<div>             MACROECONOMIC ANALYSIS OF FORMER VICE PRESIDENT BIDEN’S TAX PROPOSALS Benjamin R. Page, Jeffrey Rohaly, Thornton Matheson, Gordon Mermin October 29, 2020  The Tax Policy Center (TPC) has analyzed the macroeconomic effects of former vice president Joe Biden’s tax proposals. We find the tax proposals would boost US gross domestic product (GDP) 0.2 percent in 2021, reduce GDP 0.2 percent in 2030, and increase GDP by small but rising amounts by 2040 and beyond. The resulting net decrease in economic output over the first decade would reduce the net revenue generated from the proposals by $154 billion from 2021 to 2030 (around 7 percent of the 10-year total). In the following decade, macroeconomic feedback on output would reduce the net revenue increase by $41 billion (with net revenue losses in earlier years partially offset by gains in later years). Biden’s spending proposals would also have important effects on the overall economy, but TPC has not estimated those.    F ormer vice president Joe Biden’s tax plan would increase income and payroll taxes for high-income individuals and increase income taxes for corporations. His plan would also expand tax credits for middle- and lower-income individuals and for new investments in domestic manufacturing. On net, his proposals would increase federal revenues by $2.4 trillion over the next decade, before accounting for their macroeconomic effects.1 TPC has analyzed the macroeconomic effects of the tax proposals. We find the following:  The proposals would increase GDP relative to baseline projections by 0.2 percent in 2021 but would reduce GDP in each year for the remainder of the decade. By 2040 the impact of these tax proposals on GDP would again be positive, and that positive effect would increase over time. The decrease in output would reduce revenues over the first decade, offsetting about 7 percent of the net revenue increase projected under the proposals without accounting for macroeconomic feedbacks.  Macroeconomic effects would, on net, also reduce the projected gain in revenues slightly over the second decade.    1. For a more detailed analysis of the revenue and distributional effects of the tax proposals , see <a href="https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals">“An Updated Analysis of Former Vice</a> <a href="https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals">President Biden’s Tax Proposals” </a>(Mermin et al. 2020).  TAX POLICY CENTER | URBAN INSTITUTE &amp; BROOKINGS INSTITUTION1 EFFECTS ON OUTPUT The tax proposals would affect output primarily through their influence on aggregate demand, labor supply, and saving and investment. Aggregate Demand The proposals would increase aggregate demand in 2021 but would reduce it in later years. TPC assumes that the tax increases included in the plan would not be effective until January 1, 2022, but a proposed temporary increase in the child tax credit would reduce taxes in 2021. Therefore, the proposals in the aggregate would increase after-tax incomes in 2021 but reduce them in subsequent years. (A variety of tax credits would continue to reduce taxes for lower-income households after 2021, but that effect would be more than offset by much larger tax increases on higher-income households and corporations.) Households would spend some of their additional income in 2021, increasing demand for goods and services, but aggregate incomes and demand would be reduced in later years. TPC assumes the effect on demand in 2021 would be attenuated somewhat by the effects of the pandemic on spending behavior, but it would also be enhanced because benefits from the child tax credit flow disproportionately to lower-income households, who spend a larger share of any increases in income than higher-income households. By contrast, almost all tax increases in the following years would flow to high-income households, who spend a smaller share of any increases in after-tax income than lower-income households; these tax increases, per dollar change, would therefore would have a smaller effect on demand. Through the first several years, the changes in demand would have larger effects on output than usual because, with high unemployment and uncertainty from the pandemic, the Federal Reserve is projected to maintain interest rates at very low levels irrespective of changes in tax policy. (In a more normal economic environment, the Federal Reserve would offset part of the macroeconomic effects of changes in tax policy by changing interest rates). Labor Supply For some taxpayers, the proposals would increase effective tax rates on labor income (i.e., wages and salaries for employees and self-employment income for others), primarily by increasing payroll tax rates for many higher-income workers. The resultant reduction in the after-tax wage rate would reduce labor supply. Most households, however, would see no change to the effective tax rates on their labor income. Saving and Investment The proposals would increase marginal tax rates on investment income, largely by increasing the corporate income tax rate and tax rates on individual income, capital gains, and dividends for high-income households. (That impact would be partially offset by a tax credit for investment in domestic manufacturing.) The increased tax rates would tend to discourage saving and investment. Although the tax proposals would reduce incentives to save and invest, they would also substantially reduce federal budget deficits after 2021. Lower budget deficits would free up funds that would otherwise be used to purchase government bonds for use in private investment activities. That effect increasingly offsets the impact of reduced saving incentives associated with higher marginal tax rates as the effects of greater revenues on the federal budget compound, eventually turning positive the net impact on aggregate private investment.           TAX POLICY CENTER | URBAN INSTITUTE &amp; BROOKINGS INSTITUTION2 Output Accounting for all these effects, we estimate that the proposals would boost GDP 0.2 percent in fiscal year 2021, mostly because of their effect on aggregate demand (table 1). By 2022, the effect on demand turns negative as net aggregate tax increases take effect, reducing incomes. Further, higher tax rates discourage working and saving. The negative impact on output diminishes after the first few years as the effects on aggregate demand fade and the reduced federal budget deficits begin to boost private investment. The net impact on GDP becomes positive in 2038, reaching 0.1 percent of GDP in 2040 and growing larger in later years.                            Former vice president Biden has also proposed several measures that would increase federal spending, but TPC’s macroeconomic analysis includes only the effects of his tax proposals. If the spending increases had been included in the analysis, the estimated effect on output would have been more positive (or less negative) over the first few years, because higher spending would increase aggregate demand. But the estimated effect on output in later years would be more negative because if additional revenues from the tax measures were spent, federal budget deficits would not decline by as much, reducing the funds available for private investment. (Some of the spending proposals, however, such as those for infrastructure investment or education, would add to the economy’s productivity, offsetting some of the adverse effect of greater spending on federal budget deficits and private investment.)                    TAX POLICY CENTER | URBAN INSTITUTE &amp; BROOKINGS INSTITUTION3 EFFECTS ON THE BUDGET The effects on output from the tax proposals would alter taxable incomes for individuals and businesses. That would in turn affect the impact of the proposals on aggregate revenues. After a small boost in 2021, the macroeconomic effects of the proposals would reduce the projected increase in revenues by a net total of $154 billion between 2021 and 2030 and by $41 billion between 2031 and 2040 (table 2). Macroeconomic feedback effects would reduce the increase in federal revenues from the plan about 7 percent over the first decade and very slightly over the second decade. By 2040, however, the annual impact of the tax proposals on federal revenues would be positive and continue to increase.                      REFERENCE Mermin, Gordon B., Janet Holtzblatt, Surachai Khitatrakun, Chenxi Lu, Thornton Matheson, and Jeffrey Rohaly. 2020. “<a href="https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals">An Updated</a> <a href="https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals">Analysis of Former Vice President Biden’s Tax Proposals</a>.” Washington, DC: Urban-Brookings Tax Policy Center.                       The views expressed are those of the authors and should not be attributed to the Urban-Brookings Tax Policy Center, the Urban Institute, the Brookings Institution, their trustees, or their funders. The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. For more information, visit taxpolicycenter.org or e-mail <a href="mailto:info@taxpolicycenter.org">info@taxpolicycenter.org.</a> Copyright © October 2020. Tax Policy Center. All rights reserved. Permission is granted for reproduction of this file, with attribution to the Urban-Brookings Tax Policy Center.    TAX POLICY CENTER | URBAN INSTITUTE &amp; BROOKINGS INSTITUTION4</div>

TPC: Biden's Tax Proposals Would Raise GDP by 2040

TPC: Biden's Tax Proposals Would Raise GDP by 2040

Urban-Brookings Tax Policy Center

The Urban-Brookings Tax Policy Center in an October 29 report said Democratic presidential candidate Joe Biden's tax proposals would slightly boost GDP in 2021, then slightly reduce GDP and revenue over the rest of the decade, but by 2040 would have a positive annual impact on federal revenues and growth.

The Urban-Brookings Tax Policy Center in an October 29 report said Democratic presidential candidate Joe Biden's tax proposals would slightly boost GDP in 2021, then slightly reduce GDP and revenue over the rest of the decade, but by 2040 would have a positive annual impact on federal revenues and growth.