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Corporate Tax Rates and Unemployment

On September 12, 2010, in Uncategorized, by admin

Update (9/14/2010): Reader JzB has noted that a large drop in the top marginal rate that appears in graph two may not have occurred. At this point I think I made a transcription error in pulling the data. I will check the numbers when I get a chance and redo the post. Apologies.

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I’ve been kind of swamped, low on sleep, and doing a few book related things in my few waking hours that don’t work or parenting (buy a copy of Presimetrics!!!!), so posting has been light. But I thought I’d do a quick and dirty post today about a hot topic – the effect that taxes on businesses have on unemployment. The usual argument is that the lower the taxes on businesses, the more money they keep and pump back into, well, doing business, and thus, the more people they end up hiring. But is it true?

Now, since the talk right now is about cutting payroll taxes in particular, ideally I’d use that data. However, in a quick perusal at the IRS’ site, all I found was the corporate marginal tax rate. However, the folks who suggest tax cuts as a way to boost hiring aren’t particular – most of them feel any tax cuts will lead to more hiring. So let’s check that, at least, shall we?

Figure 1 below shows the data used in this post; the top corporate marginal tax rate (obtained from the IRS) is on one axis and the unemployment rate for individuals sixteen years and over (from the Bureau of Labor Statistics) is on the other axis. The latter series begins in 1947, but truth be told, I didn’t notice the first year until I had already prepared the graph, so I begin in 1948.


Figure 1

Now, consider the correlation between the top corporate marginal tax rate and the unemployment rate. If it is true that lower taxes = lower unemployment, the correlation between the two series should be positive. A positive correlation means the series should move more or less in the same direction; as tax rates rise, unemployment rises, and as tax rates fall, unemployment falls.

If the correlation is, in fact, negative, that means that lower unemployment tends to happen when tax rates are higher. Correlation may not be causation, but it would be very hard to argue that cutting taxes on corporations leads to lower unemployment if we do not see a positive correlation between the two series.

Now, obviously, it may take time for tax rates to do whatever magic they might have. So Figure 2 looks at the correlation between the top corporate marginal tax rate and the unemployment rate in the same year, the unemployment rate the next year, etc., all the way through ten years out. Its really hard to see how the effect of tax rates should last beyond a couple of years, but I figured I’d be thorough and put up the figures. I’ll take a pass at interpreting them, but feel free to reach your own conclusions.

Additionally, because whatever effect tax rates might have on unemployment might change over time, each correlation is computed several times: once for the entire 1948 – 2009 sample, a second time for 1960 – 2009, a third time for the period since 1970, a fourth for the period from 1980 and a fifth time for the 1990 – 2009 period. (I didn’t look at just post-2000 because the top corporate rate has been frozen during that period.)


Figure 2.

So what does this say? Here’s my interpretation. If you look at the entire data set, the correlation between tax rates and unemployment appears to negative. That is to say, lower unemployment rates tend to be associated with higher corporate tax rates, not lower ones. Fast forward to the 1970s, and you see some of the oft-stated effect; higher taxes do seem to be associated with lower unemployment, and that effect becomes even stronger when you focus on the 1980s and beyond. However, the whole thing falls apart when you move into the 1990s and beyond, when the correlation is clearly negative, at least for the early years. The effect in out years is positive, but once again, its hard to see how the effect would lag that long. If I had to guess, the 1970s and 1980s were an aberration but I don’t have time to develop that thought right now.

My second interpretation… if I wasn’t some random guy who enjoys looking at data in an attempt to understand the world, but rather someone determined to reach a certain pre-determined conclusion, I’d pick my time sample very, very carefully.

How do you see it?

7 Responses to “Corporate Tax Rates and Unemployment”

  1. hemen parekh says:

    No Job takers ?

    Problem of Ashmount Primary School ( London ) is :

    It cannot find enough local Math teachers even at 40 pounds per hour.

    Because UK produced only 5980 Math graduates in 2009.

    Tom Hooper ( BrightSpark Education ) came to rescue of Ashmount and ” found ” them 100 Math teachers at 12 pounds per hour !

    From a Call-Center like remote-teaching service in India, which turned out 690,000 Maths graduates in 2009.

    It is another matter that the Indian Call-Center pays them only 7 pounds per hour on a full time basis.

    Ashmount assistant head teacher, Rebecca Stacy says, “The kids really enjoy it “.

    Would you say, a win-win situation?

    May be. But not for the 689,900 graduates who are still jobless!

    They have joined the ranks of 38 + million unemployed who have registered with State Employment Exchanges of India.

    With regards

    hemen parekh

    Jobs for All = Peace on Earth

    http://www.CustomizeResume.com

    • Mike Kimel says:

      hemen parekh,

      I think you misread the post. This is about taxes and unemployment in the US, not any perceived lack of qualified applicants or unemployment in India, which are topics for which I do not have data.

  2. [...] embarrassed. I messed up last week’s post which appeared at Angry Bear and on the Presimetrics blog. Essentially, I copied in some of the data on tax rates incorrect for three years in the late [...]

  3. Lane says:

    Thank you for this analysis. This is a good place to start, for anyone attempting to begin to understand the correlates of unemployment. Have you thought about doing a production capacity correlation to unemployment, with consumer price index or inflation metric on a third axis. Thanks for the info. Or perhaps a cohort analysis, with Europe or East Asia? Keep up the interesting work.

  4. [...] – do you have a source for it? In this blog – the writer takes data from the IRS and BLS and compares corporate tax rates with unemployment and puts it on a graph: [...]

  5. Richard Raffield says:

    I note that you only compared corporate rates.

    I think your process greatly skews the effects of taxation because most job creators in America are now small business owners, sole proprietors and smaller LLC’s.

    To be most accurate, you need to look at total taxation for individuals and corporations, other wise you risk having data that is not functionally correct.

    I’m not a believer of so called trickle down economics because it looks like all funds are flowing upwards to the richest people who are more able to control the system. “Capital over labor” was the mantra in the 70′s and still works today.

    We’ve allowed a global economy to destroy our labor markets by allowing cheaper workers and often countries abusive labor practices to manufacture products that are sold in higher cost markets such as the USA.

    We built many of the countries that are now rallying against us, but don’t expect any acknowledgment of that process.

    The rich get richer, because of the greater spread between production costs and profits, and we do nothing to protect our markets from this invasion of abusive work/labor practices.

    We could perhaps set tariffs on goods produced in the most abusive markets and give steep discounts to those companies bringing jobs to the USA. Unfortunately new global economy regulates this interaction and trade tariffs become increasingly difficult to pass or regulate.

    However high taxes in general for corporations with extreme write offs for companies adding jobs in the USA might be possible.

    Americans, should also really consider what they buy and how they invest their retirement funds. Investing in companies that offshore our jobs is like playing Russian roulette with our futures.

    Also, judging from your chart flow, your sampling of data points seems to be a bit light…

  6. Mike Kimel says:

    RR,

    As noted in the beginning of this post – there is an error with the data in this post. I have an update to that post here: http://www.presimetrics.com/blog/?p=168

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