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Brief, Tax Policy, Economic Growth
Mariko Paulson
Senator Elizabeth Warren’s Wealth Tax: ...

  • Senator Elizabeth Warren has proposed a wealth tax equal to 2 percent of net worth above $50 million and 6 percent of net worth above $1 billion, which her campaign estimates would raise $3.75 trillion over 10 years.

  • PWBM estimates that the proposal would raise about $2.7 trillion over fiscal years 2021-2030, not including macroeconomic effects. Including macroeconomic effects, PWBM estimates that the proposal would raise about $2.3 trillion over the same period.

  • PWBM projects that the proposal would reduce GDP by 0.9 percent in 2050 under the standard budget scoring convention that additional revenues reduce the deficit. If the revenues were instead spent on public investments, PWBM projects GDP in 2050 would fall between 1.0 and 2.1 percent, depending on the productivity of the investment. Average hourly wages in the economy in 2050, including wages earned by households not directly subject to the wealth tax, would fall between 0.8 and 2.3 percent due to the reduction in private capital formation.

Senator Elizabeth Warren’s Wealth Tax: Budgetary and Economic Effects
Blog Post, Tax Policy
Mariko Paulson
The Revenue-Maximizing Capital Gains Tax Rate: ...

Under current law, PWBM estimates that a 33% capital gains tax rate maximizes revenue, but this rate increases to 42% if stepped-up cost basis at death were eliminated.

Blog Post, Tax Policy, Economic Growth
Mariko Paulson
Policy Options: Increase Tax Rates on Capital ...

We estimate the budgetary and economic effects of increasing the top rate on long-term capital gains and qualified dividends from 20 percent to 24.2 percent, which is enacted on January 1st, 2021. We project that it will raise around $60 billion of additional revenue on a conventional basis over the 10-year budget window and increase GDP by 0.1 percent by 2050.

Blog Post, Tax Policy, Economic Growth
Mariko Paulson
Policy Options: A 1% Value-Added Tax

We estimate the budgetary and economic effects of a new broad-based 1 percent value-added tax (VAT) with a progressive universal rebate calculated based on earnings, which is enacted on January 1st, 2021. We project that it will raise $700 billion of additional revenue on a conventional basis over the 10-year budget window and increase GDP by 0.8 percent by 2050.

Blog Post, Tax Policy, Economic Growth
Mariko Paulson
Policy Options: A Carbon Tax of $30 per ton

We estimate the budgetary and economic effects of a new carbon tax of $30 per ton of emissions, which is enacted on January 1st, 2021, rising by inflation plus 5 percent through 2050. We project that it raises $1.6 trillion of additional revenue on a conventional basis over the 10-year budget window and increases GDP by 2.2 percent by 2050.

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The Tax Cuts and Jobs Act: Extending Changes to Individual Taxes

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The Tax Cuts and Jobs Act: Extending Changes to Individual Taxes

  • 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.

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The White House's Trade Policies and the Economy

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A recent CNBC article by John Harwood, Peter Navarro says Trump’s trade policies are ‘good for the market,’ but economists aren’t buying it, applies two Penn Wharton Budget Model (PWBM) studies on the effects of tax cuts by industry and the probable effects of a trade war. The author analyzes the possibility that recent administration actions increasing protectionist measures would slow economic growth.

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Incentives and Corporate Tax Cuts

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Justin Wolfers’ New York Times article, "How to Think About Corporate Tax Cuts" analyzes the economic effects of President Trump’s corporate tax cuts and references Kent Smetters of Penn Wharton Budget Model. While the tax bill promises to increase the incentive to invest and gives companies more cash, Smetters argues that in the short run giving more money to corporations helps the owners.

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The Effect on Households of Different Methods of Financing a UBI

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To evaluate the potential effects of a hypothetical $1.5 trillion Universal Basic Income (UBI) program, PWBM conducts analyses of the program under three different financing policies. Each of the three financing options has different effects on household savings, consumption, and labor decisions, which leads to significantly different effects on the aggregate economy and household welfare.

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Options for Universal Basic Income: Dynamic Modeling

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Options for Universal Basic Income: Dynamic Modeling

  • 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.

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The Omnibus Spending Bill of 2018

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The Omnibus Spending Bill of 2018

  • Recently, President Trump signed the Omnibus Spending Bill of 2018 into law. The bill increases the level of federal discretionary spending in 2018.

  • This report projects the impact on the economy assuming that the increase to spending levels will be sustained in future years and evolve with PWBM’s demographic and macroeconomic projections.

  • By 2027, we project that debt increases by 1.6 percent and GDP falls by 0.1 percent, relative to current spending levels. By 2037, debt increases by 1.6 percent and GDP falls by 0.2 percent.

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Indexing Capital Gains to Inflation

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Richard Rubin of the Wall Street Journal reports that the Trump administration is considering changing tax law so that capital gains would be adjusted for inflation. Under current policy, households owe taxes on the full nominal value of certain capital gains; this proposal would index the asset basis to inflation, leaving only the real value of any capital gain as taxable income. Our analysis suggests that this policy would cost $102 billion dollars over the next decade. While high-income households would benefit most, the share of taxes paid by AGI would not change meaningfully.

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Recent Immigrants Are Better-Educated Than Ever Before

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From 1997 to 2007, a newly arrived adult immigrant to the United States was about as likely to have a college degree as to have not finished high school. During that period, each group accounted for about one third of new arrivals (including both legal and unauthorized immigrants). Over the decade since 2007, those odds changed dramatically. The share of recent immigrants with a college degree grew by nearly 50 percent, while the share without a high school degree fell by a similar proportion (see Figure 1). By 2017, a recently arrived immigrant was almost three times as likely to have a college degree as to have not finished high school.

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W2018-2 Tax Based Switching of Business Income

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Authors: Richard Prisinzano and James Pearce

Abstract

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The Impact of a Trade War Could Wash Out Tax Cuts

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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.

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The Economic Costs of a Trade War

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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.

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Wage Growth and Tax Cuts by Industry

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A recent Bloomberg article by Mark Whitehouse, “Are Tax Cuts Driving Raises? It's Hard to See,” cites a Penn Wharton Budget Model (PWBM) study about the effects of the Tax Cuts and Jobs Act by Industry. The author analyses recent reports of wage growth to see if they are related to the tax bill passed this fall.

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PWBM Infrastructure Analysis has Impact on White House

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Philadelphia Inquirer reporter Erin Arvedlund digs into recent a recent post from the White House about PWBM’s analysis of the White House infrastructure plan and PWBM’s response. “War of Words Between Wharton and Trump White House,” compares the White House’s statement that PWBM lacks transparency with the model equations and methods made available by PWBM. PWBM is excited to see the White House engage with our work and we look forward to further discussion.

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A Response to the White House’s Critique of PWBM’s Infrastructure Analysis

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Last Thursday, Transportation Secretary Elaine Chao was asked in Senate testimony to respond to PWBM’s recent analysis of President Trump’s FY 2019 infrastructure plan. On Friday, the White House issued a formal response that is critical of PWBM’s analysis.

To quickly recap, the President’s infrastructure plan proposes that the federal government spend $200 billion in incentives to produce $1.5 trillion in total additional infrastructure spending across state and local governments, including private sector partnerships. PWBM analysis of the President’s plan estimates that total infrastructure spending, across all layers of government, would increase between $20 billion to $230 billion, including the $200 billion federal investment. We also estimate that this spending would have little impact on GDP.

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Trump Infrastructure Plan Falls Short of Its Goal

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A recent CNBC article by John W. Schoen, “Trump infrastructure plan comes up $1 trillion short of its funding goal, analysis finds”, discusses the President’s newly proposed infrastructure plan. Analysis by PWBM shows that the plan will fall more than $1 trillion short of its investment goal.

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Will President Trump’s Plan Stimulate State Spending on Infrastructure?

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New York Time’s reporter Jim Tankersley analyzes PWBM’s predictions for President Trump’s infrastructure plan. "Experts Doubt Trump's Infrastructure Plan Will Boost Economy," compares and further explores the implications of the differences between Mr. Trump's promises and PWBM's forecast.

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Design Matters for Infrastructure Plan Outcomes

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The Washington Post article “The Math in Trump’s Infrastructure Plan Is off by 98 Percent, Upenn Economists Say” highlights PWBM’s analysis of the White House FY 2019 infrastructure plan.

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The White House FY 2019 Infrastructure Plan

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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.

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For Teen Workers, Parents’ Education Matters

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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.

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Listen to a Discussion of President Trump’s Infrastructure Plan

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Knowledge@Wharton features PWBM research in an article about President Trump’s infrastructure plan. The article also includes research from Virginia Tech’s Kevin Heaslip and Duke’s Henry Petroski.

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