Trump Tax Plan Seen Adding Jobs, Then Erasing Them Long-TermBy
Clinton’s tax plan would do the opposite, analysis finds
Wharton study is latest entry in ‘dynamic scoring’ debate
Donald Trump’s proposed tax plan could provide a short-term boost to the economy before costing more than 690,000 jobs over a decade, while Hillary Clinton’s plan could send job-creation in the opposite direction -- first down, then up, according to a new policy report.
The main reason for the differing outcomes is the plans’ effects on the federal debt, according to the analysis by economists and computer engineers at the Wharton School of Business at the University of Pennsylvania -- which didn’t consider the candidates’ spending proposals. Trump, the Republican presidential nominee, proposes tax cuts for businesses and individuals, while Clinton, the Democratic nominee, calls for tax increases on the highest earners.
While Trump’s plan stimulates more growth and jobs “in the very short run, it under-performs both current policy and Clinton within a decade, due to higher debt,” a synopsis of the report says. Success for the Trump plan “hinges critically on finding substantial cuts to government spending down the road,” according to the synopsis. In a “worst-case scenario,” Trump’s tax plan might slow U.S. job creation by as many as 692,000 jobs by 2027, said Kent Smetters, the director of the Wharton economic-modeling group.
Trump’s campaign didn’t respond to a request for comment on the report, which was prepared by Wharton School officials in tandem with the Washington-based Urban-Brookings Tax Policy Center. Campaign advisers have said that Trump’s tax plan -- along with his calls for renegotiating international trade deals, cutting government regulations and stimulating the domestic energy industry -- would contribute to annual economic growth, easing his tax plan’s impact on the federal Treasury.
Jacob Leibenluft, a senior policy adviser to Clinton, said the new findings show that Trump’s plan would be a drag on the economy.
“But because this analysis only takes into account the candidates’ tax plans, it doesn’t show the truly stark differences between their economic visions,” Leibenluft said in an e-mailed statement.
The analysis found that under Clinton, growth in gross domestic product, a measure of total economic health, would fall 0.19 percent in 2018, when measured against growth expected without the effects of her plan. But by 2027, Clinton’s plan would produce GDP growth of 0.4 percent above the baseline, and by 2040, 1.19 percent above the baseline.
Trump’s plan would grow the economy by 1.12 percent above the baseline in 2018, but then it would become a drag on growth -- by about 0.43 percent in 2027 and by 6.73 percent in 2040, according to the report.
The report is based on the “Penn Wharton Budget Model,” a new, proprietary method of calculation that incorporates predictions of the economic effects of tax proposals on human behavior. The group’s method, known broadly as “dynamic scoring,” used data from the Internal Revenue Service, the Federal Reserve, mortality tables and population surveys, among other sources, to model the candidates’ plans.
The group also used recent findings by the Tax Policy Center, which is a joint venture by the Urban Institute and the Brookings Institution. The center calculated the effects of both candidates’ proposals on a “static” basis -- that is, without accounting for the predicted effects of human behavior.
The Wharton model also reflected assumptions that growth would come from previously unemployed people getting jobs, rather than from currently employed people working harder. Smetters, the director of the modeling group, said that assumption was “hotly debated” in academic and policy circles.
Under that assumption, Trump’s plan would create 1.7 million new jobs in 2018. But by 2027, his plan would create as many as 692,082 fewer jobs than would the current economy without his tax plan. By 2040, Trump’s plan would mean as many as 11.2 million fewer jobs against the current baseline. Smetters said those figures represented the “upper limits” of the group’s calculations.
Clinton’s plan would produce 282,012 fewer jobs by 2018 against the baseline, but then create 645,161 new jobs by 2027 and more than 2 million new jobs by 2040, the report said, again using so-called upper limits.
Earlier this month, the Tax Policy Center had found that, on a static basis, Trump’s plan would decrease federal revenue by $6.2 trillion over a decade, and the top 1 percent of earners would receive almost half the benefit of his proposed tax cuts. The Trump campaign sharply criticized that finding.
In addition to boosting economic growth through his tax, trade and regulatory policies, Trump has called for cutting “non-defense and non-entitlement programs” to save almost $1 trillion over the next 10 years. But Wharton’s Smetters said Trump’s proposed tax cut is so steep that he’d have to cut spending on everything other than Social Security and Medicare to avoid hurting long-term GDP growth.
“Even if you reduce government spending under Trump, excluding Social Security and Medicare, even by 10 percent, it doesn’t overcome the negative effect” of the tax proposals on federal revenue, Smetters said in a call with reporters. “You’d have to go up to 50 percent for Trump’s GDP not to fall over the long term.”
Under Clinton’s plan, the tax-policy center found last week, federal revenue would increase on a static basis by $1.4 trillion over a decade, with the top 1 percent of earners paying for about 90 percent of her proposed tax hikes. Both the Center and the Wharton group describe themselves as nonpartisan.
The center’s new scoring based on the Wharton model shows that Clinton’s tax plan would reduce GDP growth by as much as 1.2 percent in the first year, but the effect would gradually recede and then disappear by 2021. The Wharton report considered only the candidates’ tax plans; it didn’t measure either candidate’s spending proposals -- or any planned spending cuts.
The spending plans “are much less specific than their taxes, so we don’t want to venture” into estimating their effects, Smetters said. A report last month by the non-partisan Committee for a Responsible Federal Budget found that, on a static basis, Clinton’s tax and spending plans would add $200 billion to the federal debt over the next decade, while Trump’s would add $5.3 trillion.
The fight over how to determine the cost and economic effects of the candidates’ tax plans has thrust a wonky debate over “scoring” into the mainstream and created an arms race among think tanks and research centers to churn out new models and reports. Dynamic models vary widely -- economists disagree on the best way to construct them. But they tend to make the impact of some tax cuts look less costly to federal budgets over time.
Last year, Congress required the Congressional Budget Office and the Joint Committee on Taxation to use dynamic models in their analyses.