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!
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%:
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%:
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%:
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%:
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:
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:
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%:
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:
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.
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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