Tax Myth Number One

The First Of Many?

In contemplating a title for this hub, which is about one of the pervasive myths regarding the United States income tax, I eventually recognized that there are so many myths and misconceptions regarding taxes that I would probably need to write a hundred hubs to cover them comprehensively. So, in anticipation of such future endeavors, I begin here with "number one," the first of what could prove to be many tax-related discussions.

It's an article of faith among some politicians (and far too often repeated in the mainstream media) that cutting the income tax rate for the richest Americans creates jobs. After hearing so many times about a positive historical correlation between taxes and unemployment, I decided to research the matter for myself. Understanding that the current debate regards tax rates that are ALREADY in place, and in light of the current high rate of high unemployment, I approached my investigation with a highly skeptical eye. Still, I half expected to see some historical synchronization.

There was, indeed, a correlation between the highest income tax rates and unemployment, but it proved to be NEGATIVE, not positive! In other words, the historical data suggests that when the rich pay higher marginal tax rates, unemployment tends to go DOWN, not up!

Do they really need MORE money?
Do they really need MORE money?

Looking At The Numbers

For my research I relied upon historical data from the Bureau of Labor Statistics and the Tax Policy Center. Specifically, I found the top marginal income tax rates (that is, the base rate, not adjusted for exemptions and loopholes) from 1948 to 2009 and compared them with the annual unemployment rates for those same years.

What I discovered was that, except for a brief six-year period in the late 1980s to early 1990s when the two rates mostly moved up and down together, the unemployment rate and highest tax rate usually moved in OPPOSITE directions. When the tax rate remained steady, the unemployment rates usually fluctuated, with two notable exceptions:

The first was from 1982 to 1986 (50%), where unemployment declined from 9.7% to 7.0%. The second was from 1993 to 2000 (39.6%), where unemployment declined from 6.9% to 4.0%. The first occured after the tax rate has been lowered (by less than 1%), the second after it had been raised (by more than 8%). It's impossible to draw a direct correlation from one without negating it with the example of the other.

In the data offered below, the first number is the year, the second is the top marginal income tax rate and the third is the annual unemployment rate.

First, from 1948 to 1952, the top tax rate grew from 82.12% to 92%, yet from 1949 to 1953 the unemployment rate declined from 5.9% to 2.9%:

1948_____82.13_____3.8
1949_____82.13_____5.9
1950_____91.00_____5.3
1951_____91.00_____3.3
1952_____92.00_____3.0
1953_____92.00_____2.9

Just another statistic
Just another statistic

The next year, the upper tax rate dropped a percentage point, and the unemployment rate nearly doubled, to 5.5%. Then, as the tax rate remained steady for ten years, the unemployment rate went up and down, ranging from 4.1% to 6.7%:

1954_____91.00_____5.5
1955_____91.00_____4.4
1956_____91.00_____4.1
1957_____91.00_____4.3
1958_____91.00_____6.8
1959_____91.00_____5.5
1960_____91.00_____5.5
1961_____91.00_____6.7
1962_____91.00_____5.5
1963_____91.00_____5.7

Then, in 1964 the top tax rate dropped dramatically, from 91% to 77%. Yet, the unemployment rate dipped only one half of a percent, from 5.7% to 5.2%:

1964_____77.00_____5.2

For the next 15 years, with the exception of a brief three year bubble, the top tax rate remained at 70%, while the unemployment rate fluctuated up and down.  Of the entire 15 years, the middle of that bubble, 1969, recorded the highest tax rate at 77%.  It also recorded the lowest rate of unemployment at 3.5%:

1965_____70.00_____4.5
1966_____70.00_____3.8
1967_____70.00_____3.8
1968_____75.25_____3.6
1969_____77.00_____3.5
1970_____71.75_____4.9
1971_____70.00_____5.9
1972_____70.00_____5.6
1973_____70.00_____4.9
1974_____70.00_____5.6
1975_____70.00_____8.5
1976_____70.00_____7.7
1977_____70.00_____7.1
1978_____70.00_____6.1
1979_____70.00_____5.8
1980_____70.00_____7.1

Next, in 1982 the tax rates began to drop dramatically, from 69.13% to 50%, and the unemployment rate immediately peaked to 9.7%, then steadily dropped as the tax rate remained steady:

1981_____69.13_____7.6
1982_____50.00_____9.7
1983_____50.00_____9.6
1984_____50.00_____7.5
1985_____50.00_____7.2
1986_____50.00_____7.0

The only time period when unemployment rates and the upper tax rates were largely in synch was from 1987 until 1992, where both fell, then rose together:

1987_____38.50_____6.2
1988_____28.00_____5.5
1989_____28.00_____5.3
1990_____31.00_____5.6
1991_____31.00_____6.8
1992_____31.00_____7.5

In 1993 the upper tax rate again rose to 39.6%, and the unemployment rate immediately dropped to 6.9%. Then, as the tax rate remained steady until 2000, the unemployment rate declined steadily to a low of 4.0%:

1993_____39.60_____6.9
1994_____39.60_____6.1
1995_____39.60_____5.6
1996_____39.60_____5.4
1997_____39.60_____4.9
1998_____39.60_____4.5
1999_____39.60_____4.2
2000_____39.60_____4.0

The next year, the tax rate dropped a percentage point to 38.6%. The unemployment rate rose to 4.7%, continuing to rise to a peak of 6% in 2003:

2001_____38.60_____4.7
2002_____38.60_____5.8

Since then the top tax rate has remained at 35% and, after dipping at 4.6% in 2006 the unemployment rate has once again climbed, to 9.3% in 2009.

2003_____35.00_____6.0
2004_____35.00_____5.5
2005_____35.00_____5.1
2006_____35.00_____4.6
2007_____35.00_____4.6
2008_____35.00_____5.8
2009_____35.00_____9.3

In the end, I must state for the record that I'm not claiming a direct cause-and-affect historical correlation between the top tax rates and unemployment rates. I fully realize there were myriad other economic factors affecting the rate of employment. Still, the next time someone tries to tell you that lower income taxes on the rich mean lower unemployment, you can demonstrate to them that the historical data actually suggests the opposite!

 

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Comments 9 comments

jdavis88 profile image

jdavis88 6 years ago from Twitter @jdavis88hub

Great research! good job!


Paladin_ profile image

Paladin_ 6 years ago from Michigan, USA Author

Thank you, jdavis88! When I began the research, I mostly expected mixed results. Of course, as I stated in the hub, the numbers don't prove cause and affect, but the correlations they suggest still surprised me!


HSchneider 6 years ago from Parsippany, New Jersey

Great Hub and very accurate. I am disgusted the Obama Administration capitulated on the Bush tax cuts. I would have stuck to my guns on the $250,000 and over and let them expire. I would have let all the estate tax cuts expire also. The Republicans are phonies on the deficit. They have now proven it.


Paladin_ profile image

Paladin_ 6 years ago from Michigan, USA Author

Thanks, HSchneider! I'm also disgusted by Obama's tax cut deal. However, I'm not surprised. He's made it clear, despite all his talk of "changing" Washington, that he's just another establishment politician.

Even worse, he's proven fairly inept when it comes to the art of political bargaining. To borrow my man Cenk Uygur's analogy, he's like a chess player who opens the match by giving the opponent his queen, then crows when he captures a pawn.


Xenonlit profile image

Xenonlit 5 years ago

This is a good reference. But isn't it amazing that you get an ad for "Christian debt relief?" I'm a Christian, so am I supposed to pray my way out of it? No..I know that I have to pay my bills!


gconeyhiden profile image

gconeyhiden 5 years ago from Brooklyn, N.Y.C. U.S.A

I like your knight's helmet and the research analysis.


Sooner28 4 years ago

This is a very good hub! I never thought it made much sense upon reflection. Instead of paying good teachers to educate children, Warren Buffet needs a tax cut on his billions; and somehow, this will become some sort of magic elixir that will cure all problems in the world.


Paladin_ profile image

Paladin_ 4 years ago from Michigan, USA Author

Thank you, Sooner and gconey!


Paladin_ profile image

Paladin_ 4 months ago from Michigan, USA Author

This comment is regarding the troll who recently left an anonymous comment on this hub, which has now been deleted.

I've recently changed the comments sections of my hubs to disallow anonymous comments (thanks to previous problems with spamming), and he apparently went through all twenty-five of them until he found the ONE that wasn't yet updated. That's one desperate troll!

Sadly for this vile, pathetic little person, his snarky comments have been forever deleted, and no one will ever read them. Of course, he'll read THESE comments, as trolls can't resist seeing what responses they evoke. He simply won't be able to help himself. It's what trolls live for.

But, then, since he refuses to create a HubPages account (which would subject him to the same rules as everyone else here), he won't be able to reply, which -- for a troll -- is a fate worse than death. I guess it sucks to be him. ;-)

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