Fearlessly, if not Uselessly, Entering the Fact-Free Zone

December 6th, 2011 at 3:56 pm

As you may have heard, the D’s proposal to extend the payroll tax cut is partially paid for by a tax on incomes of about $1 million.  For Republicans looking for reasons to oppose the extension, this has provided an obvious target.

From the Federal Times:

…Senate Minority Leader Mitch McConnell, R-Ky., and Sen. Dean Heller, R-Nev., rejected a Democratic proposal to pay for the payroll tax cut extension with a 3.25 percent tax on millionaires. McConnell and Heller said that tax would harm “job creators”…

I won’t spend a lot of time rebutting this because these guys are impervious to evidence.  But there are many ways in which this claim about millionaires as job creators is wrong.  Nick Hanauer, an actual rich person, made the case beautifully the other day, but here’s some more evidence, FWIW.

First, we actually underwent something rare and very useful in economics: a natural experiment comparing the supply-side, trickle-down GW Bush years vs. the more progressive tax structure of the Clinton years.  The results break sharply the wrong way for the tricklers (courtesy Chad Stone):

Second, this tax doesn’t even hit the vast majority of small businesses: according to recent Treasury analysis, 99 percent of small business owners make less than one million dollars.  And less than half of one percent of taxpayers are millionaires or better.   (HT: CCH)

There’s no support over the historical record either.  Let’s look at a few simple scatterplots of the growth of employment as a function of the top tax rates.  We’ve got annual data on both back to 1939.

The first figure plots the percent change (I used log changes) in employment (DEMP) against the top rates (TOPRT).  The R’s meme implies a negative correlation.  There is none.  If anything, the line slopes up, implying higher rates are correlated with faster job growth.  But once you control for the two outliers up there in the upper right, the slope is statistically insignificant.

Source for this and next two figs: Tax Policy Center and BLS

“But wait!,” you say.  I’m including those nasty government employees, and we’re not talking about massive tax hikes to support government workers.  We’re talking about the private sector.

Sorry, doesn’t help.  This figure plots changes in the private sector employment against the top rates.

“But wait!,” you say again.  You’re not talking about the level of taxation at the top.  You’re talking about changes.  You’re saying if we are foolish enough to increase taxes on millionaires, that’s where we’ll see the negative association with job creation.  So we must look at the above chart but use the changes in the top tax rate.

Still nothin’ there (that cluster at zero on the x-axis represents all the years when there was no change).

I’m sure once they see these graphs, the scales will fall from their eyes and the R’s opposition will fade.  Or maybe they’ll insist on a more detailed modelling of the question as opposed to my cursory correlations.  Or maybe they really don’t care about helping the middle class.

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4 comments in reply to "Fearlessly, if not Uselessly, Entering the Fact-Free Zone"

  1. mcarson says:

    When you talk about businessmen and millionaires, please remind people of the following:

    No decent businessman is a millionaire. When you have a business, each year you decide how much money to take for yourself, and how much to leave in the business to pay for supplies and wages and the building – all the business expenses. That business profit is either not taxed at all or taxed at a lower rate than personal income tax. So, unless you are a profligate idiot spendthrift, you only take out of the business what you intend to spend on yourself in the next 12 months. Not a penny more. Why take money out of your business and pay 20% income tax on it, only to place it in a savings account earning 1%? Leave the money in the business, and borrow less to operate the business – that interest savings adds to the business profitability, allowing you to go from leasing your location to owning it, saving you $5,000 a month in rent. All these little savings pile up in your business until you are ready to sell it – at that point your business is worth 3 or 4 million, and you can retire rich, which is a lot better than spending thousands to live in a 6,000 square foot house that you’re not even home in often, because you’re at the business all day.

    I know someone with a payroll of over $250,000 who takes out so little in income from his business he qualifies for earned income credit. Everything he earns goes back into the business, he’ll start taking out money once he has the free time to spend it. Until then, small house, older car, short vacations. But the cash value of his business has gone from $20,000 to 1.5 million in less than 5 years. He keeps paying off loans and buying property and machinery, all money he’ll get back when he sells.

    Small businessmen have low incomes and high net worth. They’re millionaires who live on $3,000 – $5,000 a month.


  2. Fargus says:

    Great work, Jared. One quibble, though. When you say less than one half of one percent of taxpayers are millionaires, you mean that less than one half of one percent of taxpayers make over a million dollars a year, right? Not just that less than one half of one percent of taxpayers HAVE a million dollars?


    • Jared Bernstein says:

      According to Tax Policy Center data, 0.3% of households have annual income of $1m or more, about half a million households.


  3. Michael says:

    Meh, prosecute banksters.


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