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.
The top tax bracket affects how the top tax rate and capital gains tax rate correlate with growth. As the top bracket moves higher the growth maximizing marginal tax rate also moves higher.
The top tax rate appears to have a growth maximizing rate of 54% when the top bracket is below 80 times per-capita GDP and a maximizing rate of 66% when the top bracket is above 80. The scatter plots showing these correlations are in Figure G12. Eighty times 2010 per-capita GDP was about $3.8 million.
The capital gains tax rate appears to have a growth maximizing rate of 28.7% when the top bracket is below 900 times per-capita GDP and a growth maximizing rate of 91% when it is above 900. The scatter plots showing these correlations are in Figure G13. Nine hundred times 2010 per-capita GDP is about $42.6 million.
Growth in the post war period has a positive correlation with the top tax bracket. The growth corresponding to a top bracket above 80 times per-capita GDP annualized growing 4.1%. This is the data shown on the right side of the scatter plot or prior to 1968 on the time series plot. Growth influenced by a top bracket below 80 times has only annualized growing 2.9%. The low bracket data is represented on the left side of the scatter plot or since 1967 in the time series plot.
The breaking point between the high bracket and low bracket periods came when the top bracket was cut to $200,000 in 1965 from $400,000 in 1964. This cut started impacting growth about 3 years later in 1968. Another view of the high bracket and low bracket data is shown in Figure T3.
The scatter plot shows that over the last 90 years the top tax bracket has had a positive relationship with growth. This is demonstrated by the upward sloping best fit line in the scatter plot. The strongest year of growth, represented by the highest point in the plot was 1942 which grew 18.5%. This growth corresponds to the top bracket in 1939 of $5 million or 7106 times per-capita GDP.
There have been three distinct multi year periods where GDP annualized growing more than 7%: the early 1920s, the mid 1930s and the early 1940s. All three of these periods correspond with a top bracket of at least $1 million or over 1000 times per-capita GDP. The best growth came with the $5 million bracket.
On the other hand, cutting the top bracket from $5 million to $200,000 corresponds with the weakest year of growth outside The Great Depression.
The significant correlation of the top bracket’s influence on growth in recent years is somewhat hidden by the large variation in the top bracket prior to W.W.II. The post war period is shown separately in Figure G10.
The linear correlation of the top bracket to growth shown here is the first of 3 variables making up the GDP growth model shown in Figure G14. The other two are the influence of the top tax rate and the capital gains rate.
The top tax bracket is the income level above which the top marginal tax rate applies. In 2010 the top bracket for married filing jointly couples was $373,650. The portion of ordinary family income above this level was taxed at the top rate of 35%. The first $373,650 of family income was taxed at the lower marginal rates.
The top bracket has ranged from $29,000 to $5 million or from 1.4 times per-capita GDP to 7648 times. Currently the bracket is about 7.9 times per-capita GDP. The top bracket as a multiple of per-capita GDP has a stronger correlation with growth and job creation than as a dollar amount or an inflation adjusted dollar amount.
The top bracket to some degree represents the scope and progressivity of the tax system. When it was at $5 million it directly affected very few people, but represented a system with over 30 tax brackets.
The top bracket has its strongest positive correlation to GDP growth leading 3 years. So a higher bracket this year would be a positive influence on GDP growth 3 years from now. The correlation is shown in Figures G9 and G10.
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