10 Charts of the Year — Tax Rates and Job Creation

Today’s Chart of the Year comes from the Center for American Progress.  It shows the average percent growth in employment by the top marginal income tax rate for the last 60 years.

Source: Center for American Progress

What does this chart mean?

All year long, the country has been engaged in a debate over the best way to spur job creation, especially in the context of widening budget deficits. The year began with a deal to preserve the Bush tax cuts, including those for the wealthiest 2 percent of Americans, and it concluded with a fight over whether millionaires should pay higher taxes to offset the cost of the payroll tax cut. This chart neatly puts the lie to the notion that lower marginal tax rates for the wealthy will produce enormous job growth by showing that, over the past sixty years, the economy has actually produced far more jobs when the top income tax rate was higher. — Michael Linden, Director of Tax and Budget Policy, Center for American Progress


5 Responses to “10 Charts of the Year — Tax Rates and Job Creation”

  1. While I agree that we cannot continue to spend in deficit and that part of the solution is going to be tax increases, this sort of data “cherry-picking” does not tell the whole story. A bigger issue in taxes has to do both with stability of the rates and complexity of the system. When the rates were higher, the tax code was not as complex. Although no one truly paid the top rate, there was an expectation as to how much people were going to pay. The other part is that the rates were not in constant danger of being raised (and possibly by significant amounts) at every turn, because they were already high (you can’t go much higher than 91%). The issue we have with taxes and why it is a component in the lack of job creation is because of the lack of stability. We need our leadership to come up with a reasonable set of compromises to raise the rates (or I say simplify the code which could also raise revenue without changing the rates) and then leave it alone and let it work.

    And there is a case that taxes shouldn’t be too high. As a quick example, If you look inflation-adjusted median household income from 1967-1981 when the top rate stayed more or less at 70%, the median income went up over that time period just under 8%. From 1981-1989, when the rate went from 70% to 28%, median household income went up just under 12%. Then from 1989-1996 when rates were raised back to 39%, incomes actually fell and took until 1996 just to get back to the 1989 level. We are going to have to be prepared for that…we are going to raise our taxes, but it is going to hurt us all in the pocket book to do so, not just the rich.

    • Certainly, the chart here isn’t meant to imply that tax rates seen in the 1950s are optimal. Rather, it’s to put to bed the notion that we’ve heard repeatedly over the last decade that tax cuts are a cure-all for everything that ails the economy. We’ve had nothing but tax cuts — ones primarily targeted at wealthy “job creators” — and we’ve seen abysmal job growth. There are so many other factors that go into a robust economy, and we need to be willing to pull some other levers other than the tax code to get the economy back to where it needs to be.

  2. Oh, I get it. Taxing people CREATES jobs. Wow, that’s quite a concept. You could be an Obama advisor with that kind of logic.

  3. My fellow Eric complains that the chart, which covers 60 years, cherrypicks, and then he cherrypicks his own data to tell a peculiar story of what’s happened over a period less than half that long. The great benefit of the original chart is that it clearly shows that high tax rates by themselves do not prevent job growth. The chart does not necessarily show, of course, that it was those high rates by themselves did produce excellent job growth–but that is not its purpose. There is almost nobody arguing loudly that we should raise rates to produce job growth–though maybe there should be–but there are lots and lots of very powerful people very loudly and visibly arguing that we should lower taxes in order to produce job growth. They are wrong, and this chart shows it.


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