By Thomas Hyclak, Lehigh University professor of economics
A common argument against raising tax rates on the richest Americans is that doing so will harm job growth, especially since many of these taxpayers are small business owners. Yet, the data doesn’t support this argument.
In the attached chart (right), I plotted for each year, from 1952 to 2011, the highest marginal tax rate for that year against the rate of job growth in the non-farm Business sector. What it shows is that the range of annual job growth rates was about the same in the 1950s when the top rate was 92 percent, as it was in the 1970s when the top rate was 70 percent and as it was in the 2000s when the top rate was 35-39 percent.
The statistical correlation between these variables indicates a weak positive relationship. While this is not a very sophisticated analysis, one might have expected to see evidence of a robust negative relationship given the strongly held views on this matter.
We teach students in principles of economics that a profit maximizing employer would hire an additional worker only if the extra revenue that worker generated was at least equal to the extra cost incurred by the firm in hiring that worker. It’s hard to see how the top marginal tax rate facing the owner of the business might factor into that calculation. So the evidence squares with economic principles and leads us to conclude that the top marginal tax rate has little to do with job growth (or, as other such charts suggest, productivity growth or output growth).
I am not using this analysis to argue in favor of raising taxes on the rich. Positions in favor of greater fairness in the tax burden or greater progressivity in the tax system rest on other arguments (for instance, matching the distribution of taxes with that of the benefits from public services). Rather, I am dismayed that more economists have not pointed out the logical and empirical problems with the notion that raising the highest marginal income tax rate will stunt job growth.
Too much of what passes for policy analysis seems to be based on beliefs and political values rather than basic economics. Recognizing the difference between a person speaking as a pundit on TV and the same person speaking as a research economist is another lesson for the students in the principles of economics class.