Penn Wharton Budget Model’s Tax Module (PWBM-TM) uses a highly detailed simulation and projection of U.S. demographics from the Penn Wharton Budget Model Microsimulation model (PWBMsim). PWBM-TM incorporates the details from PWBMsim to forecast federal tax revenues attributable to different types of tax filers (individuals, families, head of households). It also allows an attribution by type of tax paid (income, payroll, business source). PWBM-TM uses PWBMsim output to split total income into business and labor income. Subsequently, business income is allocated across organizational form and subjected to corporate level taxation, where appropriate.
PWBM-TM uses PWBMsim inputs to better inform PWBM’s dynamic OLG model. The dynamic OLG model uses the tax functions generated by the PWBM-TM to produce a baseline of the U.S. macroeconomy and to calculate how changes in tax policy affect the U.S. macroeconomy accounting for how the changes feed back into the federal budget. Any discussion of fiscal policy is incomplete without considering the feedback effects estimated by the dynamic model (also called dynamic feedback effects or dynamic scoring). A careful analysis of any contemplated policy change includes the estimated macroeconomic feedback from those policy changes that affect revenues and outlays and is essential to understanding the true effect of any policy decision.