Penn economists tout tax changes as a way to help federal budget woes
They contend that proposals in their report could slash the mounting federal budget deficit while growing the U.S. economy.
Economists at the University of Pennsylvania’s Wharton School proposed sweeping changes to taxes, Social Security, and immigration on Thursday, arguing that they could slash the mounting federal budget deficit while growing the U.S. economy.
Among the proposals: raising taxes on capital gains and on the income of certain business owners, cutting the top marginal tax rate for individuals to 28%, eliminating most tax deductions, and doubling legal immigration while requiring immigrants to purchase their own, unsubsidized health insurance.
The ideas in the report could be a difficult sell to federal policymakers. But Kent Smetters, who led the project, said the analysis shows that deficit reduction can coexist with economic growth and preserving social safety-net programs. “People say one of those has to give,” Smetters said. “We’re saying actually you can get all three.”
The researchers also call for imposing a carbon tax to address climate change and raising the retirement age for Social Security benefits to 70 while cutting the benefits for higher-earning seniors.
"I view it as sort of a proof of concept," said Alan Auerbach, a University of California at Berkeley economist invited by the Penn group to read the report before its publication. "If you're willing to implement policies that have political opposition, then you can get somewhere."
The report comes as Republicans are poised to take control of Congress in January and look to extend a package of tax cuts enacted during President-elect Donald Trump’s first term. Extending the tax cuts would add more than $4 trillion to the burgeoning national debt over the next 10 years, a massive sum that could spook foreign investors and increase borrowing costs.
Republican budget leaders are scrambling to find ways to cut that cost. Their ideas so far — including changing Medicaid, repealing Biden-era clean energy programs, and expanding fossil fuel production — bear little resemblance to the ideas in the Penn Wharton report.
But Smetters said the report shows that policymakers can bring the debt under control without significant economic pain. “It’s basically trying to make the point that you can do aggressive debt reduction while actually growing the economy,” he said, “and doing so without just clobbering low-income and middle-income people.”
The economists behind the Penn Wharton Budget Model frequently analyze the budget impacts of government proposals and policies. Thursday’s report has its roots in an earlier project by the group that analyzed three sets of policies suggested by experts — one more liberal list of reforms, one more conservative, and one in the middle. For the new report, they chose ideas from all three lists.
Not every item reduces the deficit. Government revenue would be reduced by cutting the top marginal rate and by replacing the standard deduction with a partially refundable credit worth at least $1,500 per person. But the researchers argue that their beneficial effects on the economy and on income redistribution outweigh the direct effects on the federal budget.
The Penn Wharton group contends its overall package would reduce the federal deficit by 38% over the next 30 years, while increasing gross domestic product by 21% and overall wages by 7%. Under its assumptions, the lowest-earning 20% of households would see their income nearly doubled 30 years from now, while income would drop slightly for most in the middle and would rise 1% for the very richest households. The analysts also expect that carbon emissions would fall and health-care premiums would go down 27%.
The item on the list that raises by far the most revenue, researchers estimate, is the dual proposal to double the rate of legal immigration while also requiring immigrants to carry health insurance without government subsidies.
The estimated economic benefit from immigration stood out to economists given early access to the report. Persuading lawmakers to increase legal immigration would be a good thing, said David Bier, who focuses on immigration issues at the Cato Institute, a libertarian think tank. Skeptics who argue that immigrants devour government resources are wrong, he said.
“The argument that we’re going to reduce the debt by slashing legal immigration, that we’re spending all this money on immigrants, that doesn’t hold up,” Bier said. “And I think [the Penn Wharton proposal] does inject an alternative way of reforming immigration as well, to focus on eliminating the programs that they’re eligible for as opposed to eliminating their opportunity to immigrate at all.”
Trump has vowed to deport millions of undocumented immigrants, and an increase in legal immigration looks unlikely. But economists on both the left and right who read the report said politics shouldn’t prevent scholars from offering ideas for righting the nation’s fiscal ship.