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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.

Economic Growth

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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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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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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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A Discussion of the White House FY 2019 Budget

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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).

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Education and Income Growth

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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.

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Will federal dollars for infrastructure boost the economy?

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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.

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Options for Infrastructure Investment: Dynamic Modeling

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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.

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The Tax Cuts and Jobs Act, as Reported by Conference Committee (12/15/17): Static and Dynamic Effects on the Budget and the Economy

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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.

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The Senate Tax Cuts and Jobs Act, as Passed by Senate (12/2/17): Static and Dynamic Effects on the Budget and the Economy

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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.

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The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Comparing Dynamic Effects Estimated by PWBM & JCT

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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.

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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 (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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