Labor Market Effects of the Tax Cuts and Jobs Act

The Institute for Research on Poverty hosts seminars on the UW-Madison campus most Thursdays during the academic year. These presentations are free and open to the public. Room 8417.

media release: Lecture by Anil Kumar, professor and Henry B. Tippie Research Fellow, Department of Economics, University of Iowa

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 projections 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 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. Findings suggest that tax cuts amounting to 1 percent of Adjusted Gross Income under the TCJA are associated with a 0.7-1 percentage point increase in the labor force participation rate and a 0.8-1.5 percentage point acceleration in job growth over the two years following the TCJA’s implementation. Results appear broadly robust to assumptions about heterogeneous state responses and the inclusion of interactive fixed effects.