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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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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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Estimates of TCJA Repatriation of Foreign Earnings on Investment and GDP

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An important part of the discussion surrounding the passage of the Tax Cuts and Jobs Act (TCJA) was the accumulation of untaxed profits in U.S. corporations’ foreign subsidiaries, which were estimated to be as high as $2.8 trillion in 2017. Before 2018, these earnings were generally not subject to U.S. taxes unless they were paid to the U.S. parent corporation as a dividend (“repatriated”), leading many companies to accumulate profits abroad. The TCJA introduced a deemed repatriation provision, which provides a tax “holiday” for foreign earnings by taxing them at a reduced rate of 15.5 percent on cash and eight percent on other assets. Speaker Paul Ryan argued that the TCJA’s tax holiday for foreign dividend payments directly affects the economy because, “money will come back and that will help economic growth.” Indeed, many companies have already committed to significant repatriation amounts, with Apple notably pledging to pay $38 billion in tax on repatriated income.

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For Every Gain, a Loss: New IRS Regulations Reduce the Cost of Tax Cuts For Pass-Through Business Owners

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The passage of the Tax Cuts and Jobs Act brought with it a new 20 percent deduction for income earned from a pass-through business. The IRS recently released proposed regulations that clarify some of the issues associated with the new deduction. Our model suggests that depending on the effectiveness of the regulations, the overall cost of the deduction could be reduced between $54 and $65 billion over the 10-year budget window.

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No Bang for the Bucks - Indexing Capital Gains Doesn’t Lead to Economic Growth

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In this blog entry, we use PWBM’s OLG model to explore the dynamic effects of capital gains indexation, which includes the impact of the proposed policy change on economic growth. We project that this policy change will produce no meaningful economic feedback effect over the next decade.

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Strong 2018 Q2 Economic Growth Unsustainable

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Washington Post columnist Catherine Rampell uses Penn Wharton Budget Model’s analysis of tax reform to delve into the implications behind strong second quarter U.S. economic growth in The economy’s great. That doesn’t mean Trumponomics is.

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Public Infrastructure: Avoiding the Bridge to Nowhere

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This June, PWBM’s First Spring Policy Forum discussed what real world evidence has to say about public infrastructure policy. PWBM’s Jon Huntley looked at how infrastructure plans can be designed to maximize growth while Ernst & Young’s Mike Parker shared a broad picture of the impact of federal spending on infrastructure.

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

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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.

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

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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.

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Senate GOP Wary of New Tax Cut Sequel

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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.

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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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