A new study published in June 2026 on the 2017 U.S. tax reform points to a link between tax cuts and an increase in labor force participation and the number of jobs
Whenever a government considers changing tax rates – whether by reducing corporate tax, expanding income tax brackets, creating investment incentives, or granting relief to certain geographic areas – the familiar argument almost always arises: tax cuts will encourage businesses, attract investment, and create jobs. This argument is repeated again and again in budget and economic policy debates in many countries.
On the other hand, critics of this approach argue that tax benefits do not necessarily translate into actual employment. In practice, they may mainly increase the budget deficit and benefit certain groups without generating a broad economic impact. The difficulty is that a national economy is affected by hundreds of factors at the same time, making it difficult to isolate the specific effect of any particular tax change.
A recently published study attempts to answer this question by using the real differences that emerged on the ground following the 2017 U.S. tax reform. The findings point to a positive link, but one that is more complex and more conditional than the political narrative sometimes suggests
The 2017 U.S. Tax Reform
To understand the study and the significance of its findings, it is useful first to understand the reform that was examined. The Tax Cuts and Jobs Act, known by the acronym TCJA, was signed into law at the end of 2017 and was the most comprehensive change to the U.S. federal tax code since the 1986 reform. This was a reform that affected the foundations of the tax system, not merely marginal adjustments.
At the individual taxpayer level, the reform reduced tax rates for most brackets, nearly doubled the standard deduction, eliminated personal and dependent exemptions, expanded the child tax credit, and significantly narrowed the application of the Alternative Minimum Tax (AMT). In addition, the deduction for state and local taxes was capped at $10,000, and mortgage interest deductions were also limited. These changes, which were originally scheduled to expire after eight years in 2025, have since been extended by Congress.
At the corporate tax level, the reform permanently reduced the federal corporate tax rate from 35% to 21%. In parallel, extensive changes were made to the international tax rules, including a move from a worldwide tax system to a partial territorial system, with new mechanisms designed to protect the U.S. tax base against the shifting of profits overseas.
The stated objective of the reform was to encourage economic activity, increase investment, and strengthen the labor market. But in every tax reform, stated intentions and real-world outcomes do not necessarily align. That is exactly the question the study sought to examine.
The Study’s Findings
The classic difficulty in examining the impact of a tax reform on the economy is that it is hard to know what would have happened without it. The study addressed this in a relatively simple way: because the reform affected different U.S. states differently, a natural gap emerged between states in the size of the effective tax cut each experienced. The study simply examined whether the states that benefited from a larger tax cut also showed greater improvement in their labor market indicators.
According to the analysis, a tax cut equal to 1% of a state’s adjusted gross income was associated with an increase of between 0.7 and 1 percentage point in the labor force participation rate, and an increase of between 0.8% and 1.5% in the number of payroll jobs – within two years of the reform taking effect.
From an economic perspective, the findings reflect a local tax multiplier in the range of approximately 1.4 to 2.7. In other words, for every dollar the state “gave up” in tax revenues, economic activity increased by more than one dollar.
The study notes that tax policy operates through two parallel channels. The first is the demand-side channel: a tax cut increases households’ disposable income and allows them to spend more, which increases aggregate demand in the economy and encourages businesses to retain and hire employees. The second channel – and in the view of many, the more important one in the long term – is the supply-side channel: a tax cut can change deeper economic incentives. Businesses that benefit from a lower tax burden may invest more, expand their operations, and hire additional workers. Individuals who benefit from lower tax rates on their income may decide to enter the labor market, work additional hours, or start an independent business.
What Is the Connection to Israel?
Israel is not the United States, and the Israeli tax system differs from the U.S. system in many respects. However, the questions raised by the study – whether tax changes affect the labor market, how to measure that effect, and what the difference is between an effective tax cut and a statement of intent – are questions that concern every country seeking to design smart tax policy.
In Israel, the debate over tax policy is usually conducted at two extremes: on one side, the Ministry of Finance’s immediate budgetary considerations; on the other, political and sectoral pressures to grant specific tax benefits. What is sometimes missing from the discussion is the empirical examination: whether these benefits actually reach the labor market, and to what extent.
The Encouragement of Capital Investments Law, for example, offers significant tax benefits to companies that meet certain conditions, such as reduced corporate tax rates for “Preferred” and “Technological” enterprises. The assumption embedded in the law is that these benefits will encourage investment, job creation, and economic development.
In a world in which countries compete with one another to attract investment, global companies, human capital, and development centers, tax rates and the structure of tax incentives have a real effect on where companies choose to establish operations, where executives choose to live and work, and where venture capital funds decide to invest. The 2017 U.S. reform, which also included far-reaching changes in international taxation, was partly a response to global competition over tax bases and cross-border business activity.
For Israeli businesses operating in foreign markets, and for foreign companies considering activity in Israel, the implications of tax changes in different countries affect the cost of capital, holding structures, international tax planning, and decisions on where to locate income and profits. Understanding the logic behind such reforms, and the empirical evidence regarding their effects, is an important tool for anyone making business decisions or advising clients in an international environment.
Want to understand how tax policy affects your business decisions?
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, bringing together a legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear, practical language. We also work with a professional network of accounting firms and law offices around the world, in order to provide comprehensive support in cross-border matters.
If you are an Israeli business with international activity, a foreign company considering a presence in Israel, or an executive dealing with tax planning questions in a changing global environment – we invite you to a strategic consultation. We would be pleased to review your operating structure together, identify opportunities for smart tax planning, and provide professional guidance that also takes the broader economic picture into account.
FAQ
Could a reduction in corporate tax in Israel affect the labor market?
Possibly – under certain conditions, a reduction in corporate tax can encourage hiring and business expansion, but the effect depends on the structure of the reform and on who benefits from it.
What is the difference between a local tax multiplier and a national tax multiplier?
A local multiplier measures the impact within a specific state; a national multiplier measures the impact on the economy as a whole.
Are the findings of the U.S. study applicable to Israel?
Not directly. The tax structure, the size of the economy, and the characteristics of the labor market are different, but the methodological questions raised by the study are relevant to any discussion of tax policy.
When should I consult a tax expert about the effects of international tax changes on my activity?
When a restructuring is planned, when entering a new market, when raising capital abroad, or when there is a regulatory change in a country where the business operates.
