Wharton analysis: Trump's tax plan would only boost GDP in the short run

Wharton analysis: Trump's tax plan would only boost GDP in the short run

Donald TrumpDonald John TrumpNFL freezes policy barring players from protesting during anthem McConnell spokesman on Putin visit: 'There is no invitation from Congress' Petition urges University of Virginia not to hire Marc Short MORE’s tax plan would increase gross domestic product (GDP) and jobs in the short run but would reduce them compared with current policy in long run, because the Republican presidential nominee's plan would increase the debt, according to a new analysis.  

Conversely, Democratic nominee Hillary ClintonHillary Diane Rodham ClintonProminent Putin critic: If Trump turns me over, I'm dead Dems unveil slate of measures to ratchet up pressure on Russia Trump tweets old video of Clinton talking up 'a strong Russia' MORE’s tax plan would decrease GDP and jobs compared with current policy in the short term but out-perform current policy in the long run because it would reduce the debt, according to the analysis from the Wharton School at the University of Pennsylvania.

The analysis of the candidates’ plans, described in a webinar on Monday, is “dynamic,” meaning that it looks at the plans’ macroeconomic effects. It is integrated with the Urban-Brooking Tax Policy Center’s (TPC) “static” model, which does not take economic effects into account.

The analysis’s release comes as the Clinton and Trump campaigns argue over their very different tax plans. Clinton’s plan is focused on raising taxes on the wealthy, while Trump’s plan would cut the individual and corporate tax rates.

The TPC estimated that without considering economic effects, Clinton’s plan would raise $1.4 trillion over 10 years, while Trump’s plan would cost $6.2 trillion. The Trump campaign has been critical of the TPC’s estimate, in part because it did not factor in the economic growth the plan would produce.

The Penn Wharton Budget Model makes assumptions about behavior that users can adjust on its website. But on Monday, Kent Smetters, faculty director of the model, focused on the economic effects of Clinton's and Trump’s tax plans using an assumption that 40 percent of every additional dollar of debt would be financed by foreign investors. This assumption is considered plausible or possibly generous, he said.

The greater the percentage of debt financed by foreign investors, the less debt burden on the U.S. economy, he said.

In 2018, Trump’s plan would increase GDP by 1.12 percent compared with current policy, according to the analysis, while Clinton’s plan would decrease GDP compared with current policy by 0.19 percent. But by 2027, the end of the 10-year budget window, Trump’s plan would decrease GDP by 0.43 percent, and Clinton’s plan would increase GDP by 0.4 percent, analysts reported.

In 2018, Trump’s plan would create at the most about 1.7 million new jobs, while Clinton’s plan would result in about 282,000 fewer jobs at the worst. By 2027, however, Trump’s plan at the worst would result in about 692,000 fewer jobs, while Clinton’s plan at the best would lead to about 645,000 more jobs than there otherwise would be under current law, Smetters said.

Smetters said that it is difficult to estimate the impact tax changes have on jobs. A good estimate of the amount of jobs gained or lost would be to multiply these upper and lower bounds by 0.45.

The conservative-leaning Tax Foundation recently produced dynamic analyses that reached a very different result from the Wharton analysts. The Tax Foundation found that at the end of a 10-year period, Clinton’s plan would reduce GDP by 2.6 percent compared with current policy, while Trump’s plan would increase GDP by 6.9 percent to 8.2 percent.

Smetters said that one of the differences between his model and the Tax Foundation model is that the Tax Foundation ignores the impact of debt on the economy, and doing so generally is favorable to tax cuts that aren’t revenue neutral.

The Clinton campaign has also disagreed with the Tax Foundation’s dynamic analysis, while the Trump campaign has viewed it favorably. The Trump campaign has said that its candidate’s overall economic plan — including its tax, trade, energy and regulatory components — is revenue neutral.