We project that the Tax Cuts and Jobs Act (TCJA) will cause 235,780 U.S. business owners---77 percent of whom have incomes of at least $500,000---to switch from pass-through entity owners to C-corporations, primarily to take advantage of sheltering their income from tax by converting to C-corporations.
The biggest switchers include doctors, lawyers and investors, especially if owners can afford to defer receipt of business income to a later year. Other business owners, who are qualified to use the 20 percent deduction for pass-through business income, including painters, plumbers, and printers, are more likely to remain as pass-through entities.
We project that about 17.5 percent of all pass-through Ordinary Business Income will switch to C-corporations.
Senate Democrats propose spending $1,022 billion on public infrastructure over the next 10 years, financed with taxes on personal income and corporate income.
An additional dollar of federal aid could lead state and local governments to increase total infrastructure spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing and planned infrastructure programs. Based on an extensive literature review, we estimate that infrastructure investment across all levels of government increases between $225 billion and $1,039 billion, including the $1,022 billion federal investment.
Depending on how much state and local governments spend on infrastructure in response to federal aid, we estimate that the plan changes GDP between -0.1 and 0.1 percent by 2032 relative to no policy change. By 2042, the plan changes GDP between -0.3 and -0.2 percent.
PWBM previously analyzed the effects of the tax bill passed this December. Most of that bill’s tax cuts for individuals (non-businesses) expire at year-end 2025. This brief reports the budgetary and economic effects of indefinitely extending the individual-side tax cuts.
By 2027, we project that debt increases between $573 billion and $736 billion. However, GDP is relatively unchanged, although slightly contracts, because this standard 10-year budget window covers only two years of tax cut extensions.
By 2040, we project that GDP contracts by 0.6 percent to 0.9 percent relative to current law, where the tax cuts for individuals are set to expire. Debt increases between $5.2 trillion and $6.1 trillion.
Public support for a Universal Basic Income (UBI) has been increasing over time, and several experiments are already underway.
The Roosevelt Institute recently published an analysis of a UBI proposal that would pay $6,000 per year to every adult in the United States. Roosevelt estimates that GDP would increase by up to 6.8 percent within eight years after the policy’s onset, if the policy were deficit financed.
We estimate the impact of the same plan on the federal budget and economy using a richer dynamic model. If deficit financed, we project that same UBI plan would increase federal debt by over 63.5 percent by 2027 and by 81.1 percent by 2032. GDP falls by 6.1 percent by 2027 and by 9.3 percent by 2032. The smaller tax base also sharply reduces Social Security revenue, by 7.1 percent by 2027 and by 10.4 percent by 2032.
Major U.S. trading partners have already indicated they might retaliate to new U.S. trade tariffs recently announced by President Trump. New tariffs could, therefore, lead to a “trade war.” However, game theory also suggests that U.S. trading partners could eventually respond with “trade opening,” depending on the ultimate payoffs to each party in the trading partnerships.
We estimate that an all-out trade war would reduce GDP by 0.9 percent by 2027 and by 5.3 percent by 2040. Wages would decline by 1.1 percent by 2027 and 4.8 percent by 2040, relative to current policy. A trade opening would have the opposite effect: GDP would increase between 0.2 to 0.7 percent by 2027 and between 1.3 to 4.0 percent by 2040. Wages would increase between 0.3 to 0.8 percent by 2027 and between 1.2 - 3.6 percent by 2040, relative to current policy.
The downside risk of a trade war, therefore, is larger than the upside potential from a trade opening.