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Brief, Tax Policy, Economic Growth
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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
Penn Wharton Budget Model
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.

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

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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 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.

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Fundamental Tax Reform: A Comparison of Three Options

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Fundamental Tax Reform: A Comparison of Three Options
  • 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.

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Tax Policy and Retirement Savings

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Tax Policy and Retirement Savings
  • Tax subsidies for retirement saving cost $180 billion in 2016 and are 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.

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

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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.

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The Economics of Corporate and Business Tax Reform

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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.

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Tax Policy Toward Low-Income Families

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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.

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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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Tax Benefits for College Attendance

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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.

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Economic and Distributional Effects of Tax Expenditure Limits

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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.

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

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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.

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Environmental Taxation

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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, reduce the deficit, or redistribute income.
  • A carbon tax would reduce carbon dioxide emissions, but by how much is uncertain.

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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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