Tax plan debates in the US presidential election: A dynamic CGE analysis of growth and redistribution trade-offs

• Published in: Economic modelling 2018-01, Vol.68, p.529-542
• Main Authors: Bhattarai, Keshab, Bachman, Paul, Conte, Frank, Haughton, Jonathan, Head, Michael, Tuerck, David G.
• Format: Article
• Language: English
• Subjects: Distribution; Dynamic CGE; Growth; Tax reform; US economy
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2017.08.031

The two major candidates in the 2016 presidential election made sharply different proposals for reforming the Federal tax code. Donald Trump proposed cutting taxes to provide “tax relief for middle-class Americans”, and lowering corporation taxes to boost economic growth, while Hillary Clinton proposed modest increases in taxes on high-income Americans, with a view to increasing the “fairness” of the tax code. We have simulated the effects of these two proposals, using a two-tier modeling design, with a large dynamic computable general equilibrium model to address the macroeconomic magnitudes, linked to a micro-simulation tax calculator model to measure the distributional effects. The Trump proposals would boost economic growth, but sharpening the incentives to work and to save/invest would be regressive, with 70% of the benefits accruing to those in the top income decile. The budget deficit could only be maintained if spending were to be cut sharply; and if spending were reduced more modestly, the deficit would rise greatly. The Clinton proposals would have little net effect on 90% of households, which is at odds with her promise of tax relief for working people, but would reduce net income in the top decile by almost 2%. They would slow economic growth slightly. Although he was elected president, Donald Trump's proposals are likely to be altered, mainly so that the budgetary effects are much smaller, before being presented to Congress. But the rationale, shape, and tone of the proposals will likely remain the same. •Discussion of tax policy was important in the Trump and Clinton 2016 campaigns.•Top decile would get 70% of large benefits from Trump cuts to personal, corporate tax.•85% of (small) increase in taxes proposed by Clinton borne by those in the top decile.•Trump tax cuts would boost economic growth, but likely create huge budget deficits.•Clinton tax program too modest to provide relief to the middle class.