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

Bhattarai, Keshab; Bachman, Paul; Conte, Frank; Haughton, Jonathan; Head, Michael; Tuerck, David G.

Authors

Paul Bachman

Frank Conte

Jonathan Haughton

Michael Head

David G. Tuerck

Abstract

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.

Journal Article Type Article
Publication Date 2018-01
Journal Economic modelling
Print ISSN 0264-9993
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 68
Pages 529-542
Institution Citation Bhattarai, K., Bachman, P., Conte, F., Haughton, J., Head, M., & Tuerck, D. G. (2018). Tax plan debates in the US presidential election : a dynamic CGE analysis of growth and redistribution trade-offs. Economic modelling, 68, (529-542). doi:10.1016/j.econmod.2017.08.031. ISSN 0264-9993
DOI https://doi.org/10.1016/j.econmod.2017.08.031
Keywords Dynamic CGE; Tax reform; Growth; Distribution; US economy
Publisher URL http://www.sciencedirect.com/science/article/pii/S0264999316306009
Copyright Statement © 2017 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons....icenses/BY-NC-ND/4.0/).
Additional Information Copy of article first published in: Economic modelling, 2018, v.68.

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Copyright Statement
© 2017 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/BY-NC-ND/4.0/).




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