President Trump’s New Tax Plan: What’s Changed?

President Trump’s New Tax Plan: What’s Changed?

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 the 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.

Fundamental Tax Reform: A Comparison of Three Options

Fundamental Tax Reform: A Comparison of Three Options

Consumption taxes have the potential to reduce the 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.

Tax Policy and Retirement Savings

Tax Policy and Retirement Savings

Tax subsidies for retirement saving cost $180 billion in 2016 and is one of the largest tax sources of revenue loss for the government.

Evidence based on administrative data finds that tax incentives only induce a minority of households to save more. So-called “nudges” might be just as or more important.

In 2017, 30 states are exploring different types of retirement savings reforms. State reforms may help inform a national policy to increase household saving.

 

U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

 U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

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.

The Economics of Corporate and Business Tax Reform

The Economics of Corporate and Business Tax Reform

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.

Tax Policy Toward Low-Income Families

Tax Policy Toward Low-Income Families

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.

Housing Finance: Potential Reforms to Mortgage Markets

Housing Finance: Potential Reforms to Mortgage Markets

The actions taken in the aftermath of the Great Recession allayed the economics burdens of the financial crisis, but the housing market still remains vulnerable to systematic problems that have not been effectively addressed.

While access to credit was justifiably tightened following the financial crisis, evidence suggests that new restrictions and standards may be excessively hindering homeownership growth.

Since 2008, the secondary mortgage market has seen a significant withdrawal of private capital and a greater involvement of Fannie Mae and Freddie Mac. Several proposals have outlined fundamental overhauls to restore the presence of private capital, but policymakers must reform the market to foster competition and accountability without sacrificing stability and liquidity.

Penn Wharton Budget Model’s Tax Policy Simulator

 Penn Wharton Budget Model’s Tax Policy Simulator

CLICK HERE FOR INTERACTIVE SIMULATION

CLICK HERE FOR A VIDEO DEMONSTRATION OF THE 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.

Setting Behavioral Responses in PWBM’s Dynamic Simulations

Setting Behavioral Responses in PWBM’s Dynamic Simulations

Click Here for Interactive Simulation

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 change 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.

Tax Benefits for College Attendance

Tax Benefits for College Attendance

Tax benefits for higher education make up 17 percent of federal aid for postsecondary students.

Families find it difficult to take advantage of tax benefits for higher education. About 14 percent of families do not take benefits for which they qualify. Evidence that tax benefits for higher education induce more students to go to school is weak.

The authors explore the potential impact of different simplification strategies, providing a roadmap for future empirical work.

 

 

Economic and Distributional Effects of Tax Expenditure Limits

Economic and Distributional Effects of Tax Expenditure Limits

Reforms to certain tax expenditures considered in this paper can increase tax revenue by as much as $366.3 billion in 2016, equal to almost half of the budget deficit. Smaller reforms produce less revenue.

The method of limiting certain tax expenditures, however, can have substantially different impacts on the distribution of taxes paid by income.

Tax Compliance and Enforcement: An Overview of New Research and Its Policy Implications

Tax Compliance and Enforcement: An Overview of New Research and Its Policy Implications

The government loses almost 14.5 percent of revenue due to noncompliance, enough money to substantially narrow or even eliminate the federal deficit.

Third-party reporting of income is effective at improving reporting of income. However, increased reporting of income from third parties does not necessarily lead to increased tax revenue. In addition, most studies indicate that an appeal to moral duty is not effective at improving reporting of income to tax authorities.

Instead, increasing the chances of audit is effective at reducing tax evasion.

Environmental Taxation

Environmental Taxation

A carbon tax is a cost-effective way to correct for environmental costs imposed by the production of the energy sector.

A carbon tax can produce substantial revenue that can be used to lower other taxes, reduced the deficit, or redistribute income

 ● A carbon tax would reduce carbon dioxide emissions, but by how much is uncertain.

Effects of Income Tax Changes on Economic Growth

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.

The Penn Wharton Budget Model’s Social Security Policy Simulator

The Penn Wharton Budget Model’s Social Security Policy Simulator

Click Here for Interactive Simulation

Click Here for a Video Demonstration of the 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.

The Penn Wharton Budget Model’s Immigration Policy Simulator

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.

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

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 technology improvement continues on trend, maintaining U.S. productivity growth will require more rapid capital accumulation, especially as worker efficiency stagnates or declines.

The Decline in Labor Efficiency in the United States

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.  

Population Aging

Population Aging

As in many of the world’s developed nations, America is undergoing a momentous increase in the share of older individuals in the population, or “population aging.”

Population aging is projected to increase throughout this century due to decreasing mortality rates, where people live longer, and decreasing fertility rates with fewer newborns.

Sustained population aging will pose a significant fiscal challenge: How best to allocate resources for adequately supporting older generations’ consumption and health care. 

Education and Income Growth

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.