier tax cuts presumes that the wealthy will create more job opportunites. Yet it’s more likely than not that they are hoarding the money or purchasing high end goods and services.”Let me see if I understand you.The less you tax the wealth investors make, the more likely they are to stop investing and to sit on or spend their money.Which implies that, the more you tax the wealth investors make, the more likely they are to invest and less likely to sit on or spend their money.Bizarro world.

  25. Realist says:

    @BartUnless you invest in the primary issuance of debt or equity, investment has a tertiary impact on the economy as a whole, at best. Far more of a positive impact is achieved through either primary investment or exchange of money for goods and/or services.

  26. Jeff says:

    @Realist: “Unless you invest in the primary issuance of debt or equity, investment has a tertiary impact on the economy as a whole, at best. Far more of a positive impact is achieved through either primary investment or exchange of money for goods and/or services.”=======Investment is investment. Small business investment is direct — the owner buys a truck or a machine. Large corporate investment is indirect — buy a stock or bond in companies, and they buy the equipment.Capital markets are what make large corporations (and economies of scale) possible. Capital markets cannot function without liquidity, meaning a sufficient supply of buyers — and sellers. Aside from micro-businesses like a restaurant or dry cleaners, why would anybody invest in a small company unless there was a potential exit strategy after success? The kind of companies we need are like HP, Intel, Fed Ex, etc, who grew for years and years and had a constant need for additional capital to support their growth. Venture capital firms make investments in small companies or smart people with ideas, in the hope that some day they can take profits through an IPO. Highly successful VC’s typically have ratios like 50% failure, where they lose their money, 20% break-even, 20% profitable, and — if they’re lucky, one home run. Reduce the ability to hit a home run by reducing capital market liquidity, and you choke off innovation. This is why capital gains rates are so important.Economies don’t grow because of “exchange of money for goods and services.” If they did, we could all get rich paying each other to do our laundry. You’re mistaking cause and effect. Growing economies create more exchanges of goods and services, not the other way around. This was the basic fallacy of the stimulus program. It took money from one pocket and put it into another pocket, and said the resulting exchange of goods and services would lead us to the economic promised land.

  27. shrinkers says:

    Investors don’t invest if there are no consumers to consume. Yes, economies grow because of “exchange of money for goods and services.” Without that, no one does anything. Demand leads supply. The Stimulus program prevented a second Great Depression for exactly this reason.

  28. Realist says:

    @JeffCapital markets cannot function without liquidity, meaning a sufficient supply of buyers — and sellers.That’s the tertiary effect to which I alluded.Increasing the number of players in that market doesn’t have a primary impact on the economy. Rather, it increases liquidity options. But given a choice between adding dollars to the primary markets and adding dollars to the secondary markets, I’d take the former any day.So if we assume that we’re going to cut taxes by a certain number of dollars, we’ll get a much bigger positive impact on the economy by putting those cuts in the lower-income brackets than we will by putting them in the upper-income brackets.Furthermore, if we wish to go revenue neutral, raising taxes in the upper brackets while simultaneously lowering them in the lower brackets will also have a similar positive impact on the economy…to a point. Like everything else, it’s all a question of moderation.

  29. JBH says:

    Amen! The most economically incompetent president of the last 120 years was FDR. Going into his third term the unemployment rate hit 19%! After the financial panic and recession of 2008-9 are fully analyzed, economists and historians are going go to back and set the record straight. Obama is the second most incompetent. He is like the servant in the bible who, given one talent by his master, buried it instead of putting it to work.

  30. Pingback: Take 2: Could Employing Tax Cuts Tax Employment? | 538 Refugees

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