1. What is the purpose of Penn Wharton Budget Model (PWBM)?

PWBM’s mission is to provide non-partisan, research-based analysis to inform the country’s budget. The nation needs an honest broker to help us better understand the tough choices the country must make to achieve important policy goals. To that end, PWBM was designed to provide accurate, accessible and transparent economic analysis of public policy’s economic impact. The project’s research briefs and online budget simulators help policymakers, the media and the American public easily analyze policy proposals to better understand their impact on the economy. PWBM does not advocate for any particular policy change. Access to information allows people to decide for themselves what initiatives are best for the country’s future in a fact-based manner.

2. How does PWBM model work?

PWBM acts as a “sandbox” in which different policy ideas can be tested to see how they will impact the budget and the economy while legislation is drafted—instead of afterwards. The model applies modern advances in economic modeling, big data science, cloud computing and visualization to inform public policy choices.

To make projections about a given policy’s impact on the American economy, PWBM models households at an individual level and uses what is known as a “stochastic simulation.”  The microsimulation modeling techniques take into account demographic and economic shifts to allow elected officials, media, and average Americans to better understand the long-term impacts of political decisions.

The online budget tool’s dial controls allow users to test policy choices related to Social Security, immigration, tax policy and ultimately other topics to quickly and easily see how policy changes impact the economy. For example, users can see how an increase in the Social Security retirement age would impact how many years before the Social Security Trust Fund is depleted or how an increase in immigration impacts GDP over the next 35 years.  Policymakers can then make more informed decisions and average Americans can better understand the implications of proposed policies for themselves individually along with country at large. Meanwhile, non-partisan research briefs authored by economists from Penn Wharton and other leading institutions, provide context and commentary on the budget tool dial controls and policy proposals.

3. What is your motivation? Why is Penn Wharton doing this now?

Penn Wharton saw a void: policymakers and the American public need statistically sound models and research. We want to foster big ideas and nonpartisan discussion by providing research-based resources for policymakers, media and average Americans alike. There is too much at stake not to do this. What our, our children’s, and our grandchildren’s Social Security benefits and taxes will look like, how our tax and immigration systems are structured, how much we invest in things like transportation, healthcare or education, and—importantly—how we’ll afford the changes we make and grow our economy should not be left up to chance and guesswork. Or rather, in the absence of reliable data and analysis, ideology-driven partisanship.

4. How is this different from the official scorekeepers such as the Congressional Budget Office (CBO) or the Joint Committee on Taxation (JCT)?

The CBO and JCT are Congress’ official scorekeepers. PWBM is available to policymakers earlier on in the policymaking process—while a bill is being drafted, instead of after. PWBM is available to the public and media as a transparent tool.  In some cases we provide analysis that is not yet available through the CBO.

PWBM gives policymakers a “sandbox” to test-drive an idea while they are drafting a bill, before they begin lobbying and putting reputational stakes in the ground. After a bill is written, our analysis can also help policymakers shape and simplify their discussions with CBO and JCT. Indeed, in many cases, our results are similar to those of CBO and JCT.

PWBM’s online tools are also publicly available for all to see. Anyone can use it to better understand the tough fiscal choices the country must make to balance our spending with revenues and achieve important policy goals.

5. How is this different from the structural models used by academics and the reduced-form models used by consulting firms?

The structural models used by academics allow for the analysis of new policy changes. However, those models also make abstractions that don’t reflect the real world. On the other hand, the reduced-form models used by consulting firms are better at reflecting the real world but are restricted to a single economy and policies from the past. PWBM incorporates the best of both. Our Dynamic OLG uses Census-level data to include numerous types of households and real world policy details. Our microsimulation contains even more demographic detail. Integration is achieved by first running the OLG model in “static” mode and then running the model in “dynamic” mode. The differences between the two are then layered on top of the microsimulation results. This approach allows us to reflect the real world and analyze new policy changes.

6. How much does the tool cost?

PWBM is completely free for all users.

7. Who funds PWBM?

More details about PWBM’s funders can be found here.

8. What are the best policy solutions according to PWBM?

As an academic effort, Penn Wharton Budget Model does not advocate for any policy positions. We focus on providing rigorous analysis without policy advocacy (following the “NBER Rules” from the National Bureau of Economic Research). We give average Americans, policymakers and media the tools to make informed decisions for themselves using a statistical model and academic research.

That said, we have a few interesting examples:

• When you adjust the dials for the immigration module, we learn that in terms of legalizing or deporting unauthorized immigrants the status quo, or current policy, provides the best-long term economic forecast as measured by U.S. population, employment, the old-age dependency ratio, and GDP.

• For Social Security, we would need to make changes across the board in order for the program to reach fiscal balance in the long run.

9. Does PWBM make policy recommendations?

No. In addition to being non-partisan, we are non-normative, which means we show analysis without making policy recommendations. To give us a sound fiscal roadmap and ground our political debate on the country’s budget in facts, we need non-normative research-based analysis. We intend to be an honest broker. PWBM’s goal is to provide statistically sound resources to help policymakers, media and the public better understand the tough fiscal choices the country must make to balance our spending with revenues and achieve important policy goals.

10. How do you ensure PWBM remains nonpartisan?

PWBM makes no judgments; it simply provides research-based information for policymakers to decide for themselves. In developing the tool, analysts at PWBM consult with members of Congress and staffers who represent a wide array of policy views—encompassing both sides of the aisle. The tool has already provided information that could be used to support arguments made by both sides of the aisle. For instance, the immigration module shows that allowing unauthorized immigrants to attain legal status, a policy preferred by some on the left, does not increase GDP, while also showing that increased deportation of unauthorized immigrants, a policy preferred by some on the right, has a negative impact on GDP as well.

11. Can PWBM offer insights for balancing the entire federal budget, not just for specific pieces of legislation?

Our immediate goal is to fill a void by providing statistically sound models and research to inform the development of specific policies. Over time, we will add many different policy options.

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12. What resources does PWBM consult when producing its economic forecasts?

PWBM is built in consultation with outside experts, including professors at other schools, analysts at think tanks and federal agencies. It reflects this collective group’s detailed knowledge of federal programs and tax codes, careful reading of relevant research literature, and extensive data sources. Specifically, some of the data sources we consult include:

• Current Population Survey (CPS)

• Panel Study of Income Dynamics (PSID)

• Internal Revenue Service’s Statistics of Income (SOI)

• Social Security Administration (SSA)’s Benefits and Earnings Public Use File, 2004

• SSA’s Earnings Public Use File, 2006

• Center for Disease Control’s National Centers for Health Statistics Vital Statistics

• Bureau of Economic Analysis Integrated Macro Accounts for the United States & National Income Product Accounts

• Federal Reserve Board Survey of Consumer Finances

• Federal Reserve Board Financial Accounts of the United States

• National Cancer Institute U.S. Mortality Data

• International Monetary Fund Data

• Bureau of Labor Statistics

13. How often will the model be updated?

PWBM plans to update estimates both semi-annually and on an ad-hoc basis when new data is available, to include additional policy proposals, or to account for policy changes. PWBM’s goal is to make information available and transparent to policymakers and the public as quickly as possible.

14. Is the specific methodology used by PWBM to generate projections publicly available?

Yes, transparency is a primary goal of PWBM. All of our methodology and assumptions are available online, and our findings are generally consistent with the CBO, SSA and other economic models, although sometimes there are differences. To make projections about a given policy’s impact on the American economy, PWBM models households at an individual level and uses what is known as a “stochastic simulation.” 

In the model, hundreds of thousands of individuals, across a wide range of population subgroups, are calibrated to Census-level data. Using a variety of additional large data sets, households are assigned key economic attributes including, fertility, mortality, immigration, labor-force participation rates, education, marriage, divorce, capital, disabilities, and earnings. Households are then subject to various life events: They grow up, go to school, get married, potentially divorce, get jobs, pay taxes, and eventually retire and receive Social Security benefits. This helps the model make future predictions based on current laws, while accounting for dynamic, evolving future conditions.

15. What assumptions are made in the modeling, and how did you form those assumptions in the development of the tool?

PWBM uses similar assumptions as other widely used models, such as the CBO and SSA. For instance, PWBM and SSA make similar assumptions about disability incidence and long run interest rates. We also work with outside experts and academics to validate our methods.

PWBM is built using detailed knowledge of federal programs and tax codes, careful reading of relevant research literature, and extensive data sources. PWBM’s estimates and briefs are reviewed internally for objectivity, clarity, and sound analysis. Outside experts and academics are often employed to examine PWBM’s methods and assumptions. In some cases, PWBM will allow policymakers to choose between alternative assumptions.

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 16. What topics are currently available in PWBM? What’s coming next?

PWBM intends to analyze policy topics that are widely discussed and of interest to the public. Currently, the model includes online simulators for immigration, Social Security, and tax policy. Individual and business tax calculators are also available as well as reports on a wide variety of topics including public infrastructure, trade and housing. In the future, PWBM will also include simulators on health care, criminal justice, education, retirement policy, housing finance, regulatory, and aggregate risk.

17. How does PWBM decide what to study?

Analysts at PWBM consult with members of Congress and staffers who represent a wide array of policy views—encompassing both sides of the aisle. We also reviewed major bills under consideration, including those from the White House, Congress and those being assessed by the CBO and JCT. We also consult think tanks and news outlets to determine policy options that are of interest to a wide audience. We are continuing to expand the topics available in PWBM as new policy options become available, and anyone can request that specific policies be reviewed by PWBM.

18. What are some of the variables PWBM accounts for in its estimates?

PWBM accounts for many individual demographic variables such as Americans’ family structures, fertility, marital status, and education levels.  These variables are related to the behavior of individuals and, when individual choices are summed up, can affect the impact a particular policy will have on the economy. 

PWBM also accounts for variations such as labor supply and capital holdings. The labor supply is the sum of individual decisions to work full-time, part-time, or not work. Capital holdings are the sum of individual net worth and public capital. Public capital is spread equally across all people. Individual labor force participation decisions and individual net worth depend on different demographic and economic characteristics such as age, gender, education, and other characteristics. Since the prevalence of these characteristics shift over time, so do labor supply and capital holdings.

19. How does PWBM define “Baseline Projection”?

PWBM’s baseline projection reflects how the economy and federal programs will perform under current law.

20. What behavioral responses are included in PWBM estimates?

The dynamic version of PWBM allows households to change several key attributes in response to a change in policy. Key attributes include labor supply and capital holdings. These individual behavioral responses then impact the economy.

21. How does PWBM track “labor effectiveness”?

PWBM gathers many sources of data to measure the “labor effectiveness,” or productivity, of different individuals. The measurement depends on a large number of worker demographic and economic characteristics such as age, gender, education, marital status, family structure and others.

Total labor supply grows with the size of the population and workforce. But PWBM also tracks changes in total “effective labor” from changes in worker characteristics. These changes overall may enhance or reduce labor effectiveness.  For example, as the baby boomers retire, the reduction in the portion of experienced workers dampens workforce productivity. As educational attainment plateaus, labor efficiency growth slows relative to the past. Labor efficiency may also be influenced by changes in marriage-divorce rates and shifts in family structures toward singles and single-headed families. Since the prevalence of these characteristics shift over time, so does overall labor effectiveness. As such, today’s aging society can impact the total workforce productivity and economic outcomes of policy options.

Incorporating these sources of change in labor efficiency when making economic projections enhances estimation of the effects of policy changes.

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22. Is PWBM accurate and valid? How do we know?

Yes, PWBM is built using detailed knowledge of federal programs and tax codes, careful reading of relevant research literature, and extensive data sources. In addition, PWBM goes through a rigorous testing process using historical data first, before making future predictions, to ensure that PWBM is a reliable tool. PWBM runs simulations using a number of variables that can affect population-wide economic models, accounting for differences across Americans’ family structures, fertility, marital status and education levels. During the testing process, we compare predictions made by PWBM from 1995 through 2010 against actual measurements from the CPS during that same time frame—ensuring that our model’s predictions remain accurate.

Analysts also review PWBM to ensure it is consistent with the CBO, SSA and other economic models.  In the cases it differs, PWBM publishes the rationale, including differences in assumptions made by other models.

It’s important to remember that PWBM’s projections reflect current law, at the time of the release. If a law changes, the projections PWBM makes may differ from the true impact of a given policy, because each new law affects the actual performance of the economy. That’s why PWBM plans to update estimates semi-annually and on an ad-hoc basis when new data is available.

23. Who reviews PWBM’s work to verify its accuracy?

To supplement the rigorous internal review by the nonpartisan Penn Wharton team, we invite outside experts, leading academics and policymakers to comment on and validate PWBM’s assumptions and methodology. For example, members of our internal and external advisory boards can be found here.

We also sponsor outside research by leading scholars to learn more about the effects of policy and model methods. For example, we work with experts from think tanks and universities on the following topics related to tax reform:

• Taxation and Growth, Bill Gale, Ph.D. in Economics, Stanford University, Brookings and Tax Policy Center, and Andrew Samwick, Professor of Economics, Dartmouth College

• Environmental Taxation, Rob Williams, Professor of Economics, University of Maryland

• Tax Administration, Compliance and Enforcement, Joel Slemrod, Professor of Business Economics and Public Policy at the Stephen M. Ross School of Business at the University of Michigan

• Approaches to Base Broadening, Len Burman, Robert C. Pozen Director of the Urban-Brookings Tax Policy Center, and the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University, and Eric Toder, PhD in economics, University of Rochester, Urban Institute and TPC

• Tax Policy toward Education, Sue Dynarski, Professor of Public Policy, University of Michigan

• Tax Policy toward Low-Income Families, Hilary Hoynes, Professor of Public Policy and Economics, Berkeley, and Jesse Rothstein, Associate Professor of Public Policy and Economics, University of California, Berkeley

• Corporate and Business Tax Reform, Dhammika Dharmapala, Julius Kreeger Professor of Law, University of Chicago

• Capital Gains and Estate Tax Reform, Wojciech Kopczuk, Professor of Economics, Columbia University

• Tax Treatment of Pensions and Retirement Saving, John Friedman, Associate Professor of Economics and International and Public Affairs, Brown University

• Fundamental Tax Reform. Alan Viard, Resident Scholar, American Enterprise Institute

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24. Who is leading and staffing PWBM?

Currently, there are 20 staff members, led by Kent Smetters, the Boettner Chair Professor at The Wharton School of the University of Pennsylvania. Professor Smetters is the former Deputy Assistant Secretary of the U.S. Department of the Treasury and served in the George W. Bush Administration.  He was previously an economist at the CBO. He holds a Ph.D. in economics from Harvard University. As can be seen from his academic articles, he has a strong reputation for being non-partisan. In fact, some of his most-cited work shows the inefficiencies of moving to a flat tax system as well as privatizing Social Security. More information about PWBM staff is available on our Team page.

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More information about PWBM’s Social Security policy simulator can be found here.

A video demonstration of the simulator can be found here.

25. What policy options are available on PWBM’s Social Security policy simulator?

Penn Wharton Budget Model (PWBM) allows policymakers, members of the media, and the general public (“users”) to see the impact of potential reforms to Social Security. Potential reforms include an increase in Social Security’s payroll tax rate, changes to the taxable maximum earnings limit, an option to base annual Social Security’s annual Cost-of-Living Adjustment (COLA) on alternative price indices, a progressive benefit reduction, and an increase in the full-benefit retirement age. Any combination of these policy options can be considered at the same time, thereby allowing for a total of 648 policy combinations. PWBM’s Social Security policy simulator shows dynamic results that account for how individuals respond to policy changes.

These policy choices do not indicate our view of the desired range of policies. The policies and potential reforms included reflect the current legislative landscape and will be adjusted as the environment changes. Additionally, Congress and other users can request special analysis of specific policies not currently included, and we will do our best to accommodate.

26. What economic metrics are available on PWBM’s Social Security policy simulator to assess the impact of policy changes?

Penn Wharton Budget Model (PWBM) allows policymakers, members of the media, and the general public (“users”) to see the impact that potential reforms to Social Security will have on the Trust Fund, payroll tax revenues, benefits, Social Security’s annual balance (income from tax revenues and interest minus expenditures), the annual non-interest income balance, federal debt, GDP, wages, capital services, and annual shortfalls.

27. What is the difference between PWBM’s Social Security policy simulator and projections from SSA and CBO?

Our findings are generally consistent with the CBO, SSA and other economic models, although sometimes there are differences. To make projections about a policy’s impact on the economy, PWBM models households at an individual level and uses what is known as a “stochastic simulation" and makes results accessible to all.

In the model, hundreds of thousands of individuals, across a wide range of population subgroups, are calibrated to Census-level data. Using a variety of additional large data sets, households are assigned key economic attributes including, fertility, mortality, immigration, labor-force participation rates, education, marriage, divorce, capital, disabilities, and earnings. Households are then subject to various life events: They grow up, go to school, get married, potentially divorce, get jobs, pay taxes, and eventually retire and receive Social Security benefits. PWBM accounts for these dynamic, evolving economic attributes to make future predictions based on current laws.

The Social Security Administration (SSA) uses an aggregated “cell-based” approach that deals with groups rather than single individuals. One of the reasons PWBM projects an earlier Social Security Trust Fund depletion date is that the individual Census-level detail of PWBM allows it to take account of how demographic shifts affect worker productivity. For example, the retirement of the Baby Boom generation means that many experienced, high productivity workers will exit the labor force and be replaced by younger and less productive workers. The retirement of the baby boom generation will therefore reduce Social Security’s payroll tax revenues and worsen the system’s finances. Cell-based methods typically do not fully control for these compositional changes. 

We also show estimates produced by the Congressional Budget Office (CBO). The CBO projects that the Social Security Trust Fund will run out of money at the end of 2031, while PWBM expects the Trust Fund to be exhausted two years later in 2033. The projections differ because, although PWBM and the CBO use similar types of models for analyzing Social Security, they make different assumptions. For example, PWBM assumes life expectancy will increase at a slower rate, the incidence of disability will be a little lower, and long run interest rates will be a bit higher.

28. What impact does an increase to Social Security’s Normal Retirement Age have on the trust fund and on Social Security’s long run finances?

The Full-Benefit Retirement Age (FRA) is the age at which workers can claim Social Security retirement benefits that are not adjusted for retiring early nor for retiring later. Social Security’s FRA is already increasing from age 65 to age 67 under current law. Penn Wharton Budget Model can simulate increasing the FRA beyond age 67, in two-month increments per year of birth, similar to the rate at which Social Security’s FRA is currently increasing. Regardless of the age that the FRA is set, the model projects that the Trust Fund exhaustion date is extended by at most a year because changes to the FRA phase-in slowly and only affect future retirees. Increasing the FRA lowers Social Security benefits, but total benefits continue to grow as the Baby Boom generation retires and life expectancy continues to increase. However, PWBM shows that an increase in the FRA to age 70 does significantly improve Social Security’s finances in the long run. 

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More information about PWBM’s immigration policy simulator can be found here.

A video demonstration of the simulator can be found here.

29. What policy options are available on PWBM’s immigration policy simulator?

Penn Wharton Budget Model’s (PWBM) Immigration simulator allows policymakers, members of the media, and the general public (“users”) to see the impact of potential reforms to immigration policy. Potential reforms include an increase in net legal immigration, an increase in the share of skilled/educated immigrants, and allowing unauthorized immigrants to obtain legal status or to deport more unauthorized immigrants. Any combination of these options can be considered at the same time, thereby allowing for a total of 125 policy combinations.

These policy choices do not indicate our view of the desired range of policies. The policies and potential reforms included reflect the current legislative landscape and will be adjusted as the environment changes. Additionally, Congress and other users can request special analysis of specific policies not currently included, and we will do our best to accommodate.

30. What economic metrics are available on PWBM’s immigration policy simulator to assess the impact of policy changes?

Penn Wharton Budget Model’s (PWBM) immigration simulator allows policymakers, members of the media, and the general public (“users”) to see the impact that potential reforms to immigration policy will have on the U.S. population, employment, the old-age dependency ratio, gross domestic product (GDP), GDP per capita, and output per worker.

31. What is the difference between PWBM’s immigration policy simulator and projections from CBO?

Our findings are generally consistent with the CBO. When PWBM analyzes a similar, but not identical set of policy changes, it finds similar results as the Congressional Budget Office (CBO). The most comparable CBO analysis is for S. 744, Border Security, Economic Opportunity, and Immigration Modernization Act. PWBM and CBO expect similar effects on population, the number of unauthorized immigrants, and GDP. PWBM finds that if currently unauthorized immigrants are allowed to obtain legal status, their wages will increase by about 10 percent on average because better job matches will lead to higher productivity. In comparison, the CBO expects wages to increase by 12 percent. When the projections differ between PWBM and CBO, it is usually because PWBM makes different assumptions or because PWBM provides a more detailed analysis of labor market activity. In particular, PWBM finds that the change in legal status reduces employment, while CBO does not appear to estimate how employment differs by legal status. PWBM also assumes that new immigrants will adjust and find employment faster than does CBO. Because the CBO’s analysis is based on S.744, they assume that new immigrants would be less skilled than the typical immigrant is today. In contrast, PWBM’s analysis assumes that future immigrants would be similar to those who arrived recently. These different assumptions about the characteristics of new immigrants lead the CBO to expect weaker economic growth than PWBM.

32. How many people immigrate to the U.S. each year?

Net legal immigration to the U.S. is about 800,000 people each year. At about 800,000, the number of new immigrants in any year is 0.25 percent of the U.S. population, which in mid-2015 stood at over 321 million people. The relatively small number of annual immigrants in comparison to the U.S. population is important for understanding the limited ability of immigration policy to cause large swings in economy-wide statistics.

33. Does PWBM show the impact of changing immigration policy on Social Security?

Currently, PWBM does not model interactions of immigration and Social Security policy. However, it does model the impact that changes to immigration policy has on the old-age dependency ratio.

The old-age dependency ratio compares the number of retirement-age people (aged 65 or older) to the number of working-age people (aged 18-64). The old-age dependency ratio is an important statistic for assessing the impact of immigration policy on entitlement programs such as Social Security and Medicare. Because few immigrants are age 65 or older, increasing immigration increases the working-age population while leaving the number of retirees stable in the near term.

34. Why doesn’t increasing the portion of immigrants with a college degree have a larger impact?

About 35 percent of new legal immigrants have at least a college degree. Increasing college educated immigrants to 55 percent of new legal immigrants, while keeping the entire flow of immigrants constant, has only a small, positive impact on the U.S. economy. In most years, new immigrants with a college education add only about 0.5% to the college-educated workforce in the United States. Increasing their numbers from 35 percent to 55 percent of total immigrants, therefore, has very little impact on economy-wide variables.

35. What is the economic impact of allowing unauthorized immigrants to be legalized?

Perhaps surprisingly, legalization of unauthorized immigrants has a small downward impact on employment. Unauthorized immigrants have a higher attachment to the workforce than legal immigrants. Once they obtain legal status, currently unauthorized immigrants may be able to access government benefits such as unemployment insurance and other safety net programs that allow them to leave the workforce, possibly to care for children, or spend more time searching for a job. Although legal immigrants are less likely to be employed, they find better jobs to match their skills, which leads them to be more productive and earn higher wages once they attain legal status. The decline in employment, therefore, does not lead to a corresponding fall in GDP. Legalizing unauthorized immigrants has almost no impact on GDP, especially in the near term.

36. What is the economic impact of deporting more unauthorized immigrants?

Increasing deportation reduces the size of the U.S. population and the number of jobs, which leads to less economic growth. More deportations, however, do improve the old-age dependency ratio in the long run, as deported immigrants fail to reach retirement age. That said, under current law, unauthorized workers, generally do not qualify for federal benefits, including Social Security.

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More information about PWBM’s tax policy simulator can be found here.

A video demonstration of the simulator can be found here.

37. What options are available on PWBM’s tax policy simulator?

Penn Wharton Budget Model’s (PWBM) tax policy simulator allows policymakers, members of the media, and the general public (“users”) to create their own bottom-up tax plan and see the projected impact of their plan on the economic and federal budget.

Users can decide for themselves the appropriate economic environment to compare the economic outcomes of each plan. For example, users can choose the openness of the U.S. economy to capital flows and the return to capital.

The tax provisions available on Tax Policy Simulator do not indicate our view of the desired range of policies. The policies and economic drivers included reflect the current legislative landscape and will be adjusted as the environment changes. Congress and other users can request special analysis of specific policies not currently included, and we will do our best to accommodate.

38. What economic metrics are available on PWBM’s tax policy simulator to assess the impact of policy changes?

Penn Wharton Budget Model’s (PWBM) tax policy simulator allows policymakers, members of the media, and the general public (“users”) to see the impact that potential reforms to tax policy will have on many the economy and the federal budget.

39. How does PWBM integrate static model results with dynamic model results?

Integration between PWBM’s dynamic model and static model are achieved by first running the overlapping-generations (OLG) model, which the dynamic results are based upon, in “static” mode and then running the OLG model in “dynamic” mode. The differences between the two are then layered on top of the static microsimulation results from the stochastic simulation. This approach captures the richness of detail in the microsimulation model along with the behavioral changes observed in the OLG model.

40. Why is the openness of the U.S. economy to capital flows so important for analyzing the economic outcome of tax policy?

Tax changes impact federal deficits in the amount of new Treasury securities issued. The openness-to-capital-inflows slider determines the share of U.S. federal deficits that are funded by foreigners. Under its high setting, foreigners take up a large share of new Treasury securities and federal deficits divert less domestic saving away from domestic investment. A low setting means that domestic saving mainly funds federal deficits, with a commensurate negative effect on domestic investment. More information can be found here.

41. Why is labor supply elasticity important for analyzing the economic outcome of tax policy?

The Frisch labor supply elasticity measures by how much labor supply increases in response to an increase in the after-tax wage, holding wealth constant. Changes to tax rates impact after-tax wages and therefore may affect labor supply. A high setting for the labor supply elasticity makes the labor supply response to a given tax change stronger. A low setting dampens the labor supply response when after-tax wages change. More information can be found here.

42. Why is savings elasticity important for analyzing the economic outcome of tax policy?

The saving elasticity measures how national saving responds to a change in the return to saving. Changes to income tax rates impact after-tax returns from interest, dividends, and capital gains, which may affect personal and national saving. A high setting will incorporate a strong saving response when the after-tax return changes. A low setting will dampen the saving response to the after tax return. More information can be found here.

43. Why is federal spending important for analyzing the economic outcome of tax policy?

Federal tax changes not offset by other tax and federal spending changes affect federal deficits and debt. The economic incentives introduced by tax reforms that change the federal debt under such tax reforms are accompanied by indirect effects from changing the composition of national spending. For example, federal deficit increases that reduce investment and capital formation would reduce the nation’s productivity and economic growth over time. 

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More information about USAFacts can be found here.

44.  What is USAFacts?

USAFacts is an unbiased, non-partisan, not-for-profit organization. It provides access to, visualization of and reports on a variety of large government data sets. Information at USAFacts is available to the public at no charge. Click here for more information about USAFacts.

45. What is PWBM's role with USAFacts?

PWBM compiles and maintains the data store that powers USAFacts. We coordinate with USAFacts to provide a single platform for internet access to a variety of large government data sets. The goal is to help policymakers, the media, researchers and the public make data-based decisions.

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