Corporate Tax Rates and Unemployment, A Correction
by Mike Kimel
Corporate Tax Rates and Unemployment, A Correction
Cross posted at the Presimetrics blog.
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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?
Mike, I am leery of long range statistical analysis when the subject, tax policiy, studied is essentially used as a short term policy. Long term analysis levels the ranges, esp[ecially when any smoothing is used.
I also am concerned when the under lying conditions are obviously ignored. Why go back to the period when the only operating major economy was the US? Why ignore the impacts of the huge demographic anamoly of the baby boomers. Why ignore the impacts of a long bubble economy under Clinton?
All of these negatively impact any correlation. But, more importantly why ignore the reality that tax policies are used as short term stimulus and longer term recovery of lost revenue? In that use you show a very good short term correlation. You said this: “2. For the three shorter time samples, the correlations are very big (positive for 1970 – 2009 and 1980 – 2009, negative for 1990 – 2009).”
But, you conclude this: “That influence may not be in the direction that tax cut proponents keep telling us about, though,…”
You seem to bend yourself into a pretzel to make an obscure point.
Here is something I have been wondering: tax rate changes and interest rate changes are means to affect the decisions of the mass of consumers and investors; what impact does it have on their efficacy as tools when the percentage of assets and income is increasingly held by a tinier slice of the population? If 99% of the population reaps 92% of income (as in the 80s), then, surely, the tools are far more efficacious than when 99% of the population reaps 77% of income (as is the case today). If the top 1% pull in 23% versus 8%, how can the tools be as efficacious to spur growth?
Here is something I have been wondering: tax rate changes and interest rate changes are means to affect the decisions of the mass of consumers and investors; what impact does it have on their efficacy as tools when the percentage of assets and income is increasingly held by a tinier slice of the population? If 99% of the population reaps 92% of income (as in the 80s), then, surely, the tools are far more efficacious than when 99% of the population reaps 77% of income (as is the case today). If the top 1% pull in 23% versus 8%, how can the tools be as efficacious to spur growth?
I’m going to repeat my same point. The statutory corporate tax rate is the price at which no tranactions take place. Essentially no firms pay anywhere near the top corporate rate. The actual or effective tax rate is massively different from the statutory rate.
CoRev,
The convoluted point is this – I keep checking for some evidence that cutting taxes produces some beneficial results. I’ve looked at it many ways, with many data sets, over many time periods, and for many levels of granularity. This is the closest I’ve come in any post to showing those positives. That oughta tell you something about your faith in tax cuts.
arby,
Good question. I have to think about it.
spencer,
I agree. But I’ve already looked at the tax burden. I’m simply leaving no stone unturned.
Are advocating a tax increase on January 1, 2011 or not?
If you are…….make your prediction on the effect of the economy now!
If you are not….make your prediction on the effect of the economy now, and explain why your going against your own analysis.
If you refuse to make a prediction…you shouldn’t be taken seriosly….it’s just that simple!
Mike, I just look back on the past administration and can see what tax cuts mean. If you can’t then i worry about your judgement.
Thank you for considering this. I look forward to your thoughts, My assumption is that the response of the bottom two economic quintiles and the top one percent to these broad policy tools is essentially zero when dealing with the kind of minor adjustments discussed by current policy makers. These are tools that produce only marginal changes in mass behavior, and, as the share of national income earned by other Americans shrinks, they will have an increasingly smaller impact. Trend is not destiny but a decade from now these tools could be even less impressive on a macroeconomic policy level.
Thank you for considering this. I look forward to your thoughts, My assumption is that the response of the bottom two economic quintiles and the top one percent to these broad policy tools is essentially zero when dealing with the kind of minor adjustments discussed by current policy makers. These are tools that produce only marginal changes in mass behavior, and, as the share of national income earned by other Americans shrinks, they will have an increasingly smaller impact. Trend is not destiny but a decade from now these tools could be even less impressive on a macroeconomic policy level.
Thank you for considering this. I look forward to your thoughts, My assumption is that the response of the bottom two economic quintiles and the top one percent to these broad policy tools is essentially zero when dealing with the kind of minor adjustments discussed by current policy makers. These are tools that produce only marginal changes in mass behavior, and, as the share of national income earned by other Americans shrinks, they will have an increasingly smaller impact. Trend is not destiny but a decade from now these tools could be even less impressive on a macroeconomic policy level.
and here might be another possibility –
there may not be any correlation at all.
i dont know, im just suggesting that maybe corp tax rates and unemployment rates should not be compared because there is no correlation – ie one does not have any effect on the other.
maybe unemployment rates are influenced by many other things. it looks like, in these charts, that my conclusion is that there is no correlation, as unemployment rates go up and down multiple times while corp tax rates seem steady for multiple years at a time and dont vary wildly like unemployment rates.
Firstly, thanks so much for your effort Mike! I’ve been having a debate with some others over the correlation between tax rates and unemployment rates, and have attempted to do similar, but don’t have the time/resources/statistical-knowledge to put it all together. I acknowledge that your research only deals with Top Corp. Income Tax Rate, which clearly is not the end-all, but considering that many are suggesting that taxing the most wealthy people/corporations is the solution to our national problems, I think your work is very relevant!
Could I possibly get a copy of your raw data? I would like to do something similar to your Figure 2., except I would like to calculate the correlations from start-date to current (or 2008 even) rather than your calculated 10-year periods. I could use pretty-much any format (Excel, CSV, etc.) and would happily remit my findings to you for use as you see fit.
Thanks!
Kendell
kdub@kdubconsulting.com
Oops…missed that your samples were of start-year to date somehow…I would actually like to create correlation calculations for the duration of each test, not for 10 year periods…my mistake!