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
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