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Brief, Tax Policy, Economic Growth
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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.

Brief

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Senator Bernie Sanders' Wealth Tax: Budgetary and Economic Effects

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Senator Bernie Sanders' Wealth Tax: Budgetary and Economic Effects

  • Senator Bernie Sanders has proposed a graduated wealth tax starting at 1 percent of net worth above $32 million and climbing to 8 percent on net worth above $10 billion, which his presidential campaign has reported as raising $4.35 trillion over 10 years.

  • PWBM estimates that the proposal would raise about $3.3 trillion over fiscal years 2021-2030, not including macroeconomic effects. Including macroeconomic effects, PWBM estimates that the proposal would raise about $2.8 trillion over the same period.

  • PWBM projects that the proposal would reduce GDP by 1.1 percent in 2050. Average hourly wages in the economy in 2050, including wages earned by households not directly subject to the wealth tax, would fall by 1.0 percent due to the reduction in private capital

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The Biden Tax Plan: Budgetary, Distributional, and Economic Effects

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The Biden Tax Plan: Budgetary, Distributional, and Economic Effects

  • Former Vice President Joe Biden has proposed a plan to raise taxes on high-income households, which the Biden presidential campaign estimates would raise $3.2 trillion over 10 years. PWBM projects that this plan would raise between $2.3 trillion (including macroeconomic effects) and $2.6 trillion (not including macroeconomic effects) over fiscal years 2021-2030.

  • We project that more than half of the tax change falls on the top 0.1 percent of the income distribution, corresponding to an average tax increase of more than $1 million per taxpayer and a 14 percent reduction in their after-tax income. For all groups outside of the top 5 percent, average after-tax income decreases by less than 1 percent.

  • PWBM projects that this plan would have little impact on the aggregate economy, decreasing GDP by 0.1 percent by 2030 and increasing GDP by 0.1 percent by 2050.

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Senator Bernie Sanders' Estate Tax: Budgetary Effects

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Senator Bernie Sanders' Estate Tax: Budgetary Effects

  • Senator Bernie Sanders has proposed expanding the federal estate tax by lowering the exemption to $3.5 million for singles and $7 million for married couples as well as creating four new brackets with marginal rates up to 77 percent.

  • Not including macroeconomic effects, PWBM projects that this plan would raise about $267 billion in additional revenue over fiscal years 2020 - 2029.

  • PWBM projects that this plan would increase the percentage of decedents that would face any estate tax liability to about 0.5 percent in 2030.

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Senator Michael Bennet’s “The Real Deal” Tax Plan: Budgetary Effects

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Senator Michael Bennet’s “The Real Deal” Tax Plan: Budgetary Effects

We project that five major tax proposals included in Senator Michael Bennet’s “The Real Deal” would raise over $4.5 trillion dollars over the 10-year budget window (2020 - 2029) on a conventional basis before economic feedback effects.

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Senator Elizabeth Warren’s Wealth Tax: Budgetary and Economic Effects

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Senator Elizabeth Warren’s Wealth Tax: Budgetary and Economic Effects

  • 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.

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Social Security Projections: Competing Baselines

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Social Security Projections: Competing Baselines

  • The Social Security Trust Fund is projected to be depleted between 2032 - 2035, depending on various assumptions.

  • Upon Trust Fund depletion, Social Security’s “payable” benefits--corresponding to a precise “current law” definition and based on annual payroll taxes collected in each year-- will equal between 70 - 75 percent of the “scheduled” benefits, based on the statutory formulas currently used to determine benefit levels (“current policy”).

  • Since Social Security’s financial projections typically extend beyond the depletion date, a modeling assumption must be made for benefit payments (“payable” or “scheduled,” “current law” or “current policy”) after Trust Fund depletion when projecting the impact of potential Social Security reforms on the economy. This decision plays a major role in projections of different potential reforms on the economy.

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The Social Security 2100 Act: Updated Analysis of Effects on Social Security Finances and the Economy

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The Social Security 2100 Act: Updated Analysis of Effects on Social Security Finances and the Economy

  • In this update to our analysis, we project that the Social Security 2100 Act would eliminate Social Security’s conventional long-range imbalance while reducing the program’s short-range imbalance on a dynamic basis.

  • The Act reduces annual shortfalls that would otherwise add to national deficits under current policy, but at the cost of new tax distortions. In the short run, the two effects nearly offset in the macroeconomy. We project that the Act decreases GDP by 0.7 percent by 2029 and decreases GDP by 2.7 percent by 2049.

  • PWBM previously analyzed the Social Security 2100 bill in March of this year. Since that time, PWBM has made enhancements to both our Social Security and our dynamic overlapping generations equilibrium models. These enhancements were made as part of our ongoing process to continually develop the most flexible and dependable model possible.

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The Social Security 2100 Act: Who Wins and Who Loses?

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The Social Security 2100 Act: Who Wins and Who Loses?

Using PWBM’s new dynamic distributional analysis, we find that the Social Security 2100 Act benefits wealthy, retired households at the expense of young, high-income households.

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The $2 Trillion Congressional Democrat and White House Infrastructure Proposal

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The $2 Trillion Congressional Democrat and White House Infrastructure Proposal

  • Due to various offsets, a $2 trillion federal investment would increase infrastructure spending across all levels of government increases between $440 billion and $2,033 billion---including the original $2 trillion---based on evidence of past experience.

  • If a gas tax were used to fully fund the $2 trillion investment, the gas tax would have to rise by $1.67 per gallon for 10 years, thereby increasing the current federal gas tax from $0.184 (18.4 cents) per gallon to $1.854 per gallon.

  • If fully deficit-financed, the $2 trillion infrastructure proposal lowers GDP between 0.1 and 0.5 by 2043, relative to current policy. If fully financed with user fees or higher gas taxes it typically boosts GDP, between -0.1 and 0.4 percent by 2043.

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Options to Return Social Security to Financial Balance: The Impact on Economic Growth

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Options to Return Social Security to Financial Balance: The Impact on Economic Growth

  • We examine a range of policy options that put Social Security on a sustainable path.

  • The analysis emphasizes the need for analyzing Social Security reforms using deep modeling that reveals important interactions that challenge conventional wisdom.

  • Tax increases generally produce more growth than “current policy” analysis where shortfalls are combined with the standard unified surplus measure. Additional debt can be combined with changes in benefits to produce even more economic growth. Reforms that combine tax increases and progressive benefit reductions produce the most growth.

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Analysis of "Tax Reform 2.0"

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Analysis of "Tax Reform 2.0"

  • Recently, the House Ways and Means Committee introduced “Tax Reform 2.0” that includes new incentives to start up a business, enhanced savings accounts and makes permanent the individual tax cuts in the 2017 Tax Cuts and Jobs Act.

  • In April of 2018, PWBM anticipated and estimated the effects of the largest piece of this legislation that makes the TCJA individual tax cuts permanent.

  • This brief updates that analysis for the new 10-year budget window and incorporates the rest of the provisions in “Tax Reform 2.0.”

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Penn Wharton Budget Model's Social Security Simulator

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Penn Wharton Budget Model's Social Security Simulator

Click Here for Interactive Simulation

  • Penn Wharton Budget Model’s updated Social Security Simulator allows users to build Social Security reform plans to see the budgetary and economic impact of those plans.

  • Users can try up to 648 different policy combinations.

  • The model can handle a much wider range of Social Security policy options, which are not shown to conserve space. Policymakers, major media outlets and thought leaders who want to test different Social Security reforms can contact us for estimates.

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Social Security’s Worsening Financial Condition

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Social Security’s Worsening Financial Condition

  • Since the major Social Security reforms were passed in 1983, Social Security Trustees have slowly reduced their projected Social Security trust fund exhaustion date from at least 2058 to 2034. Yet, Trustees’ estimates still don’t incorporate key future macroeconomic variables, including the nation’s growing debt.

  • Using a model that incorporates future macro-economic forces, PWBM projects that the Social Security trust fund depletes in 2032. More importantly, we project much larger future annual cash-flow shortfalls. Relative to the payroll tax base, we project a cash-flow shortfall in 2032 that is 36 percent larger than the Trustees’ estimate for that year. By 2048, our projected cash-flow shortfall is 77 percent larger.

  • If Social Security shortfalls continue to contribute to the federal government’s unified deficits, consistent with no changes in taxes or benefits, we project that the federal debt-to-GDP ratio will exceed 200 percent by 2048, a path that is not sustainable.

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Projecting the Mass Conversion from Pass-Through Entities to C-Corporations

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Projecting the Mass Conversion from Pass-Through Entities to C-Corporations

  • We project that the Tax Cuts and Jobs Act (TCJA) will cause 235,780 U.S. business owners---77 percent of whom have incomes of at least $500,000---to switch from pass-through entity owners to C-corporations, primarily to take advantage of sheltering their income from tax by converting to C-corporations.

  • The biggest switchers include doctors, lawyers and investors, especially if owners can afford to defer receipt of business income to a later year. Other business owners, who are qualified to use the 20 percent deduction for pass-through business income, including painters, plumbers, and printers, are more likely to remain as pass-through entities.

  • We project that about 17.5 percent of all pass-through Ordinary Business Income will switch to C-corporations.

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The Jobs and Infrastructure Plan for America’s Workers

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The Jobs and Infrastructure Plan for America’s Workers

  • Senate Democrats propose spending $1,022 billion on public infrastructure over the next 10 years, financed with taxes on personal income and corporate income.

  • An additional dollar of federal aid could lead state and local governments to increase total infrastructure spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing and planned infrastructure programs. Based on an extensive literature review, we estimate that infrastructure investment across all levels of government increases between $225 billion and $1,039 billion, including the $1,022 billion federal investment.

  • Depending on how much state and local governments spend on infrastructure in response to federal aid, we estimate that the plan changes GDP between -0.1 and 0.1 percent by 2032 relative to no policy change. By 2042, the plan changes GDP between -0.3 and -0.2 percent.

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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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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 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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