Rising employment or tall tales – does lowering tax produce jobs?

It’s been another glorious, sunny day today. So, naturally(!), I decided to spend an afternoon researching figures and playing with tables to find out whether yet another ideology/policy combination of the current government held water any better than your average sieve. (I did at least decide to do it in the garden with good coffee and an unplanned but steady stream of great barbecue food from my very kind Iranian and and Pakistani neighbours, proving that I’m not a complete idiot but that xenophobes and bigots are!)

The area that’s been tugging at my curiosity the last couple of days (ok, given the wonderful weather maybe I am a bit weird! 🙂 ) has been the interrelation of tax levels and employment. The Tory component of the coalition government has a strong commitment to reducing tax levels for both wealthy individuals and for corporations.

Faced with the obvious accusation that reducing tax is either insane or hypocritical – or quite possibly both – when they claim they have to ‘sort out the mess Labour left’ (see http://skwawkbox.org/2012/05/23/the-myth-of-the-inherited-mess-52/ for just how sieve-like THAT claim is!), Tories claim that reducing tax makes Britain an attractive place for companies to do business – in other words, that cutting taxes creates employment. The idea is that if UK taxes are low, companies will want to operate here, while rich owners and executives will want to live here – and in doing so will create jobs that benefit the country as a whole by creating employment, increasing tax take, reducing welfare costs and so on.

In justifying his recent budget decision to reduce the top rate of personal income tax from 50% to 45% when ordinary people are increasingly facing economic hardship, Chancellor George Osborne claimed:

“No chancellor can justify a tax rate that damages our economy and raises next to nothing.”

By the Tories’ own admission in other statements, ‘next to nothing’ is at least £500 million (!) but we’ll leave that aside for the moment. Osborne claims that high tax-rates for the wealthy are counter-productive, discouraging investment, entrepreneurship and growth, and driving wealth-creators out of the country to less tax-heavy locations. In the same budget in which he cut the top rate of personal taxation, Osborne also announced a cut in corporation tax and flagged plans for a further cut, on the basis that this will encourage companies to invest in the UK.

About 18 months ago, I sat in a studio with the excellent Chukka Umunna and Tory rising star Claire Perry, as guest ‘pundit’ on John Pienaar’s Sunday evening politics show. I argued on air that the Tory government had a one-sided view of deficit reduction, because there are two ways to reduce debt: reduce spending – and/or increase income. In terms of a national economy, one of the main and most obvious ways to increase income is to increase taxation on the wealthiest. Naturally, Claire Perry was in vehement disagreement with this point of view. Off-air, as the discussion continued, Claire pulled out a list of spending cuts the government had made or was planning to implement, and admonished Chukka that the Tories were the only party to be aggressive on spending cuts – plainly she felt this was something to be proud of, while I would have been far more impressed to see something like a balanced plan that would have evidenced some serious, non-ideological thought. Claire was a very pleasant lady, even going so far as to tweet that she was leaving the studio with me (my first real encounter with Twitter), but I felt and feel that her political imagination is lacking.

That aside, the point of this little illustration is this: if you believe (or want people to believe) that increased taxation is going to damage the economy, then you only leave yourself with the option of cutting spending. The problem is – as we’ve seen from recent economic reports and forecasts and the double-dip recession – cutting spending only sucks money out of the economy and worsens the debt spiral.

So, let’s take a look at some figures and see whether the evidence backs up the Tory dogma that you have to cut taxes to attract employers, and that increasing taxes will be worse for the country by driving away business.

Graph 1


The graph above shows the top rates of tax charged by countries on their highest earners, alongside their rates of unemployment. To keep the information readable and to maintain a degree of ‘comparing like with like’, I’ve only included countries from the European union, but the sample is certainly large enough to be illustrative, The UK is shown at the current top rate of 50%, as the new lower rate hasn’t yet come into force.

Far from showing that high personal taxation drives away so-called ‘wealth creators’, we see that in fact the situation is the opposite. The 5 countries with the highest top tax rate have among the lowest unemployment, while the countries with higher employment are predominantly at the worse end of the unemployment scale. Take out the ‘crisis’ countries of Greece, Spain and Portugal, whose unemployment situations have nothing to with taxation rates, and the picture is even clearer:


All of the countries with over 10% unemployment are in the cheapest half of the distribution in terms of tax on the wealthy, while countries with the highest top tax rates have the healthiest employment situations. One might argue that some of these countries are relatively small – but in fact that makes the situation even more striking. Small countries don’t have large populations that may attract companies to take the tax ‘pain’ to operate there.

Having established that the numbers show that Tories are wrong to claim that maintaining/increasing tax rates on the wealthy will be bad for the UK economy, let’s look at the same kind of data with regard to corporate rates:


Here we see the same unemployment data, but this time set against the rates of corporate tax for the same set of countries. Once again, in order to clarify the picture, I’ve excluded the 3 EU crisis countries whose problems go far beyond taxation rates.

And guess what? We see the same picture – if anything, even more clearly. Not only do the countries with the highest corporation tax rates not have worse unemployment, but there’s a definite progression the other way – the lower a country’s corporation tax, the more likely it is to have higher unemployment.

Of course, for any individual country, one can find arguments that explain why it has a particular combination. But the very least these figures prove is that there’s no justification for the Tory claim that lowering taxes boosts the economy while increasing it will damage it. Unless of course, you discount employment as a measure of economic health while considering an increase in the wealth of a tiny minority as economic growth. £155 billion increase in the wealth of the richest top 1000 people, anyone? (http://michaelrosenblog.blogspot.co.uk/2012/05/billions-were-not-allowed-to-talk-about.html)

Now, I’m no economist, just an interested amateur. But the government has any number of economists at its disposal, and it can’t possibly be unaware of these facts. Yet it continues not only to claim the opposite, but to use the patently false claim to justify the policy of tax-cuts that line the pockets of its friends, backers and paymasters. Call me cynical, but I can’t help but interpret that as meaning that they’re much more interested in enriching themselves and their ideological/financial allies than it is in the health of the country and the welfare of the British people as a whole.


  1. So to summarise what you’re saying: “I have found negative correlation between a countries corporation/income tax rate and unemployment. Therefore decreasing our own corporation/income tax rates will not help reduce unemployment.”

    This logic is flawed, since you haven’t demonstrated a causal relationship between a particular tax rate and total unemployment. You haven’t corrected for a multitude of other variables which impact unemployment (something I imagine would effect your results drastically, and also something I imagine to be extremely difficult to do). You also haven’t calculated how good your correlation is using any standard statistical tests (How do you know the correlation is just random?).

    So your conclusion that: “these figures prove is that there’s no justification for the Tory claim that lowering taxes boosts the economy while increasing it will damage it.” is wrong since the figures don’t ‘prove’ anything.

    I love simple analysis of data… but when it comes to economic data, simple analysis doesn’t cut it. You’re dealing many, many interdependent variables which cannot be ignored.

    1. If the Tories can demonstrate based on even a simple analysis that cutting taxes for companies and the rich actually improves the economic situation for the many, they should do so.

      If it worked, you’d expect there’d be some kind of correlative pattern among the examples of 27 developed nations. There isn’t.

      1. “If it worked, you’d expect there’d be some kind of correlative pattern among the examples of 27 developed nations.”

        That is only true if all other factors in those nations are equal, which is certainly a bad assumption.

        I agree that the Tories are happy to misuse stats to justify an ideological agenda, but I’m not convinced that you aren’t doing the same!

      2. I make no claim to be a professional statistician. But then they don’t agree with each other either.

        If it worked, it would tend to be working, and ‘other variables’ would create exceptions rather than a rule. It’s not the case.

        Anyway, off to bed now. Good night!

      3. The most you can say (and this is probably being too generous) is that your data suggests that tax rate is not the dominant predictor of total unemployment across 27 EU states.

        You can’t conclude from from your data that lowering a particular tax rate will not improve unemployment. It just isn’t there… and if you think it is, then you’re lying to yourself.

        G’night 🙂

  2. Btw, I think the data’s easily strong enough to suggest tax rates are NO predictor of total unemployment. In which case we might as well raise the taxes to balance the economy instead of cutting jobs and spoiling the lives of ordinary people. The rich can afford to be a bit less rich – they’ll still be very rich indeed!

    1. That link you posted is an almost identical analysis to your own. If anything, yours is better since you present the data in graphical form which is much easier to look at. Tables suck.

      I still believe the analysis to be fundamentally flawed since both of you assume that their *should* be a correlation between total (and *total* is the important word here) unemployment, and top rate tax. The fact that there isn’t a correlation, or that the correlation is negative, doesn’t mean that top rate tax doesn’t effect some amount of unemployment. It just doesn’t effect total unemployment.

      I can easily envisage a situation whereby cutting top rate tax would marginally decrease unemployment, however this decrease could be swamped out by say, higher VAT. This is just reiterating the point about ignoring other variables, where VAT is ‘another variable’.

    2. The question then becomes: is increase in employment from cutting top rate tax, worth the loss in revenue. Cost/benefit analysis. This is a complicated question in itself because cutting tax rate does not always reduce tax revenue. As I said before, simplistic analysis just doesn’t cut it here (unfortunately).

  3. Have to agree with JC here, it’s just too simplistic to say there’s a correlation based on this data. Just from personal experience there’s plenty of evidence to point out anomolous results within the graph. Ireland for instance, massive economic issues similar to our own but their policy of low corporation tax has clearly massively helped their economy and without it unemployment figures would certainly be higher. To give just one example from my own industry, since 2009 there has been over 200 new registered insurance businesses opened in Dublin (life, non-life and re-insurance) and knowing several of the CEO’s I can assure you that low tax was a major contributing factor to their decision to open in Dublin. Why on earth would they have gone to say France or Germany with much higher taxes and stricter legislation, it would make no sense.

    1. Typed a beautiful response to this and it appears to have gone into the ether, so trying to remember the key points again lol.

      If you read the last few paragraphs of my post again, you’ll see I’m not dogmatic that tax rates are inversely causative with regard to employment rates. However, I am dogmatic that the data show that there is nothing linking lower tax rates to improved employment, nor higher rates to increased unemployment.

      So, if there’s no link, we may as well raise tax rates. In a few near-obligatory sectors such as insurance, your argument might hold water – people have to buy the service/product, so tax rates might be a key factor. However, in most industries the key is demand. If there’s demand to exploit profitably, then a higher tax rate is just the cost of doing business. Especially with good legislation to force companies to operate and pay tax locally if they want access to the opportunity.

      This would be good for the economy and ultimately good for businesses. A better-funded treasury can employ and pay more in the public sector and invest in national infrastructure more freely. Both of these put money into the pockets of people who will immediately spend almost all of it and recycle it into the economy – which equals more demand, more sales, more profits. Low taxation might be a short-term gain but it’s ultimately self-defeating because it impoverishes the bulk of consumers and weakens the social fabric that makes profit meaningful in the first place.

      Thanks for commenting, though!

      1. Struggling to reply to this on a Blackberry so apologies for its brevity! Ill try to go into more detail when at an actual computer. The reason I picked insurance though was because the sector in Ireland is mature, there’s no room for major expansion, they have moved there purely as a gateway for trade with the EU and the UK. Ireland is a handy base, has low regulation and taxes and they’ve successfully managed to devalue themselves while remaining part of the Euro. The tax rates are a big part of attracting that international business they simply wouldn’t get otherwise, running a country is no different to a company, you still have to be attractive to outside investment. I might agree with you if it was likely all countries will up tax rates but while there are countries out there competing for businesses by keeping lower tax rates then business will always be attracted there. It would be interesting to find data on inward foreign investment by companies (excluding mining, oil etc for obvious reasons) vs local tax rates both corp and personal.

      2. That would indeed be interesting! I’ll have a dig around & see if I can find something. Think Ireland’s not really a good case study as its home demand is far smaller than the UK because of the smaller population. If legislation makes a fair tax rate the ‘cost of doing business’, people will live with it because there’s profit to be made – and then pay tax on. 🙂

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