E3 Unemployment vs Top Tax Bracket

E4 Unemployment vs Tax Policy

The tax policy model of unemployment suggests that current tax policy is consistent with an unemployment rate of 9.0%. The model is a regression of the curvilinear correlation of the capital gains tax rate in Figure E2 and the linear correlation of the top tax bracket in Figure E3.

The linear correlation of the top tax rate in Figure E1 was not statistically significant when the bracket and capital gains rate were controlled for and was not included in the model.

E2 Unemployment vs Capital Gains

The capital gains tax rate has a curvilinear relationship with the unemployment rate. The strongest correlation is with the capital gains rate leading by 6 years. The capital gains rate that minimizes unemployment appears to be about 24.7%, but any rate between 21% and 29% would help keep the unemployment rate low.

The capital gains tax rate was raised to 39.9% in 1976 six years later the unemployment rate averaged 9.5% in 1982. The capital gains tax rate was cut to 15% in 2003 six year later unemployment averaged 9.3% in 2009. The correlation suggests that a 15% capital gains tax rate is consistent with a 9.1% unemployment rate.

While the current measure of unemployment only goes back to 1948, the correlation suggests that the 12.5% capital gains tax rate in place from 1922 to 1933 would have led to a 12.6% unemployment rate from 1928 through 1939.

The influence of the capital gains tax rate is combined with the influence of the top bracket in Figure E3 to make the unemployment model in Figure E4.

E1 Unemployment vs Top Marginal Tax Rate

The top tax rate has an inverse relationship with the unemployment rate. In the 1950s and 1960s when the top tax rate was higher the unemployment rate was lower. The strongest correlation although still fairly weak is with the top rate leading by two years.