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.”
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.
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 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.
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.
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.
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.
This brief compares the Child Tax Credit (CTC) expansion plans in the House tax bill, the Senate tax bill and the Rubio-Lee proposal.
The Penn-Wharton Budget Model projects the House CTC plan costs $373 billion, the Senate CTC plan, as passed by committee, costs $557 billion, and the Rubio-Lee proposal costs $742 billion over 10 years.
In terms of distributional impact, the House CTC plan increases benefits for middle income families. The Senate CTC plan, as passed by committee, increases benefits for lower income families, doubles benefits for middle income families and increases benefits from $0 to $2,000 for higher income families. However, the Senate CTC plan never reaches its maximum refundable amount of $2,000 due to sunset provisions. The Rubio-Lee proposal reaches $2,250 in 2025 before returning to current law value of $1,000 in 2026.
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.
To use the reconciliation process that allows certain bills to pass with a simple majority vote in the Senate, the Senate Tax Cuts and Jobs Act (amended) must satisfy the Byrd Rule.
PWBM projects that the Senate bill will satisfy one part of the Byrd rule, as the 10-year net revenue shortfall will be less than $1.5 trillion in the associated budget resolution.
However, the Byrd Rule also requires that bills do not reduce net revenue (revenue net of outlays) after the 10-year budget window. Thus far, government scorekeepers have not weighed in on the Rule publicly. PWBM, however, projects that the provisions in the Senate TCJA will reduce net revenue in each year from 2028 to 2033 and will therefore fail the Byrd Rule.
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.
This brief reports Penn Wharton Budget Model’s (PWBM) conventional (static) analysis of The Senate Tax Cuts and Jobs Act (TCJA), as amended on November 15, 2017, which includes numerous sunsets to comply with the Byrd Rule governing the budget reconciliation process.
PWBM’s conventional (static) analysis finds that the bill lowers tax revenues by $1.3 trillion over the first 10 years.
PWBM projects that provisions in TCJA continue to reduce revenue after the 10-year window and we list the reason for each: (a) permanent revenue losses due to a lack of sunset; (b) income shifting across years to exploit sunsets; and (c) reclassification of income to exploit differences in marginal tax rates, potentially permanent or due to sunsets.
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.
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.
We present the static (conventional) distributional impact of the Tax Cuts and Jobs Act (TCJA) under two measures: the traditional measure and as tax shares.
Under standard assumptions, the traditional measure indicates that in 2018, 37 percent of the reduction in taxes accrues to households in the top one percent of the income distribution. By 2027, this group receives 53 percent of the tax change and, by 2040, almost 55 percent.
In contrast, the share of taxes paid by households in the top one percent of the income distribution is only moderately lower under TCJA. In 2018, the top one percent of the income distribution pays 28 percent of federal taxes under current policy and 27 percent under TCJA. By 2027, this group pays 28 percent under current policy and 26 percent under TCJA. By 2040, the tax share falls slightly from 30 percent under current policy to 28 percent under TCJA. Due to increasing progressivity over time under current law, the top one percent will still pay a slightly larger share of the nation’s tax base by 2040 under TCJA relative to what they pay today under current law.
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.
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.
This Brief describes the assumptions and methods implemented in the three major integrated calculators of the Penn Wharton Budget Model (PWBM) Static Tax Simulator (STS). These calculators estimate and project individual income taxes, payroll taxes and business taxes.
The PWBM-STS revenue estimates incorporate domestic and international income reclassifications among various entities associated with different policies. Income shifts are modeled between corporate taxpaying entities, across business and individual tax payers, and by businesses across domestic and foreign tax jurisdictions.
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.
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.
President Donald Trump’s White House recently outlined a new tax plan.
President Trump’s White House tax plan is similar in many ways to his tax plan while on the campaign trail. However, the new tax plan lacks considerable detail, and estimates of its impact will be revised as the plan gets more specific.
Nonetheless, lessons from PWBM’s analysis of his campaign tax plan can help guide policymakers as they add more details to the White House tax plan.
Consumption taxes have the potential to reduce taxes on saving, which may lead to economic growth.
A partial-replacement value added tax (VAT), a full-replacement X tax and a full-replacement personal expenditure tax (PET) all have different implications for how the tax is administered, transition costs, and international transactions. Policymakers will need to weigh the tradeoffs between a consumption tax and the current income tax system.
The economic impact of an X tax hinges on whether it is based on domestic consumption (includes a border-adjustment) or on domestic production.
Estate tax rates were lowered and exemptions raised dramatically in the 21st century with the result that married couples can potentially pass on an estate of up to $10,980,000 with no tax liability.
President Trump’s proposal to eliminate the estate tax while taxing capital gains at death could, in theory, raise a comparable amount of tax revenue as the current estate tax, if his proposed exemption allowance is lowered.
More research is needed to measure the impact of estate taxes and reforms to estate taxes on economic efficiency, behavior and the distribution of wealth.
U.S. statutory corporate tax rates are higher than other developed countries and based on worldwide income instead of domestic income.
Corporate tax reform can address both domestic inefficiencies such as debt structure and international inefficiencies such as the lockout effect, corporate inversions and income shifting.
More ambitious reforms may eliminate more inefficiencies. However, more research is needed to study their impact on revenue, the distribution of income, administrative costs and the response of other nations.
In 2013, tax credits for low-income families cost $124 billion. Nearly 20 percent of all households that filed taxes benefited from the Earned Income Tax Credit (EITC) alone.
The majority of EITC benefits go to single parents and to households with annual income below $30,000. The EITC is more likely to increase the employment of single parents relative to other groups.
Expanding the EITC program to childless households and increasing the refundability of the Child Tax Credit (CTC) are predicted to improve work incentives while providing more benefits for the lowest income households.
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.
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.
On June 7, Hill staffers, fiscal experts, and PWBM gathered to discuss the federal revenue loss created by tax avoidance. The U.S. has different tax rates for different income streams, thus there are opportunities for individuals and businesses to reduce their tax bills by recharacterizing income to pay a lower rate.
Bloomberg’s Saleha Mohsin reports the Trump administration’s plan to index capital gains to inflation. Citing PWBM’s analysis, Mohsin highlights that indexing capital gains will disproportionately benefit those with high incomes.
By substantially expanding the standard deduction, the Tax Cuts and Jobs Act reduced the incentive to make charitable contributions. We make use of data on non-tax itemizers to examine several potential policies designed to increase tax incentives for charitable giving. In particular, we project that a non-refundable credit for charitable contributions for filers who don’t itemize would expand giving by $208 billion (5.2 percent) and reduce tax revenue by $267 billion (0.6 percent) over the 10 year budget window. Other reforms produce smaller increases in giving along with smaller losses in revenue.
Lower interest rates since 2008 have reduced the cost of federal debt per dollar relative to the period before 2008. However, PWBM projects that the sheer size of federal debt will reach 190 percent of GDP by 2050 under present law. Even with low borrowing rates, stabilizing the debt-to-GDP level at its current value could increase GDP in 2050 by one to three times more than the projections we previously provided for the 2017 Tax Cuts and Jobs Act.
The New York Times’ Jim Tankersley cites PWBM in an explanation of how Trump's tariffs erase the benefits of the current tax cuts. In particular, Tankersley finds that the benefits of Trump's tax cuts to the lower and middle classes will likely unwind as a result of his tariffs on goods from China, Mexico, and Europe.
At the National Tax Association Spring Symposium, PWBM participated in a roundtable with other economic modelers. All modelers showed the results of cutting Social Security benefits by one-third in 2031. All models found that even with a benefit cut, by mid-century the U.S. still has a sizable debt-to-GDP ratio.
An interactive map shows the history of state-level expansion of the Earned Income Tax Credit (EITC) across the United States. States with Democrat governments and Democrat-Republican mixed governments are more likely to expand state-level EITC programs.
On March 4, Dylan Moriarty and Richard Rubin presented the Wall Street Journal Tax Calculator, powered by Penn Wharton Budget Model, to help taxpayers understand tax law as they prepare their taxes. Taxpayers only need to enter a few key characteristics such as income and marital status to get an estimate of their tax liability from 2018 to 2027.
The Economist’s print edition, published February 7th, reports that “Some Fights About the Tax Cuts and Jobs Act Seem Over.” Public opinion polls indicate that voters think that “large corporations and rich Americans” are the ones benefiting from the tax law. Meanwhile, policy analysts continue to debate the details.
In a recent interview on 60 Minutes, Congresswoman Alexandria Ocasio-Cortez presented the idea of instituting a 70 percent marginal tax rate on income over $10 million. Many commentators have weighed in on this proposal, both with op-eds supporting and criticizing this type of policy.
A conventional revenue estimate of the new tax rate would incorporate a traditional elasticity of taxable income. However, a second factor is very important for high-income taxpayers: a significant share of income above $10 million is earned by owners of pass-through businesses. We project that a significant amount of pass-through business owners will respond to this tax by reorganizing as C corporations to minimize their tax liability. This shift could cause the new 70% tax rate to lose as much as 43 percent of revenue that would otherwise be raised.
US production of crude oil has more than doubled since 2008. Starting in the mid-2000s, the application of horizontal drilling and hydraulic fracturing to tight oil formations led to a surge in US supply known as the shale boom. In this post, I discuss the shale boom’s impact on the relationship between business investment and the price of oil. I then estimate the effect of the recent rise in oil prices on investment in 2018. I find that oil prices might even account for most of the increase in the growth rate of investment in 2018.
This past Friday, Dr. Kevin Hassett, Chairman of the Council of Economic Advisers, critiqued Penn Wharton Budget Model’s analysis of the “Tax Cuts and Jobs Act” (TCJA), signed into law by President Trump in December 2017. Dr. Hassett delivered his remarks at the 2019 American Economic Association meeting. The AEA meeting is the largest annual event of academic and government economists, held this year in Atlanta, Georgia.
The rise of the ‘gig economy’ means that understanding patterns of self-employment is more important than ever for designing tax benefits and subsidies that affect business activities. In fact, self-employment represents as many as 1 in 5 jobs.
We find that gender differences in self-employment patterns are mostly driven by the differences across marital status. Married women are more likely to be self-employed than single women. On average, self-employed married women work fewer hours than men and single women, regardless of employment type, and married women who are employer-employed. These differences carry over to earnings.
On November 26th, the chairman of the House Ways and Means committee, Kevin Brady, released a new tax proposal. The bill can be treated as having five parts: Extenders, Disaster Relief, Retirement and Savings, Business Provisions and Technical Corrections to the Tax Code.
Last month, Senator Kamala Harris (D-CA) introduced her tax plan, the LIFT the Middle Class Act. This bill aims to give monthly payments to Americans who qualify in the form of a tax credit. Penn Wharton Budget Model has analyzed the potential impact of the LIFT Act on the budget and effective marginal tax rates. We find the proposal would cost the federal government approximately $3.1 trillion over the ten-year budget window and an additional $3.7 trillion over the following decade.
In contrast to earlier this year, November has seen consecutive days of falling oil prices. This drop has led to lower costs for consumers at the pump. With the annual growth rate of investment in public infrastructure slowing, some have suggested that now is the time to increase the federal gas tax. Recently, a former Secretary of Transportation urged the Administration to seize the opportunity to raise the gas tax. In the past, President Trump has endorsed an increase of 25 cents per gallon. The last increase in the federal gas tax was a quarter century ago in 1993 to 18.4 cents per gallon.
In 2017, corporations had a lower cash to debt ratio than ever before. However, the Tax Cut and Jobs Act passed in December of 2017 reduced, but didn’t eliminate, the tax incentives for firms to take on debt. Therefore, PWBM projects that corporate debt will be seven to nine percent lower going forward.
Senator Kamala Harris recently announced a proposal to establish a new refundable tax credit. This proposal (henceforth referred to as the “LIFT credit”) would be similar in design to the existing Earned Income Tax Credit (EITC), providing large payments -- up to $6,000 annually for married filers -- to low- and middle-income households. The LIFT credit would be available to households with either labor earnings or Pell grants, and would offer an option to receive benefit payments monthly rather than yearly. PWBM’s preliminary analysis suggests that on a conventional scoring basis, this policy would cost nearly $3.1 trillion over the ten year budget window (2019-2028), and would substantially change effective marginal tax rates for certain households.
Jim Tankersley emphasized how recent tax reform will not pay for itself in his New York Times article, "No, Trump’s Tax Cut Isn’t Paying for Itself (at Least Not Yet)." Even though federal revenues increased marginally in 2018, it will not be enough to cover the tax cut. On October 15th, the Treasury Department announced that despite economic growth and low unemployment, the federal budget deficit grew by 17 percent.