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I’m 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 1970s; the IRS source I was using was not in spreadsheet form. The error was spotted by JzB. To be honest, I kinda shouldn’t have written that post… it was evident even from the way I started it:

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

OK. I’ve gotten a bit more sleep (not enough, mind you, but some), and while the baby is in my care right now, he’s quiet for the time being, so let’s get this done. First off, the topic… I want to look a the relationship between corporate tax rates and unemployment. Links to the data are posted below, but all the information I use, plus the analysis itself, sits in this google spreadsheet.

So, let’s begin.

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.

Figure 1

Where we go from here was best explained in the last post:

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 do we make of this? As I stated last week, I don’t think the outyears are all that relevant; I don’t think unemployment rates are affected by corporate tax rates ten years earlier, but I included them so no-one accuses me of cherry picking. If you think they matter, explain how in comments. Here’s what I’m seeing in the graph:

1. For the longer samples (1948 – 2009 and 1960 – 2009), the correlation between tax rates and unemployment rates is very close to zero.
2. For the three shorter time samples, the correlations are very big (positive for 1970 – 2009 and 1980 – 2009, negative for 1990 – 2009).

That seems to indicate that corporate tax rates did not use to have an effect on unemployment, but in recent years, they may be never used to have an influence on jobs. That influence may not be in the direction that tax cut proponents keep telling us about, though, as evidenced by the 1990 – 2009 series; anyone who has read Presimetrics won’t be at all surprised, as we point out the same thing in a completely different way. I think its because over time, our economy has become more loop-hole oriented than doing things oriented.

Your thoughts?

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4 Responses to “Corporate Tax Rates and Unemployment, A Correction”

  1. William Fitzgerrel says:

    Your first graph indicates the only big-time effect of corporate taxes on unemployment was in the late 1980′s, where the two trends are parallel. Otherwise it looks like unemployment is bouncing up and down with little relationship to the corp. tax rate. If I read your other graph correctly, the long-term trend is a negative 10 % correlation between unemp. and taxes. This actually is not a very strong correl., as you say. Probably we would be wiser not to tinker, but work toward a more rational and predictable tax structure (one that does not try to favor certain economic areas and one that business and individuals can rely on being stable).

    • Mike Kimel says:

      If you’ve looked at other posts on the blog (or many of the posts that appeared before that on Angry Bear) and/or the book, you’ll notice a consistent outcome is that lower taxes and/or cutting taxes does not produce the “expected benefits.” This is true if you look at the data consistently, whatever data you use (I’ve used corporate or individual marginal data, taxes collected, tax burden) at whatever level (I’ve used state, federal) in whatever conditions (I’ve focused on all periods since 1929, during recessions only, during expansions only, etc) , with whatever lags you use, and whatever effect you’re after (greater economic growth, greater real income growth, more unemployment, etc.).

      Of course, pick and choose very carefully, and treat this data point differently from that data point for any arbitrary reason, and you can do find beneficial effects of tax cuts… but then using techniques like that (e.g., Romer & Romer (http://www.angrybearblog.com/2009/01/further-critique-of-romer-and-romer.html)) you can prove anything.

  2. Anthony Parisi says:

    My only question on those years is how much corporate tax rate changed. If there were only a few corporate tax rate changes per decade then any change would result in sharp distortions one way or the other. That might explain why, while we see no correlation on the whole, we see drastic jumps when looking at specific decades.

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