Do Tax Cuts Increase Employment?

In the debate over raising the debt ceiling, Republicans have refused to consider tax increases of any kind. The adjective "job-kiling" is always linked to "tax increases" even if it is eliminating a tax loophole for corporate jets. That made me wonder. If tax increases kill jobs, then tax cuts must increase taxes. According to an ABC News Report, there have been five major tax cuts in recent years: JFK in 1963, Ronald Reagan in 1981 and 1986 and George W. Bush in 2001 and 2003. What was the effect of those tax cuts on employment? I used employment rates rather than unemployment, because unemployment is a fickle figure.

Looking at the Bureau of Labor Statistics, I found that for the period between 1948 and 1984, employment rates hovered between 55-59%. It didn't matter which party was in the White House, employment rates stayed within a narrow band. However, the years 1985-2008 tell a different story. During those years, encompassing three Republican and one Democratic President, employment rates exceeded 60% every year. Because these years of high employment spanned the Reagan and Bush tax cuts, there is at least some correlation between tax cuts and employment.

However, I wasn't satisfied with that. I decided that a better comparison would be to look at government revenues as a percentage of GDP compared to employment rates. During the period since 1948, government revenues as a percentage of GDP have ranged from 14.4% to 20.6%. That means that the lowest quartile of revenues as a percentage of GDP would be 14.4%-16.0% and the highest quartile would be 19.0%-20.6%. I only found four years in the bottom quartile (1949-50 and 2009-2010), while I found eleven years in the upper quartile (1952, 1969-70, 1980-82 and 1997-01).

Comparing these rates yields the following table:

Year	Revenues as % of GDP	Employment %
1950	14.4%	56.1%
1949	14.5%	55.4%
2009	14.8%	59.3%
2010	14.8%	58.5%
1952	19.0%	57.3%
1970	19.0%	57.4%
1980	19.0%	59.2%
1982	19.2%	57.8%
1997	19.2%	63.8%
2001	19.5%	63.7%
1981	19.6%	59.0%
1969	19.7%	58.0%
1999	19.8%	64.3%
1998	19.9%	64.1%
2000	20.6%	64.4%

These numbers are very counter-intuitive. The higher the percentage of GDP consumed by the government, the higher the level of employment. While I can't prove it, my hypothesis is that when the economy is good, employment is higher and tax collections are higher as well. When the economy is in the toilet, employment is lower and tax collections are lower.

I decided to perform one last test. How did government revenues and employment change in the four years after a cut? If tax cuts spur the economy, you would expect to see revenues as a percentage of GDP stay constant, constant dollar collections increase and employment increase. Here is what I found:

Year	Revenue as % of GDP	Revenue in Constant $	Employment $
1963	17.8%	$674.9	55.4%
1964	17.6%	$704.3	55.7%
1965	17.0%	$721.1	56.2%
1966	17.3%	$789.1	56.9%
1967	18.4%	$875.4	57.3%
1981	19.6%	$1,251.4	59.0%
1982	19.2%	$1,202.8	57.8%
1983	17.5%	$1,113.6	57.9%
1984	17.3%	$1,174.3	59.5%
1985	17.7%	$1,250.9	60.1%
1986	17.5%	$1,277.7	60.7%
1987	18.4%	$1,375.7	60.7%
2001	19.5%	$2,215.3	63.7%
2002	17.6%	$2,028.6	62.7%
2003	16.2%	$1,901.1	62.3%
2004	16.1%	$1,949.5	62.3%
2005	17.3%	$2,153.6	62.7%
2006	18.2%	$2,321.4	63.1%
2007	18.5%	$2,414.0	63.0%

These are a lot of numbers. Here is what I think they mean. The Kennedy tax cuts increased revenue by $200 million and increased employment by 1.9%.

The Reagan tax cuts initially resulted in both reduced revenue and reduced collection. However, by 1987, revenue was up by $100 million and employment was up by 1.7%.

The Bush tax cuts followed the same pattern with revenue and employment trending down but then increasing. However, the Bush tax cuts resulted in a net employment loss of 0.7%.

The bottom line is that it appears that depending on how you slice and dice the numbers, you can conclude that high taxes lead to high employment or conversely that tax cuts increase employment. It is beyond my abilities as an amateur economist to figure it out.

Sources: http://www.bls.gov/cps/cpsaat1.pdf

http://abcnews.go.com/Politics/presidential-tax-cuts-now/story?id=12337213

http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf

Did You Know That Taxes Are Low And Spending Is High?

One of the Republican mantras during the debate to increase hte debt ceiling is that we have a spending problem and not a revenue problem. As it turns out, receipts as a percentage of Gross Domestic Product (GDP) are at an historic low, while spending is at an historic high. For 2009-10, government revenues were under 15% of GDP. You have to go back sixty years to 1950 to find a comparable level. Since 1940, there have only been eight years when revenue was less than 15% as a percentage of GDP (1940-43, 1949-50 and 2009-10). See Historical Tables: Budget of the U.S. Government 2011, Table 1.3, which you can find here. To be fair, the last two years are an anomaly. The same report predicts that receipts will increase to 16.8% in 2011 and 18.1% in 2012. For the post-World War II era, government receipts have traditionally been more than 15% but less than 20% of GDP. The only post World War II year in which receipts were greater than 20% was 2000.

Using the same measure, spending is historically high. In 2009-10, spending as a percentage of GDP was approximately 25% of GDP. The last time spending was that high was 1946. However, in fairness, there have been many years when spending exceeded 20% of GDP (1942-46, 1953, 1968, 1975-96, 2006, 2008-11). So which recent Presidents kept spending below 20% of GDP? President Clinton (1997-2000) and President George W. Bush (2001-05 and 2007).

So what is "normal" about receipts and expenditures? In recent years, receipts above 20% but below 25% of GDP are typical, while expenditures around 18%-22% of GDP. The past two years have been unusual in that receipts have been below historic levels and expenditures have been much higher. That has led to the history-busting deficits that I described in my prior post.

The Deficit Is REALLY BIG And That's Not Just Partisan Spin

I have been listening to the current debate about the size of the federal budget and the deficit with some confusion. Republicans say that spending is too high. Democrats say that taxes are too low. I have vague recollections of budget deficits under President Reagan and both President Bushes and a surplus under President Clinton. Those facts made me a little skeptical about claims that deficits are out of control under President Obama. Since I had a little free time on this Fourth of July, I decided to do some reading. The Government Publishing Office put out a volume titled Historical Tables: Budget of the U.S. Government. You can find it here. It contains a great history of the federal budget and it confirms that current deficits have hit record levels.

Raw numbers don't tell you much over time due to the effects of inflation and the fact that the effect of the federal budget on the economy depends on the size of the economy. That is why I found table 1.3 at page 26 very instructive. It shows government receipts, government spending and the deficit in both constant FY 2005 dollars and as a percentage of Gross Domestic Product (GDP).

According to the Report, we have historically run deficits in times of war and depression until the 1970s when we ran continuous deficits with the exception of a few years. Deficit years from 1940 forward were 1940-46(World War II), 1950 and 1952-55 (Korean War), 1958-59, 1961-68 and 1970-73 (Vietnam War) and 1974-97 and 2002-11 (Afghanistan and Iraq). The only non-wartime years that we ran deficits since 1940 were 1958-59 under President Eisenhower and 1974-97 under Presidents Ford, Carter, Reagan, George H.W. Bush and Clinton. Presidents Clinton and George W. Bush were the most recent presidents to preside over a surplus during 1998-2001.

While deficits have been common, the size of the deficit shows striking differences. During the war years of 1943-45, we had deficits equal to 30.3%, 22.7% and 21.5% of GDP. In constant dollars, those deficits were in the $500 billion range. The first postwar year of 1946 showed a fiscal hangover with a deficit equal to 7.2% of GDP and $175.6 billion in constant dollars.

In terms of percentage of GDP, we would not see a deficit equaling 1946 until the Obama administration when the deficit was 9.9% in 2009 and 10.6% of GDP in 2010. In other words, as a percentage of the economy, the deficits under President Obama consume a greater portion of the economy than at any time since World War II. (The Tables only go back to 1940, so I can't speak to the pre-World War II era. In constant dollars, we did not exceed the $175 billion level of 1946 until 1975-76 under President Ford, 1982-88 under President Reagan, 1989-92 under President H.W. Bush, 1993-95, 1996-97 under President Clinton, 2003-2008 under President George W. Bush and 2009-2010 under President Obama. However, while these deficits were greater than 1946, none reached the $500 billion level until 2009. Under President Obama, the deficit was $1.279 trillion in 2009 and 1.386 trillion in 2010. (Since the Table was using constant 2005 dollars, the actual deficits were higher at $1.4 and $1.5 trillion respectively).

Thus, it appears that President Obama's deficits really are unprecedented. In terms of GDP, they are the most since 1945. In constant dollars, they are over double the largest in history, more than double the World War II era deficits. This doesn't tell us WHY the deficits are so large. That would take a lot more digging than I have time to do on a holiday afternoon. President Obama has several strikes against him with interest piling up on the borrowing from his predecessors, wars in Afghanistan and Iraq and a population of aging Baby Boomers. However, it is a verifiable fact that they make President Reagan and both President Bushes' deficits look mild in comparison and make President Clinton's record look positively sterling.