“Job killing tax hikes”

August 25, 2010

Yesterday John Boehner, the Repblican minority leader in the House, said that Obama was pushing “jobs killing tax hikes”. The claim that tax hikes are “job killing” is opinion. Lets look at the facts:

1. The last tax hike was passed in 1993 by a Democratic President, Clinton, with a Democratically controlled Congress.

2. In 1993, the unemployment rate was 7.3%. After that “job killing” tax hike, the unemployement rate dropped steadily to 3.9% in Clinton’s last month in office, December of 2000. (That is the lowest unemployment rate in the last 40 years.)

3. In 2001, a Republican President, Bush, and a Republican controlled Congress passed tax cuts as part of the Economic Growth and Tax Reconciliation Recovery Act (EGTRRA) but used the “reconciliation” process to pass it through the Senate free of a filibuster. (Did you wonder why we needed a “recovery act” if unemployment was at a 40 year low?)

4. EGTRRA as passed by the Republicans (including John Boehner) specifically provided for taxes to increase as of January 1, 2011, so one could argue that the tax hike is a Republican tax increase (especially since the Democrats have expressed a willingness to extend for those earning less than $250,000 per year).

5. Unemployment then INCREASED for the next 2 1/2 years up to 6.2%.

6. Just to show a pattern, the Republicans lowered rates in 1988 when unemployment was at 5.5% and while it “plunged” briefly all the way down to 5.2% it was back at 7% half way through 1991.

7. Back in 1982, Reagan lowered taxes when Unemployment was at 8.6% and by the end of the year, it was up to 10.8% and didnt’ get back to 6% for 5 1/2 years.

8. Nixon’s tax cut in 1970 when unemployement was 3.9% was a relative success in that unemployment only rose to 6% by the end of 1971.

The issue is really one of vocabulary. When a Republican talks about wanting to create jobs, every proposal is actually designed to increase profits which (according to supply siders) will translate into jobs (eventually). However, what you will always see immediately after a tax cut is a very quick increase in GDP. For example, the Nixon tax cut led to a 9% growth in GDP while unemployment was rising to from 3.9% to 6%, and similarly, during the two plus years of rising unemployment following the Bush tax cuts, GDP rose every quarter. So when Republicans talk about “trickle” down, it is probably the only true word in their tax/jobs vocabulary because any benefit to working classes is, in fact a trickle.

Just for full disclosure purposes, GDP rose every quarter during the Clinton administration,including the quarters following the “jobs killing tax hike”, without any dampening resulting from the tax hike.

One of the myths about allowing the high bracket taxes to rise is that “it is crazy to raise taxes during a recession”. Even if that were true and there are no data to support it (see above where the ’93 tax hike, which was after a mere 8 quarters of GDP growth, was followed by decreases in unemployment and steady growth in GDP), we are not in a recession and, assuming no double dip, we will have had 6 quarters of GDP growth before the tax hikes go into effect. If we do go into a double dip, there will be plenty of time to undo the tax hikes before they impact.

To be fair and so as to provide full disclosure, FDR did bump tax rates in 1936 and unemployment did rise but FDR, under Republican pressure, also cut spending in 1937 and 1938 by almost 25% from 1936 levels.  It is impossible to conclude which had the greater impact in causing the spike in unemployment that occurred between 1937 and 1938.  Given the extremes of the depression and the lack of analogy to todays economy, the tax increase is probably not a harbinger of the impact of allowing the Bush tax cuts for the higher brackets to expire.

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