GOP Tax Plan Would Sacrifice Long-Term Debt For Quick Gains, Penn Wharton Analysis Shows

Tax overhauls proposed by President Donald Trump and the House GOP leadership will lead to short-term gains but long-term increases in the federal debt, according to the Penn Wharton Budget Model, which crunched the numbers for both plans up until the year 2040.

“They are cutting taxes initially and then those tax cuts [add] to the deficit and that crowds out domestic investment and economic growth,” said Kimberly Burham, managing director of legislation and special projects for the non-partisan research group at the University of Pennsylvania.

Both the House plan pushed by House Speaker Paul Ryan and the overhaul outlined by the Trump campaign would have to count on significant, perhaps unrealistic increases in foreign investment in order to avoid deficits, she said.

“Foreign investment is really key,” she said.

One of the clearest comparisons of the two plans is outlined at the research center’s tax policy simulator.

Is The BAT A VAT?

Both plans rely on a border adjustment tax (BAT), a sort of value-added tax (VAT) on imported goods. While imports sold domestically would be taxed, exports would be exempt. Both tax plans have run into opposition from retailers who rely on goods made overseas.

Supporters say the tax would be similar to the VAT taxes employed by 160 of the world’s 193 countries. VATs account for one-fifth of the world’s tax revenue, according to the Organization for Economic Cooperation and Development

Yet some experts say the BAT is its own breed of cat.

“There is no tax like this anywhere in the world,” Columbia University law professor Michael Graetz said last month at a conference on tax policy at Georgetown University.

The House GOP plan is similar to a VAT, but Graetz said its technical details are different enough to create a unique set obstacles. It includes two parts: A tax on the difference between cash income and cash expenditures, and a destination-based element that would tax imports and not exports.

But Burham said the VAT and the Republican-proposed BAT are probably more alike than different. “The basic difference with the VAT is that taxes are collected at the firm level,” she said. “With a destination-based tax (BAT) you have firms get taxed on revenues less purchases. Wages are taxed on the household level.”

Both Plans Could Cut Into Individual Savings

The Penn Wharton tax simulator analysis is based on Trump campaign proposals that would reduce marginal tax rates, increase standard deduction amounts, repeal personal exemptions, cap itemized deductions and allow businesses to elect to expense new investments and not deduct interest expense.

“The tax plan reduces taxes at every income level, but high-income taxpayers receive the biggest cuts, both in dollar terms and as a percentage of income,” according to the analysis.

The Ryan-backed plan “reduces tax rates and converts the taxation of business income into a cash-flow consumption tax.” It would reduce the individual income tax rate to 33 percent and the corporate rate to 20 percent.

What they both have in common, the researchers say, is short-term gains at the expense of long-term debt.

“Tax cuts in the Trump and House GOP tax plans initially provide incentive for more work and investment, but in the long-run the impact of federal debt crowds out domestic saving,” the Penn Wharton analysts predict.

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