Study links TCJA tax cuts to labor market gains
5 reported
A newly published paper by economist Anil Kumar examines the labor market effects of the 2017 Tax Cuts and Jobs Act (TCJA), described as the most significant U.S. income tax code reform since 1986. The study uses state-level tax variation from the TCJA and local projections with two-way fixed effects to estimate its impact. Researchers constructed tax shock measures using the NBER-TAXSIM model and state-level tax return data from the Statistics of Income. The findings indicate that tax cuts equal to 1 percent of Adjusted Gross Income under the TCJA are associated with a 0.7–1 percentage point increase in labor force participation and a 0.8–1.5 percent increase in payroll employment over two years. The results are reported as broadly robust to assumptions about heterogeneous state responses and interactive fixed effects. The paper was highlighted by Kevin Lewis on Marginal Revolution.
What’s reported
The TCJA of 2017 is described as the most significant U.S. income tax code reform since the Tax Reform Act of 1986.
The study uses plausibly exogenous variations in state-level tax changes from the TCJA and local projections with two-way fixed effects.
Tax shock measures were constructed with the NBER-TAXSIM model using state-level tabulations of individual income tax returns from the Statistics of Income.
Tax cuts of 1 percent of AGI under the TCJA are associated with a 0.7–1 percentage point increase in labor force participation rate and a 0.8–1.5 percent increase in payroll employment over two years.
Results are reported as broadly robust to assumptions about heterogeneous state responses and inclusion of interactive fixed effects.
Key figures
Anil Kumar (author of the paper)
Kevin Lewis (commentator who highlighted the paper)
Sources: marginalrevolution.com
