A CNNMoney story, “Trade War Would Wipe Out Gains From Tax Cuts, Penn Analysis Says,” applies two Penn Wharton Budget Model (PWBM) studies on trade and tax cuts. Patrick Gillespie points out that two of President Trump’s policies could have opposing effects on economic growth. If the new tariffs announced by President Trump lead to an all-out trade war, gains from the tax cuts could be washed away in the short run and swamped in the long run.
The Economic Costs of a Trade War
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.
The White House FY 2019 Infrastructure Plan
President Trump recently released his updated infrastructure plan along with the Fiscal Year 2019 Budget. The plan proposes to increase federal infrastructure investment by $200 billion to provide incentives for a total new investment of $1.5 trillion in infrastructure.
However, based on previous experience reviewed herein, most of the grant programs contained in the infrastructure plan fail to provide strong incentives for states to invest additional money in public infrastructure. Indeed, an additional dollar of federal aid could lead state and local governments to increase infrastructure total spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing infrastructure programs. We estimate that infrastructure investment across all levels of government would increase between $20 billion to $230 billion, including the $200 billion federal investment.
We estimate that the plan will have little to no impact on GDP.
For Teen Workers, Parents’ Education Matters
Teenage employment has declined significantly since the late 1990s. Using data from the Current Population Survey, Figure 1 shows that 63 percent of teens aged 16 to 18 worked in 1993, but that percentage fell to 41 by 2015.
A Discussion of the White House FY 2019 Budget
In a recent podcast and article “The White House Budget: What’s the Reality” by Knowledge@Wharton, the latest budget proposal by the White House was discussed by Kent Smetters (Wharton), Alan Auerbach (UC Berkeley), and David Kamin (NYU).
Education and Income Growth
In the New York Times article “Why Is It So Hard for Democracy to Deal with Inequality?” Thomas B. Edsall relates the growth of income inequality in democracies to changes in voting patterns among those who are highly educated.
PWBM’s brief, “Education and Income Growth” was used to highlight that the incomes of highly educated people are growing in comparison to those with less education. The author finds that this trend motivates highly educated voters to support the continuation of current policy rather than policy reforms favorable to the working class.
Will federal dollars for infrastructure boost the economy?
The news blasts about America’s crumbling infrastructure are hard to miss. Data available at USAFacts shows that in 2015, 14 percent of America’s bridges were functionally obsolete and another 10 percent were structurally deficient. Meanwhile, in 2014, commuters spent an extra 42 hours stuck in traffic.
The White House proposes to spend $200 in new federal money that it hopes will subsidize an addition $1.3 trillion in new infrastructure spending by state and local government and private enterprises.
But will those dollars achieve a high speed economy with higher wages and GDP? Our new report, Options for Infrastructure Investment: Dynamic Analysis, finds that it depends.
Options for Infrastructure Investment: Dynamic Modeling
President Trump proposes to increase infrastructure investment by $1.5 trillion over 10 years by attaching incentives to $200 billion of new federal spending. However, this plan lacks details about implementation. We, therefore, consider three possible options.
By 2027, we estimate that GDP is between 0.0 and 0.5 percent larger than under current law, depending on which one of the three policy options is used. By 2037, GDP is between 0.0 and 0.4 percent higher.
By 2027, debt held by the public is between 0.4 and 0.9 percent larger than under current law. By 2037, debt is between 0.4 percent lower and 0.6 percent larger.
The Tax Cuts and Jobs Act, as Reported by Conference Committee (12/15/17): Static and Dynamic Effects on the Budget and the Economy
By 2027, under our standard economics assumptions, we project that GDP is between 0.6 percent and 1.1 percent larger, relative to no tax changes. Debt increases between $1.9 trillion and $2.2 trillion, inclusive of economic growth.
By 2040, we project that GDP is between 0.7 percent and 1.6 percent larger under our baseline assumptions, and debt increases by $2.2 to $3.5 trillion.
The Senate Tax Cuts and Jobs Act, as Passed by Senate (12/2/17): Static and Dynamic Effects on the Budget and the Economy
By 2027, under our standard economics assumptions, GDP is projected to be between 0.5 percent and 1.0 percent larger, relative to no tax changes. Debt increases between $1.8 trillion and $1.9 trillion, inclusive of economic growth.
By 2040, GDP is projected to be between 0.4 percent and 1.2 percent larger under our baseline assumptions, and debt increases by $2.6 to $3.1 trillion.
Additional sensitivity analysis indicates that even under assumptions favorable to economic growth, by 2027, GDP is projected to be between 1.0 percent and 1.9 percent larger, and debt increases between $1.5 trillion and $1.8 trillion.
The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Comparing Dynamic Effects Estimated by PWBM & JCT
This brief compares Penn Wharton Budget Model’s (PWBM) dynamic projections (which include economic feedback effects) of The Senate Tax Cuts and Jobs Act (TCJA) against the recent projections issued by the Joint Committee on Taxation. The results are substantially similar.
Both PWBM and JCT find that the Senate TCJA reduces tax revenues by about $1 trillion over the next 10 years, net of outlays. PWBM’s and TCJA’s 10-year revenue estimate (net of outlays and interest) differs by only $3 billion. Both PWBM and JCT project that the economy under the Senate TCJA plan will be 0.8% larger on average over the first 10 years relative to current policy.
The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Dynamic Effects on the Budget and the Economy
This brief reports Penn Wharton Budget Model’s (PWBM) dynamic analysis of The Senate Tax Cuts and Jobs Act (TCJA), as amended with sunset provisions on November 15, 2017.
If the sunset provisions are allowed to expire as scheduled, including economic feedback effects, revenue falls between $1.3 trillion and $1.5 trillion over the 10-year budget window, ending in 2027. Debt increases between $1.4 trillion and $1.6 trillion, which is larger than the revenue losses due to additional debt service. By 2040, revenue falls between $1.1 trillion and $2.1 trillion, while debt increases by $1.7 to $2.4 trillion.
PWBM projects that GDP will be between 0.3 percent and 0.8 percent larger in 2027 relative to no tax changes. By 2040, GDP is projected to be between 0.2 percent and 1.2 percent larger.
The Senate Tax Cuts and Jobs Act (11/9/17): Static and Dynamic Effects on the Budget and the Economy
On Thursday November 9th, 2017 the Senate Committee on Finance majority released its version of the Tax Cuts and Jobs Act that changes both individual and business taxes.
Penn Wharton Budget Model (PWBM) finds that the bill lowers tax revenues by $1.4 to $1.7 trillion over 10 years, including accounting for growth effects. Debt rises by $1.9 to $2.0 trillion over the same period. Looking beyond the 10-year budget window, by 2040, revenue falls between $4.3 trillion and $5.2 trillion while debt increases by $7.0 to $7.6 trillion.
PWBM projects that GDP will be between 0.3% to 0.8% larger in 2027 relative to its value in that year with no policy change, and between -0.2% and 0.5% larger in 2040. Over the long-run, additional debt reduces the positive impact on GDP.
The House Tax Cuts and Jobs Act, Amended (11/9/17): The Dynamic Effect on the Budget and the Economy
This brief reports Penn Wharton Budget Model’s (PWBM) dynamic analysis of The House Tax Cuts and Jobs Act (TCJA), as amended and reported out by the Ways and Means Committee on November 9, 2017.
After including the tax bill’s effects on economic growth, TCJA is projected to reduce revenues between $1.5 trillion and $1.7 trillion. Debt rises by about $2.0 trillion over the same period. Looking beyond the 10-year budget window, by 2040, revenue falls between $3.6 trillion and $4.4 trillion while debt increases by $6.4 to $6.9 trillion.
In 2027, GDP is between 0.4% and 0.9% higher than with no tax changes. By 2040, the difference between GDP under the House tax bill and current policy is between 0.0% and 0.8%, due to larger debt.
The House Tax Cuts and Jobs Act: Dynamic Effect on the Budget and the Economy
- This brief reports Penn Wharton Budget Model’s (PWBM) dynamic analysis of the Tax Cuts and Jobs Act (TCJA), which complements our static analysis previously released.
- PWBM’s dynamic analysis finds that, depending on parameter values, the bill lowers tax revenues between $1.4 trillion to $1.7 trillion over 10 years while increasing federal debt between $2.0 trillion and $2.1 trillion over the same time period. By 2040, debt is between $6.3 trillion and $6.8 trillion higher than otherwise.
- TCJA raises GDP in 2027 between 0.33% and 0.83% relative to its projected value in 2027 with no policy change. However, this small boost fades over time, due to rising debt. By 2040, GDP may even fall below current policy’s GDP.
Options for the Unified Framework Tax Plan
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- The “Big 6” recently released a ‘Unified Framework’ for addressing tax reform.
- The details of many key pieces remain unspecified.
- How the details are filled in has differential impacts on the federal budget and economy.
Penn Wharton Budget Model’s Tax Policy Simulator
CLICK HERE FOR INTERACTIVE SIMULATION
- Penn Wharton Budget Model’s new comprehensive Tax Policy Simulator allows users to build tax reform plans and see the budgetary and economic impact of those plans.
- Users can vary 16 key tax provisions, for a total of 4,096 policy combinations.
- The model accommodates a much wider range of tax policy options, which are not shown to conserve space. Policymakers, major media outlets and thought leaders who want to test different tax reforms can contact us for estimates.
Penn Wharton Budget Model’s 2017 White House Tax Plan Simulator
- Penn Wharton Budget Model’s Tax Policy Simulator allows users to see the budgetary and economic impact of President Trump’s 2017 White House Tax Plan. Users can vary the key economic behavioral parameters, for a total of 512 combinations.
- In the short-run, President Trump’s 2017 White House Tax Plan produces similar economic growth as current policy. However, in the long-run, this tax plan reduces economic growth compared to current policy due to its impact on debt.
- A policy package that combines a reduction of 20 percent to federal spending, excluding Social Security and Medicare, and the White House Tax Plan with possible options from the 2016 campaign plan to raise more revenue can lead to greater economic growth than current policy.
President Trump’s Campaign Tax Plan & White House Budget
- Our previous analysis showed that President Trump’s campaign tax plan would stimulate the economy in the short run but reduce GDP by about 8.5 percent by 2041 relative to current policy unless cuts were made to spending or additional revenue sources were found that help mitigate the increase in debt.
- More recently, the White House Budget Fiscal Year 2018 proposes to cut federal government spending, excluding Social Security and Medicare, by 16 percent. These spending cuts help reduce the negative debt impact of the proposed tax cuts.
- Nonetheless, when President Trump’s campaign tax plan is paired with President Trump’s budget, the economy is still 2.2 percent smaller by 2041 than under current policy without either change.
Penn Wharton Budget Model’s Tax Policy Simulator
- Penn Wharton Budget Model’s Tax Policy Simulator allows users to see the budgetary and economic impact of Hillary Clinton’s, Donald Trump’s and the House GOP’s tax plans. Users can vary the key economic behavioral assumptions, for a total of 512 combinations.
- In the short run, Hillary Clinton’s tax plan dampens economic growth. However, in the long run her tax plan increases economic growth relative to current policy because her tax plan reduces federal debt relative to current policy.
- In the short run, Donald Trump’s tax plan boosts economic growth. However, in the long run, his tax plan reduces economic growth compared to current policy because his tax plan increases federal debt relative to current policy.