While you were ensconced in the covers against the polar vortex last night, I was debating my old friends Larry Kudlow and Art Laffer on Larry’s show (though this is just a partial clip for some reason) on extending UI benefits—the extension surprisingly caught a bit of a buzz yesterday as the Senate got the three-fifths needed to at least keep discussing the issue (democracy at work!).
We really are old friends, but boy, are they wrong on this one. They’re both stuck in the fantasy supply-side world wherein jobs are there for the taking, if only the alternative of UI benefits were removed from the picture. I pointed out the highly elevated share of long-term unemployment—the fact that at 2.6% of the labor force it’s twice what it has been in the past when Congress allowed extended benefits to expire; and the 3/1 unemployed per job opening ratio. But to no avail—stop bothering us with your facts, man!
So why am I bothering you with this silliness? Mainly because I said I would. That is, like the moth to the flame, Art and Larry are pulled to…wait for it…lowering the corporate tax rate, the solution for all what ails ya! Art claimed it would be a huge job booster, and I claimed that you certainly don’t see such correlations in the data nor in the research on the economic impact of corporate tax changes. And I said I’d put up a graph to that effect.
So, here’s a scatterchart of the effective marginal corporate tax rate—the tax on the marginal cost of capital in the corporate sector—against employment growth (h/t to Tom Hungerford of EPI for the tax data which are from CRS tax analyst Jane Gravelle; you can do this with the top statutory corporate rate do but it doesn’t help their case at all—plus, few corps pay that rate).
EMPLOYMENT GROWTH AND EFFECTIVE MARGINAL CORPORATE TAX RATES
Annual Employment Growth and Corp Tax Rates, 1955-2006
Source: BLS and Gravelle.
Sorry the graph isn’t pretty, but I’m not going to waste time on this one. But that’s a random smutch, as we say in the biz. Regress employment growth on the tax rate (or change in the tax rate) and you get an insignificant coefficient that explains less than 3% of the variance of job growth. Lags do not help.
I will, since I have the data sitting here in my statistical software, throw employment growth, the tax rate, real GDP growth (to control for the cycle), and the corporate bond rate (Moody’s Baa) into a vector autoregression (a correlation exercise that allows you to test movements in one variable when you tweak another variable, controlling for other stuff).
When you shock the tax variable by one positive standard deviation, you actually get more job growth for a year or so, but the impact fades quickly into insignificance quickly. I don’t really believe this and don’t claim that this is much of a model. However, when the correlations are not there at first blush, you’re not likely to find them without torturing the data. Moreover, more careful research, like that of Hungerford, finds a similar lack of effects on GDP growth.
THE IMPACT ON EMPLOYMENT OF HIGHER CORP TAX
The problem with the corporate tax system is that it’s riddled with loopholes and different industries face wildly different effective rates, the result more of the skill of their lobbyists than any rational strategy. I’d be more than happy for tax policy to deal with that. But first, since a) that’s not happening anytime soon and b) it’s not going to help much, if at all, with job growth, can we quickly reinstate UI benefits for the more than one million long-term unemployed who just lost a key lifeline?