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Tax Policy

Consumers Getting Hit at the Pump

In Small Towns Are Booming, Thanks to Rising Oil Prices, The Wall Street Journal’s Rebecca Elliot and Harriet Torry cite PWBM research on the recent rise in gas prices.

New Tax Law Set to Trigger Conversions From Pass-Through Entities to C-Corporations

Politico’s Ben White and Aubree Eliza Weaver write about the Penn Wharton Budget Model’s projection of business entity classification conversions in the aftermath of the Tax Cuts and Jobs Act (TCJA) in Morning Money: The Big Switch from Pass-Throughs.

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

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.

Recent Rise in Gas Prices Offsets Some Households’ Gains from Tax Cuts

As noted in our brief, the Tax Cuts and Jobs Act reduced the direct tax liability of individuals by an estimated $1.3 billion, before considering macroeconomic feedback effects, over the period 2018-27. This reduction was achieved through a number of provisions that changed the individual income tax structure. Table 1 presents the average tax cut received by Adjusted Gross Income (AGI) percentile in 2018. The overall median tax cut is $401, with larger cuts going to groups with larger AGI.

Capitol Hill Push to Change Taxes on Capital Gains

Naomi Jagoda relies on the Penn Wharton Budget Model’s analysis of the push on Capitol Hill to change tax law to adjust capital gains for inflation in Senate Dems to Mnuchin: Don't index capital gains to inflation.

Senator Ted Cruz’s Proposal to Index Capital Gains to Inflation

Senator Ted Cruz (R-TX) recently introduced a bill titled the “Capital Gains Inflation Relief Act of 2018”. The proposal would let investors adjust asset cost basis for inflation, resulting in a lower tax bill upon realizing capital gains.

Senate GOP Wary of New Tax Cut Sequel

In his article “Senate GOP wary of new tax cut sequel,” Alexander Bolton described Republican reactions to the CBO scoring of the new tax bill and opinions over making the individual tax cuts permanent. He cites projections from Penn Wharton Budget Model (PWBM) in order to demonstrate the likely effects on the national debt from extending the individual tax cuts.

The Tax Cuts and Jobs Act: Extending Changes to Individual Taxes

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.

The White House's Trade Policies and the Economy

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.

Incentives and Corporate Tax Cuts

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.

Indexing Capital Gains to Inflation

Richard Rubin of the Wall Street Journal reports that the Trump administration is considering changing tax law so that capital gains would be adjusted for inflation. Under current policy, households owe taxes on the full nominal value of certain capital gains; this proposal would index the asset basis to inflation, leaving only the real value of any capital gain as taxable income. Our analysis suggests that this policy would cost $102 billion dollars over the next decade. While high-income households would benefit most, the share of taxes paid by AGI would not change meaningfully.

W2018-2 Tax Based Switching of Business Income

The Impact of a Trade War Could Wash Out Tax Cuts

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.

Wage Growth and Tax Cuts by Industry

A recent Bloomberg article by Mark Whitehouse, “Are Tax Cuts Driving Raises? It's Hard to See,” cites a Penn Wharton Budget Model (PWBM) study about the effects of the Tax Cuts and Jobs Act by Industry. The author analyses recent reports of wage growth to see if they are related to the tax bill passed this fall.

A Discussion of the White House FY 2019 Budget

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).

WEMBA Panel - Federal Tax Reform

The Wharton Executive MBA (WEMBA) program will be hosting a panel discussion on the recent federal tax reform and how it might affect businesses, which will feature our Faculty Director, Kent Smetters, along with two leading tax experts.

Though the event is only open to WEMBA students, we will live stream the discussion on our page for the event for anyone interested in watching. A recording will also be made available on that page after the event.

Date: Today, 2/16/18
Time: 12:30pm - 1:50pm
Live Stream: http://budgetmodel.wharton.upenn.edu/events-1/2018/2/16/federal-tax-reform-wemba-panel

W2018-1 Matching IRS Statistics of Income Tax Filer Returns with PWBM Simulator Micro-Data Output

The Tax Cuts and Jobs Act, as Reported by Conference Committee (12/15/17): Tax Effects by Industry

The Tax Cuts and Jobs Act, as Reported by Conference Committee (12/15/17): Tax Effects by Industry
  • The current U.S. statutory corporate tax rate is 35 percent. However, due to various deductions, credits and income deferral strategies, most corporations pay a lower rate, known as the effective tax rate (ETR), which averages about 23 percent under current law across all industries over the next decade. However, this value varies considerably across industries, with mining paying 18 percent and agriculture paying 33 percent.

  • The TCJA reduces the statutory corporate tax rate from 35 to 21 and the average ETR falls from 21 to 9 percent in 2018. However, by 2027, the ETR doubles in value to 18 percent, mostly due to expiring provisions.

  • In the short run, the biggest winners of the TCJA are capital-intensive industries like utilities, real estate and transportation, which benefit the most from temporary expensing of equipment. However, over time, several industry ETR’s will actually rise above the new statutory rate of 21 percent in future years.

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

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.

The Senate Tax Cuts and Jobs Act, as Passed by Senate (12/2/17): Static Distributional Analysis

The Senate Tax Cuts and Jobs Act, as Passed by Senate (12/2/17):  Static Distributional Analysis
  • Under standard assumptions, the traditional measure indicates that in 2019, 33 percent of the reduction in taxes in the Senate plan accrues to households in the top one percent of the income distribution. By 2027, this group receives almost 43 percent of the tax change and, by 2040, 48 percent.

  • In contrast, the share of taxes paid by households in the top one percent of the income distribution is only moderately lower under the Senate TCJA. Under current policy, the top one percent will pay 28 percent of federal income taxes by 2027, rising to 30 percent by 2040 due to increasing progressivity over time under current policy. Under TCJA, their tax share falls to 26 percent by 2027 and returns to 28 percent by 2040.

  • By 2040, the top one percent will pay a slightly larger share of the nation’s tax base under TCJA relative to what they pay today under current policy, although both figures round to 28 percent.