Labor market effects of the Tax Cuts and Jobs Act

Abstract

The Tax Cuts and Jobs Act (TCJA) of 2017 represents the most significant reform of the U.S. income tax code since the Tax Reform Act of 1986. Previous analyses of the TCJA’s economic impact often rely on estimates based on data prior to the enactment of the legislation. This paper leverages plausibly exogenous variations in state-level tax changes brought about by the TCJA and employs local projections with two-way fixed effects to examine its effects on the labor market. Measures of TCJA tax shocks are constructed with the NBER-TAXSIM model using state-level tabulations of individual income tax returns from the Statistics of Income (SOI). Our findings suggest that tax cuts amounting to 1 percent of Adjusted Gross Income (AGI) under the TCJA are associated with a 0.7–1 percentage point increase in the labor force participation rate (LFPR) and a 0.8–1.5 percent increase in payroll employment over the two years following the TCJA’s implementation. These results appear broadly robust to assumptions about heterogeneous state responses and the inclusion of interactive fixed effects.