New York Times: Taxes and Employment, by Bruce Bartlett:

Since the beginning of the economic crisis, Republicans have insisted that tax cuts and only tax cuts are the appropriate medicine. They almost never explain how, exactly, this would reduce unemployment other than to say it worked for Ronald Reagan in the 1980s.

If one were to take the Republican argument seriously, the linkage would have to be via the tax wedge. This is the principal means by which the government affects employment, according to the Republican economist Arthur Laffer. The tax wedge is the difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives.

When taxes go up, the tax wedge gets larger, costing employers more to hire workers at a given after-tax wage. Therefore, it is theoretically possible that a tax cut could increase employment by reducing the tax wedge and allowing employers to hire workers at a lower cost without reducing their after-tax wages.

This is a perfectly reasonable theory. There undoubtedly have been times when the tax wedge was increasing because of bracket creep or legislated increases in payroll taxes that may have had a negative effect on hiring. Whether this is the case now, as Republicans assert, is a question for analysis.

One problem with the tax-wedge theory is that taxes are at a historical low as a share of the gross domestic product. According to the Congressional Budget Office, federal revenues will be 15.8% of GDP this year. The postwar average is about 18.5%, and taxes averaged 18.2% during the Reagan administration; indeed, at their lowest point in 1984, federal revenues were 1.5% of GDP higher than they are now.

Another problem is that there hasn’t been a significant tax increase affecting average working people since 1983, when Reagan raised the payroll tax rate to 15.3% from 13.4% (employer plus employee). Contrary to popular belief among Republicans, there have been no significant tax increases during the Obama administration. In fact, there have been tax cuts aimed directly at workers. …

The reason that unemployment is high clearly has nothing to do with taxes. Consequently, there is no reason to think that reducing taxes further will do anything to raise employment by reducing the tax wedge.

Additional evidence on this point comes from a new study by the Organization for Economic Cooperation and Development on taxes paid by average workers in its 34 member countries. The data below are for a single worker without children.

As one can see, the United States is a low-tax country with a total tax wedge of 29.5%. Three-fourths of OECD countries have a larger tax wedge on average workers.

I have also included the latest data on the percentage of workers employed as a share of the working-age population. I think this is a better measure of the health of the labor market than the unemployment rate, which goes up and down for a variety of reasons unconnected to taxes.

Here, too, there is little evidence that taxes affect employment one way or another. Almost half of the countries with a bigger tax wedge employ a larger percentage of their working-age populations than the United States does, and more than half of those with a smaller tax wedge have lower employment ratios. …

There is simply no evidence that cutting taxes at the present time will do anything to raise employment.