Conservative Arguments that Higher Income Taxes for the Wealthy Hurt Employment Don’t Hold Up to Scrutiny
By Michael Linden
Center for American Progress, June 27, 2011
Last week we pointed out that even though conservatives seem obsessed with the top income tax rate, overall economic growth was actually stronger during periods of higher tax rates. But maybe we missed the point. Maybe what conservatives are really concerned about is job growth, not overall economic growth. Maybe they have some convoluted argument about how the tax rate for rich people is incredibly important for creating jobs.
Cue the quotes:
Speaker John Boehner (R-OH): “What some are suggesting is that we take this money from people who would invest in our economy and create jobs and give it to the government. The fact is you can’t tax the very people that we expect to invest in the economy and create jobs.”
Former Massachusetts Gov. Mitt Romney: “With over 20 million people who are unemployed or who have stopped looking for work, the last thing we should be doing is raising taxes on job-creators, entrepreneurs, and small business owners across America.”
John Boehner, again: “A tax hike would wreak havoc not only on our economy’s ability to create private-sector jobs, but also on our ability to tackle the national debt.”
Apparently, conservatives believe that a key driver of overall job growth is the tax rate that rich people pay on their last dollar of income. They argue that these very rich people are the ones who “create” the jobs and therefore taxing them at even slightly higher rates will make them less likely to invest, expand their businesses, and hire more people. That sounds plausible, but it turns out to be completely baseless.
In fact, they are just as wrong about this as they are about the relationship between marginal tax rates and overall economic growth. In the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now.
For instance, in years when the top marginal rate was more than 90 percent, the average annual growth in total payroll employment was 2 percent. In years when the top marginal rate was 35 percent or less—which it is now—employment grew by an average of just 0.4 percent.
And there’s no cherry-picking here. Pick any threshold. When the marginal tax rate was 50 percent or above, annual employment growth averaged 2.3 percent, and when the rate was under 50, growth was half that.
In fact, if you ranked each year since 1950 by overall job growth, the top five years would all boast marginal tax rates at 70 percent or higher. The top 10 years would share marginal tax rates at 50 percent or higher. The two worst years, on the other hand, were 2008 and 2009, when the top marginal tax rate was 35 percent. In the 13 years that the top marginal tax rate has been at its current level or lower, only one year even cracks the top 20 in overall job creation.
We showed last week that lower rates are not associated with faster overall economic growth—just the opposite, in fact. And now we know that lower rates don’t coincide with higher job growth, either. So where is the evidence that the lower marginal tax rates spur job creation? It’s certainly not present in the past 60 years of American history.
It’s worth keeping this in mind the next time a conservative lawmaker claims that raising the rates for the wealthy would “destroy jobs.”
Michael Linden is the Director of Tax and Budget Policy at American Progress.