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The strong correlation between the 2017 US TCJA corporate tax rate cuts and the deteriorating trend in the US labor market & small businesses activity

Erkan Ozsen
March 4, 2020

US Corporate tax rate reduction (TCJA) impact on the US labor market

According to our quantitative and qualitative research into the US labor market, the introduction of the US TCJA 2017 Corporate Tax rate cuts from 35% to 21% has had a strong correlation with recent developments in the US labor market economy and the business activity of small enterprises, all taking a hit since 2017 and 2019 onward. The sudden deep dive in the overall amount of job offers made, number of vacancies created (Figure 1), as well as the negative impact of the TCJA 2017 on the amount of freelancers and start-ups operating within the US economy (Charts 1 & 3) can be observed by looking at the three charts and the outcomes of mour correlation analyses. The associated positive coefficients range from 0.4 to 0.45 for the correlations between the forecasted corporate tax rate and the amount of job offers & vacancies, to 0.93 for the correlation between the effective corporate tax rate and the start-up rate. The analysis was corrected for possible moderating effects such as trade disputes and geopolitical events.

Figure 1

 

Forecasted impact of the TCJA on the US labor market


The tax rate reduction really came into effect only recently in 2019, and therefore it is still too premature to determine whether the decline in the above mentioned labor market indicators amounts to a structural break. Neither do the findings necessarily determine a causal relationship. But based on historical data, my future forecast calculations (Figure 2), and making inferences across different geographical units, it is already clear that a drastic policy measure such as the TCJA has disproportionately benefited large corporations at the expense of small enterprises. The only market area where job growth continues in an upward trend is at large employers with 5000+ employees, although close to flattening out. The latter development is much more likely to improve working conditions of large company employees eg salary increases, whereas positive spill-over effects to the external business environment will hardly occur.

Figure 2

 

 

(Effective) corporate tax rate correlation with the start-up rate

If a natural rebound does not take place or a more balanced re-distributive fiscal policy is not implemented through corrective measures, the declines in the growth of small business service providers have the potential to seriously hamper entrepreneurship and innovation, as illustrated by the decline of the start-up rate (Figure 3). Against conventional wisdom, the fact that the tax cut reductions simultaneously applied to small businesses does little too mitigate the negative effect for smaller business especially for service providers that rely on larger organizations for business generation. Tax breaks have not proven to improve productivity, most breakthrough innovations take place at small enterprises, and SMEs create most of the jobs by far. Only insiders with the right background and extensive know-how about the inner workings of the labor market can detect such developments, generating insights at the juncture of macro-economics, politics and human resources.

Figure 3

Sources

https://data.worldbank.org/indicator/SL.EMP.1524.SP.ZS?end=2019&locations=US&name_desc=false&start=2010
https://www.researchgate.net/publication/227470312_Start-up_rates_and_innovation. A cross country examination.
https://economicdynamics.org/meetpapers/2018/paper_472.pdf
https://www.slideshare.net/upwork/freelancing-in-america-2019/1
https://taxfoundation.org/tcja-economic-growth-effects-testimony/
https://www.businessnewsdaily.com/11330-how-tcja-is-affecting-smbs.html
https://spendmatters.com/2018/11/21/number-of-us-freelancers-dropped-in-2018-but-talent-pool-still-deep/
https://www.statista.com/statistics/685468/amount-of-people-freelancing-us/
https://www.gartner.com/smarterwithgartner/gartner-quarterly-update-on-global-workforce-trends/
https://tradingeconomics.com/united-states/corporate-tax-rate
https://www.bls.gov/news.release/jolts.t16.htm
https://www.bls.gov/news.release/jolts.nr0.htm

Erkan Ozsen
Erkan Özşen is the founder of Löger Group and Managing Director of it's market research subsidiary EngineerOnomics. With his long track record of developing research, writing, and publishing Erkan is now dedicated to expanding the pool of thought leadership available to Emerging Market Businesses as well as Small- and Medium-Sized Businesses, through this blog and social entrepreneurship.

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