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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 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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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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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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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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Effects of Income Tax Changes on Economic Growth

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Effects of Income Tax Changes on Economic Growth
  • Not all changes to tax policy have the same impact on growth. Studies indicate that tax cuts, if not well designed, could even reduce economic growth.
  • Tax cuts that target new economic activity, reduce distortions to capital accumulation, and are not deficit financed are more likely to lead to economic growth.

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The Penn Wharton Budget Model’s Social Security Policy Simulator

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The Penn Wharton Budget Model’s Social Security Policy Simulator

  • The Penn Wharton Budget Model’s Social Security Policy Simulator allows users to see the results of six policy options and combinations of those options, for a total of 4,096 policy combinations. Most policies can be simulated on a standard static basis or on a dynamic basis that includes macroeconomic feedback effects.

  • Relative to estimates by the Social Security Administration, the Penn Wharton Budget Model shows a faster and larger deterioration of the program’s finances. Our results are a bit closer to the Congressional Budget Office’s projections.

  • Many standard policy options for achieving solvency barely move the date that the Social Security Trust Fund runs out of money, but they might contribute significantly to the long-run shortfall. Either combinations of several policy changes or larger changes are required for securing Social Security.

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The Penn Wharton Budget Model’s Immigration Policy Simulator

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The Penn Wharton Budget Model’s Immigration Policy Simulator

Click Here for Interactive Simulation

Click Here for a Video Demonstration of the Simulator

  • The Penn Wharton Budget Model’s Immigration Policy Simulator allows users to see the results of three policy options and combinations of those options, for a total of 125 policy combinations. Policies can be simulated on a standard static basis or on a dynamic basis that includes macroeconomic feedback effects.
  • Shifting the mix of legal immigrants toward college graduates has little impact on employment and only slightly increases GDP. Legalization of undocumented workers slightly reduces employment and has a negligible impact on GDP. Deportations, however, substantially reduce both employment and GDP.
  • The largest positive impact on employment and GDP comes from increasing the net flow of immigrants.

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Not Enough Shovels? The Crucial Role of Future Capital Accumulation for U.S. Output Growth

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Not Enough Shovels? The Crucial Role of Future Capital Accumulation for U.S. Output Growth
  • Growth in physical capital per worker has contributed the most to U.S. productivity growth.
  • U.S. capital accumulation is increasingly dependent on foreign capital inflows.
  • If future technology improvement occurs at its average historical rate, maintaining U.S. productivity growth will require more rapid capital accumulation, especially because worker efficiency appears likely to stagnate or decline.

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The Decline in Labor Efficiency in the United States

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The Decline in Labor Efficiency in the United States
  • Workers’ performance on the job is related to all of their demographic and economic attributes, including education, age, family structure, gender, race, labor force status (full- or part-time work), peer group (birth-year), and others.
  • The annual market-wide “effective labor input” depends upon the quantity (number of work hours contributed) and the efficiency (related to worker attributes) of individuals engaged in market production.
  • Labor efficiency is projected to decline in the future and offset growth in labor quantity to slow growth of aggregate “effective labor input.” Official government analysts typically do not project changes in labor efficiency, thereby imparting a more optimistic outlook to budget projections.

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Education and Income Growth

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Education and Income Growth
  • The large premium that college degree holders earn relative to workers with only a high school diploma suggests that a better-educated workforce would increase U.S. output.
  • Barriers to borrowing against future income, though, may make it difficult to acquire a college education, implying a potential role for using policy to increase access to college, especially if it is appropriately targeted.
  • However, college education is costly, and the payoff is uncertain and realized only after a lengthy absence from the workforce. Optimal policy, therefore, aims to balance these costs against the potential benefits, requiring the explicit modeling of education attainment when making budget projections.

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Changes in American Economic Productivity

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Changes in American Economic Productivity

  • Improving citizens’ well-being requires increasing productivity over time – the efficiency of converting resources such as labor, land, and physical plant and equipment into useful goods and services.

  • U.S. productivity has slowed dramatically during the last decade, largely due to slower innovation and reduced growth of capital per worker.

  • The productivity slowdown will make funding government programs more challenging. Public policies that encourage additional capital accumulation and reward innovation could reverse at least some of the recent productivity declines.

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The Effects of Immigration on the United States’ Economy

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The Effects of Immigration on the United States’ Economy

  • While some policymakers have blamed immigration for slowing U.S. wage growth since the 1970s, most academic research finds little long run effect on Americans’ wages.

  • The available evidence suggests that immigration leads to more innovation, a better educated workforce, greater occupational specialization, better matching of skills with jobs, and higher overall economic productivity.

  • Immigration also has a net positive effect on combined federal, state, and local budgets. But not all taxpayers benefit equally. In regions with large populations of less educated, low-income immigrants, native-born residents bear significant net costs due to immigrants’ use of public services, especially education.

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