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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.

Tax Policy

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The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Dynamic Effects on the Budget and the Economy

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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.

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The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Static Revenue Effects

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The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Static Revenue Effects
  • This brief reports Penn Wharton Budget Model’s (PWBM) conventional (static) analysis of The Senate Tax Cuts and Jobs Act (TCJA), as amended on November 15, 2017, which includes numerous sunsets to comply with the Byrd Rule governing the budget reconciliation process.
  • PWBM’s conventional (static) analysis finds that the bill lowers tax revenues by $1.3 trillion over the first 10 years.
  • PWBM projects that provisions in TCJA continue to reduce revenue after the 10-year window and we list the reason for each: (a) permanent revenue losses due to a lack of sunset; (b) income shifting across years to exploit sunsets; and (c) reclassification of income to exploit differences in marginal tax rates, potentially permanent or due to sunsets.

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The Senate Tax Cuts and Jobs Act (11/9/17): Static and Dynamic Effects on the Budget and the Economy

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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.

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The House Tax Cuts and Jobs Act, Amended (11/9/17): The Dynamic Effect on the Budget and the Economy

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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.

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The House Tax Cuts and Jobs Act: Static Distributional Analysis

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The House Tax Cuts and Jobs Act: Static Distributional Analysis

  • We present the static (conventional) distributional impact of the Tax Cuts and Jobs Act (TCJA) under two measures: the traditional measure and as tax shares.

  • Under standard assumptions, the traditional measure indicates that in 2018, 37 percent of the reduction in taxes accrues to households in the top one percent of the income distribution. By 2027, this group receives 53 percent of the tax change and, by 2040, almost 55 percent.

  • In contrast, the share of taxes paid by households in the top one percent of the income distribution is only moderately lower under TCJA. In 2018, the top one percent of the income distribution pays 28 percent of federal taxes under current policy and 27 percent under TCJA. By 2027, this group pays 28 percent under current policy and 26 percent under TCJA. By 2040, the tax share falls slightly from 30 percent under current policy to 28 percent under TCJA. Due to increasing progressivity over time under current law, the top one percent will still pay a slightly larger share of the nation’s tax base by 2040 under TCJA relative to what they pay today under current law.

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The House Tax Cuts and Jobs Act: Dynamic Effect on the Budget and the Economy

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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.

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The House Tax Cuts and Jobs Act: Static Effect on Federal Tax Revenues

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The House Tax Cuts and Jobs Act: Static Effect on Federal Tax Revenues
  • On Thursday November 2nd, 2017 the Ways and Means Committee majority released the Tax Cuts and Jobs Act. The Act changes both individual and business taxes.
  • The Joint Committee on Taxation's (JCT) conventional (static) analysis finds that the bill lowers tax revenues by $1.414 trillion over 10 years.
  • Penn Wharton Budget Model's (PWBM) conventional (static) analysis finds that the bill lowers tax revenues by $1.750 trillion over the first 10 years and $4.391 trillion from 2018 to 2040.

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Options for the Unified Framework Tax Plan

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Options for the Unified Framework Tax Plan

CLICK HERE FOR INTERACTIVE SIMULATION

  • 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.

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Penn Wharton Budget Model’s Tax Policy Simulator

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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.

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Implementing Alternative Tax Reforms in the Penn Wharton Budget Model Static Tax Simulator

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Implementing Alternative Tax Reforms in the Penn Wharton Budget Model Static Tax Simulator

  • This Brief describes the assumptions and methods implemented in the three major integrated calculators of the Penn Wharton Budget Model (PWBM) Static Tax Simulator (STS). These calculators estimate and project individual income taxes, payroll taxes and business taxes.

  • The PWBM-STS revenue estimates incorporate domestic and international income reclassifications among various entities associated with different policies. Income shifts are modeled between corporate taxpaying entities, across business and individual tax payers, and by businesses across domestic and foreign tax jurisdictions.

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Penn Wharton Budget Model’s 2017 White House Tax Plan Simulator

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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.

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President Trump’s Campaign Tax Plan & White House Budget

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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.

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President Trump’s New Tax Plan: What’s Changed?

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President Trump’s New Tax Plan: What’s Changed?
  • President Donald Trump’s White House recently outlined a new tax plan.
  • President Trump’s White House tax plan is similar in many ways to his tax plan while on the campaign trail. However, the new tax plan lacks considerable detail, and estimates of its impact will be revised as the plan gets more specific.
  • Nonetheless, lessons from PWBM’s analysis of his campaign tax plan can help guide policymakers as they add more details to the White House tax plan.

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Fundamental Tax Reform: A Comparison of Three Options

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Fundamental Tax Reform: A Comparison of Three Options
  • Consumption taxes have the potential to reduce taxes on saving, which may lead to economic growth.
  • A partial-replacement value added tax (VAT), a full-replacement X tax and a full-replacement personal expenditure tax (PET) all have different implications for how the tax is administered, transition costs, and international transactions. Policymakers will need to weigh the tradeoffs between a consumption tax and the current income tax system.
  • The economic impact of an X tax hinges on whether it is based on domestic consumption (includes a border-adjustment) or on domestic production.

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Tax Policy and Retirement Savings

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Tax Policy and Retirement Savings
  • Tax subsidies for retirement saving cost $180 billion in 2016 and are one of the largest tax sources of revenue loss for the government.
  • Evidence based on administrative data finds that tax incentives only induce a minority of households to save more. So-called “nudges” might be just as or more important.
  • In 2017, 30 states are exploring different types of retirement savings reforms. State reforms may help inform a national policy to increase household saving.

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U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

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U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

  • Estate tax rates were lowered and exemptions raised dramatically in the 21st century with the result that married couples can potentially pass on an estate of up to $10,980,000 with no tax liability.

  • President Trump’s proposal to eliminate the estate tax while taxing capital gains at death could, in theory, raise a comparable amount of tax revenue as the current estate tax, if his proposed exemption allowance is lowered.

  • More research is needed to measure the impact of estate taxes and reforms to estate taxes on economic efficiency, behavior and the distribution of wealth.

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The Economics of Corporate and Business Tax Reform

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The Economics of Corporate and Business Tax Reform
  • U.S. statutory corporate tax rates are higher than other developed countries and based on worldwide income instead of domestic income.
  • Corporate tax reform can address both domestic inefficiencies such as debt structure and international inefficiencies such as the lockout effect, corporate inversions and income shifting.
  • More ambitious reforms may eliminate more inefficiencies. However, more research is needed to study their impact on revenue, the distribution of income, administrative costs and the response of other nations.

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Tax Policy Toward Low-Income Families

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Tax Policy Toward Low-Income Families
  • In 2013, tax credits for low-income families cost $124 billion. Nearly 20 percent of all households that filed taxes benefited from the Earned Income Tax Credit (EITC) alone.
  • The majority of EITC benefits go to single parents and to households with annual income below $30,000. The EITC is more likely to increase the employment of single parents relative to other groups.
  • Expanding the EITC program to childless households and increasing the refundability of the Child Tax Credit (CTC) are predicted to improve work incentives while providing more benefits for the lowest income households.

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Penn Wharton Budget Model’s Tax Policy Simulator

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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.

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Setting Behavioral Responses in PWBM’s Dynamic Simulations

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Setting Behavioral Responses in PWBM’s Dynamic Simulations

  • A literature survey is provided for the key behavioral parameters in tax analysis: labor supply elasticity; saving elasticity and openness to international capital flows.
    • Tax changes affect after-tax wages. The labor supply elasticity parameter controls the simulator’s labor supply response to changes in after-tax wages.
    • Tax changes also affect net-of-tax interest, dividend, and capital gains. The saving elasticity parameter controls how much national saving increases in response to changes in after-tax asset returns.
    • The openness to international capital flows parameter controls the share of new issues of U.S. financial assets that foreign savers purchase. A larger share means greater insulation of domestic investment from variation in domestic saving.
  • However, enough uncertainty exists regarding these key parameters, and so the PWBM model allows the user to try different values.

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