(Bloomberg) 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 their spending proposals. Trump, the Republican presidential nominee, proposes tax cuts for businesses and individuals, while Clinton, the Democratic nominee, proposes 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.
The brief report was prepared by the Wharton School officials in tandem with the Washington-based Urban-Brookings Tax Policy Center.
It 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 shrink it by 0.43 percent in 2027 and by 6.73 percent in 2040.
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. Kent 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 692,082 fewer jobs than would the current economy without his tax plan. By 2040, Trump’s plan would mean 11.2 million fewer jobs against the current baseline. Smetters said those figures were “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; campaign advisers argue that the tax cuts would stimulate economic growth, lessening the revenue cost of the plan.
Moreover, they say, Trump’s plans to overhaul international trade treaties, cut regulations and stimulate the U.S. energy industry would add more growth. He has called for cutting “non-defense and non-entitlement programs” to save almost $1 trillion over the next 10 years.
The tax-policy center also found, in a companion report, that under Clinton’s plan, federal revenue would increase by $1.4 trillion over a decade, with the top 1 percent of earners paying for about 90 percent of her proposed tax hikes -- again, on a static basis. Both the center and the Wharton group describe themselves as nonpartisan.
The Wharton report considered only the candidates’ tax plans; it didn’t measure either candidate’s spending proposals -- or any spending cuts.
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.