While many claim that the drop in workforce participation in 2012 was part of a long-term trend, the turnaround following the 2017 tax cuts suggests otherwise. Not only are more people working across age groups, but the improvement is actually quite enormous.
- The labor force participation rate dropped in the 21 months after the 2012 tax hike for all age groups.
- After the 2017 tax cuts, this trend reversed with labor force participation increasing across all age group.
All potential workers have a choice – to go to work or perhaps hold off until a job that pays more comes along. Cutting taxes is one way that jobs can pay more. For example, the 2017 tax act meant that in 2018 a family with three children could earn up to $74,000 before they paid any income taxes. In 2017 that figure was $57,400. Second earners in two-earner households could therefore find that they could go to work and not face any federal income tax liability. Of course, all types of workers who face lower tax rates find that the return to work is higher when their tax rates go down.
How many more people in any group decide to go to work depends on the attractiveness of opportunities of not working. Older workers, for example, may find retirement to be an attractive opportunity, but may choose to continue working or even go back to work, if they can take home more for their efforts. On the other hand, younger workers tend to get “resume value” from going to work and thus tend to be less influenced by current income. Their “resume value” – showing a consistent pattern of working and of “moving up” increases their incomes not just in the current year but for the rest of their working lives. As the chart shows, the greatest effects of both tax cuts and tax increases is on workers over 55 and the least effect is on younger workers.