The Penn Wharton Budget Model outlines steps to reduce the national debt and boost the economy.
The Penn Wharton Budget Model (PWBM)—a nonpartisan collective comprising researchers at Penn and Wharton as well as outside experts including policymakers, scholars, and analysts at federal agencies—has put forward a set of proposals designed to “rethink US federal debt policy” in the face of expanding federal debt while also keeping in mind broader goals like growing the economy and maintaining social insurance programs.
US Fiscal Policy: Lowering Debt, Growing the Economy, and Enhancing Social Insurance, published in December, examined a “policy bundle” consisting of 13 significant reforms. The PWBM team strived to steer clear of partisan points of view by selecting policies “based on widely accepted economic principles.” In the analysis, the twin pillars of taxing and spending play their usual dominant roles, but the calculations also shed light on indications of household-level welfare, such as productivity, income, and access to health insurance.
The policy bundle stretches across four broad categories, with several overarching goals that include reforming the tax code while ensuring the solvency of benefit programs like Social Security and Medicare—all while maintaining healthy economic growth. A sampling of the policy initiatives include:
• Simplifying the tax code. Among the adjustments considered for US tax filers, income generated by long-term capital gains would no longer be treated as preferred income and would no longer be taxed at relatively lower rates than ordinary income. Meanwhile, itemized deductions, which are used to reduce taxable income, would be disallowed (except for charitable donations). Such deductions would be replaced by a partially refundable tax credit, which filers could use to directly reduce taxes due.
• Taxation of carbon emissions. By taxing harmful pollutants, the policy would generate revenue while aiming to reduce major contributors to global warming. The tax would be levied on a per-ton basis (at a rate of $50 per ton, say) and would seek “to reduce emissions by seven percent in the short run and by approximately 16 percent by 2054.”
• Promoting the solvency of Social Security and Medicare. “The United States cannot grow its way out of the shortfalls facing these two major spending programs,” the research team says. A multipronged remedy is therefore prescribed, consisting of adjustments that include: raising the Social Security retirement age from 67 to 70; establishing new minimum and maximum benefits; raising the eligibility age for Medicare (except for patients with certain disabilities); and transitioning Medicare to a system in which participants choose from competing insurance plans and the government helps pay premiums directly to insurers.
To simulate the combined effects of these changes, the PWBM is fed data on hundreds of thousands of different types of households that are, collectively, representative of the US population. It then calculates the economic effects of the new policies (in the aggregate as well as at household level), essentially capturing a long cascade of events: a change in one policy inevitably stimulates economic reactions and behavioral responses, which in turn beget further changes, all of which are captured in the final analysis.
Taken together, the reforms are shown to generate positive outcomes across several economic dimensions. The federal budget deficit, for instance, is notably reduced, by a sum of $10 trillion over a period of 10 years (and by $59 trillion over 30 years). Economic output, meanwhile, is shown to grow by an additional 21 percent over 30 years when compared against current policy settings. The federal debt likewise benefits from the policy bundle, declining by 38 percent when observed over the same 30-year period. The significance of this decline, the research team says, goes beyond what meets the eye, because such reductions allow households “to allocate more of their savings toward productive capital rather than government bonds.” With more capital flowing through the economy (instead of being invested in government securities), economic well-being would be expected to improve via gains in areas like wages and consumption.
The results generated by the PWBM differ from conventional analysis in that they account for the effects of taxing and spending, rather than focusing primarily on tax provisions. This more-inclusive approach helps paint a clearer picture of household-level outcomes, providing insight into which households benefit more and which benefit less (or indeed sustain losses).
The household-level results reveal (among other findings) that most Americans, across all combinations of ages and incomes, “stand to benefit from implementing [the] policy bundle.” This is particularly true for future generations, including people not yet born. The analysis concluded that future low-income households could gain the equivalent of $300,000 in lifetime value from the reforms, which would be worth as much as $700,000 to those in the richest quintile. Such gains are partially driven, the PWBM brief says, by higher wages and lower healthcare costs.
While the policy bundle would set in motion welfare improvements for future generations, there are tradeoffs to be aware of, and some generations would fare better than others. For instance, people in their 20s through 40s at the time of the policy change would probably lose more than they’d gain, in part because they’d have to contend with lower Social Security benefits.
As the brief makes clear, no single policy action should be considered in a vacuum, given the interwoven relationships to consider. The PWBM team plans to make its framework more accessible in the coming years, so that more users can test policy reforms that are based on rich datasets, agile modeling, and state-of-the-art computing tools.
—Andrew Carr
