higher marginal rates--> lower unemployment

newmachineoverlord

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Saturday April 30, 2011 · 9:15 AM PDT

2011/04/30 · 09:15

Republicans like to refer to taxes on the wealthy as "taxes on job creators", to try to imply that such taxes lead to higher unemployment. If this were true, we could graph the unemployment rate vs the highest marginal tax rate and there would be a clear strong correlation. In fact, what we find is that for every 1 percent we increase the top marginal tax rate unemployment goes down by 0.02%, with only a weak correlation. Myth busted.

Higher marginal tax rates reduce the marginal cost of hiring new workers because wages paid out are a tax deduction. Thus if you want to hire five employees at 20k each, it would cost you $85,000 if you are at a 15% tax rate, while hiring those five people would only cost you $20,000 if you were taxed at an 80% rate. Therefore a higher top marginal rate should stimulate private investment in jobs, and historical data supports that it does.

Edit: years used were 1948-2010, x y scatterplot with linear regression. unemployment numbers were from the bureau of labor statistics.

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