Analysis of Taxes vs Unemployment, or Papa Boehner Assumes the Position

Leading into November's elections, the Republicans are looking at the prospect of a possible majority in the House--and it seems that the pundits and politicos are indicating that John Boehner (R-Ohio) would likely take the position of House Majority Leader should the switchover take place.

In the face of this new prospect, Boehner has taken the extraordinary step of putting forth a general Republican political agenda, indicating how he and his Majority would combat the economic crisis. His positions (which have been widely reported) are two-fold:

  1. Continue/Make Permanent the Bush Tax Breaks

  2. Reduce Federal Spending to 2008 Levels

For now, I am looking at his first claim, that there is a Historical Correlation between Taxes and Unemployment Levels and that lowering taxes for the wealthy helps the economy, thus lowering unemployment

I began by firing off a number of Google searches on the topic, but didn't find any meaningful historical data that would allow me to see the relationship between Taxes and Unemployment levels in a meaningful way. So, I started digging. Utilizing historical data from the IRS and several other data-mining sources (links at bottom) I started mining data from 1920 to the present, so we have a broad historical perspective.

Data:

First, I drew out the trend in unemployment rates from 1920-Present. It really doesn't look bad from out here...

Second I pulled the Individual and Corporate Tax Rates from 1920-Present. It caught me off guard:

I had no idea that personal Income Tax had ever been to 94% in the US, you learn something every day (well, every day you TRY to at least). Also, I didn't realize that there had been such a dramatic drop in personal income tax for top-tier earners in the 80s. In 1974, the Tax rate for top-tier earners was 70%. Between 1980 and 1987 it dropped to 38.5%. This is huge and unprecedented.

Also, I included corporate tax rates out of curiosity--I take the information with a grain of salt, since corporate tax avoidance is a famous American pastime, I'd be curious to see figures comparing the tax rates to the tax paid. Overall though, for this question, the Corporate Tax rates didn't seem to be terribly interesting.

Third--we get to the moneymaker--or rather, what Boehner's philosophy frames as the moneymaker. If Boehner's philosophy is right, we should see a correlation showing that drops in Individual Income Tax on top-tier earners is followed by periods of lower unemployment and general economic growth. Also, the Conservatives decry RAISING taxes (AKA not renewing the Bush Tax Cuts) because they claim it would exacerbate the current economic crisis, resulting in higher unemployment. So, we should ALSO see that unemployment goes UP following increases in taxes to the wealthy.

The first thing we see: in the 1920's we see a steep drop in the individual tax rate for top earners (green line). This is followed by a steep INCREASE in unemployment in the mid-to-late 20's. STRIKE ONE. This historical trend runs sharply counter to Boehner's assertion that lower taxes on the wealthy result in a stronger economy. The historical data from the 20's directly contradicts the Conservative assertion.

The second thing we see: in 1942 unemployment rates reached their lowest (1.2%) when individual tax rates were at their highest (94%). In 1942, tax rates for the wealthy hit 94, and stayed in the 91's until the mid 1960s. During this time, unemployment remained low and stable, averaging 4.98%. To reiterate, for 20 years the tax rates for the top-tier earners in the nation were at their highest, and unemployment was at it's lowest--the period, from 1942 to 1962, is historically seen as one of great prosperity.  STRIKE TWO.

The third thing we see is--well, it's actually something we don't see. We don't see a correlation between increased tax rates and decreased unemployment. Tax rates have been nearly flat since 1990, with a 8.6% increase between 1992 and 1993, and a 3.6% decrease between 2002 and 2003. Meanwhile, unemployment is pretty flat, fluxing normally. There is no causal correlation to be seen between tax rates and the recent (steep) rise in unemployment associated with the recent recession. I call that STRIKE THREE.

The Crux:


The heart of Boehner's Conservative position is that lowering taxes on the wealthy will spur economic growth. In the 1920s, lowering taxes for the wealthy was followed by a steep RISE in unemployment. In the middle of the 20th Century, sustained high taxes on the wealthy were coupled with historically low unemployment and a period of general prosperity and growth nationally. Recent history (20-30 years) shows a generally stable correlation between unemployment and income tax rates for the wealthy.

So what? -- Historically speaking, lower taxes for the wealthy are not associated with decreased unemployment. Economic trends from the last 90 years indicate that, in fact, lower tax rates for the wealthy tend to have either no effect, or a negative effect on unemployment.