While many claimed the drop in workforce participation in 2012 was part of a long-term trend, the turnaround following the 2017 tax cuts suggests otherwise. More people are working across age groups and the increased participation is large.
- After the 2012 tax hike, the labor force participation rate dropped for all age groups.
- After the 2017 tax cuts, the labor force participation rate increased across all age groups.
All potential workers have a choice: to seek 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, under the 2017 tax cut a family with three children can now earn up to $74,000 before they pay any income taxes. Previously 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 find that the gains from work are higher when their tax rates go down.
The number of people in any age group who decide to work also depends on the attractiveness 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 work and thus tend to be less influenced by current income. Showing a consistent pattern of working and of “moving up” the job ladder increases their incomes not just in the current year but for the rest of their working lives. As the chart shows, the largest effect of both tax cuts and tax increases is on workers over 55, and the smallest effect is on younger workers.