00:00:00
Dan Loney: Well, as we get closer to
election day, understanding the
00:00:03
policy plans of both candidates
is going to be very important.
00:00:07
The Penn Wharton budget model
has taken a deeper dive on both
00:00:11
Vice President Kamala Harris's
plans, as well as those of
00:00:14
former President Donald Trump.
And pleasure to be joined by
00:00:17
Kent Smetters, who's faculty
director of the Penn Wharton
00:00:20
budget model, joining us, as well
as Professor of Business
00:00:23
Economics and Public Policy at
the Wharton School. Kent, great
00:00:26
to talk to you again. How are
you today?
00:00:28
Kent Smetters: Great, thanks
for having me back on. - All right, so
00:00:31
I guess let's start out with the
collection of this information,
00:00:34
because I think it's also
important to understand that,
00:00:37
because we're at a point right
now where it feels like we're
00:00:40
just learning a lot about what
each candidate is potentially
00:00:43
going to bring forward. - That's
right. In particular, they're
00:00:47
very different in some sense,
that Trump, we kind of know what
00:00:51
he wants. It's very clear. It's
also very expensive, because he
00:00:56
doesn't have any way of right now
paying for it. So add a lot of
00:01:00
debt to the picture on a path
that already is exploding with
00:01:06
federal debt. Whereas the case
of Harris, the problem there is
00:01:11
that they've released an
official campaign document, but
00:01:15
then they're having these kind
of side conversations, and giving
00:01:19
some hints about how they'll pay
for some of this stuff, but it's
00:01:22
not very organized at all. And
so, you know, we and the Joint
00:01:27
Committee on Taxation, CBO in
particular, are pretty
00:01:30
consistent that you have to give
us details, and we're not going
00:01:33
to give you freebies in terms of
revenue and things like that. So
00:01:37
her package is much smaller, but
it does also increase the debt.
00:01:44
- So I think when you talk about
former President Trump, there
00:01:47
are certain things that you said
that we can kind of assume would
00:01:50
probably come into play, one
being the extension of the 2017
00:01:53
tax cuts, and what kind of
impact those would have. - That's
00:01:57
right. In particular, just
extending those tax cuts, and
00:02:01
they mainly focus on the
individual side. The business
00:02:04
side, most of those were already
permanent, although some of
00:02:07
those would have otherwise
expired as well, but mostly on
00:02:11
the individual side. And
extending the Tax Cuts and Jobs
00:02:15
Act, we're talking about over $4
trillion of additional debt over
00:02:20
the -- over the next decade, and so
it's pretty expensive. But then
00:02:24
what he's added on to it is
reducing, or in fact, even
00:02:28
eliminating taxes on Social
Security benefits, and as well
00:02:33
as lowering the corporate tax
rate even more from 21 percent to 15 percent.
00:02:38
The Tax Cuts and Jobs Act are
already lowered from 35 percent to
00:02:42
21 percent. Now he wants to take it one
step further. And so altogether,
00:02:48
that's about $5.8 trillion of
additional debt over 10 years,
00:02:52
if you allow for economic
feedback effects. And he does
00:02:55
get some positive feedback
effects during the first part of
00:02:58
the decade, and then he loses
that toward the end of the
00:03:02
decade, but the cost would be
about $4.1 trillion, whereas
00:03:07
Harris is working much the
opposite way. - As for Vice
00:03:12
President Harris, she has seemed
to show some support for some of
00:03:16
the ideas that President Biden
has been wanting to put into
00:03:20
play, like raising taxes on the
higher end of the population,
00:03:24
and even the potential of
raising the corporate tax rate.
00:03:27
- Yeah, what she stated
officially, and this was in
00:03:30
their campaign proposal, is that
she would raise the corporate
00:03:35
tax rate from 21 percent to 28 percent. That
definitely raises some money.
00:03:39
It's about $1.1 trillion over 10
years, but also has a negative
00:03:44
effect on the economy. And then
she has some other things that
00:03:48
she wants to do, including what
the Child Tax Credit, the Earned
00:03:51
Income Tax Credit, and
continuing what's called premium
00:03:55
support for the Affordable Care
Act, which is already
00:03:58
subsidized. She would subsidize
it even more. And then down
00:04:01
payment for first time
homebuyers. And so overall, we
00:04:04
estimate her entire package
would be about $1.2 trillion on
00:04:09
a conventional basis, but when
you allow for economic feedback
00:04:12
effects, it would cost -- it would
raise deficits by about $2
00:04:17
trillion. Now, what the Harris
campaign has done in light of
00:04:22
some of these numbers is that
they are having these side
00:04:25
conversations. They're telling --
you know, one reporter asked
00:04:27
them, "Well, do you not stand by
the -- you know, the Biden Harris
00:04:32
fiscal year 2025 budget?" And
the Harris campaign has said,
00:04:35
"Yes, we agree with that budget."
And so some reporters are
00:04:39
saying, "Oh, therefore you should
include all the tax increases in
00:04:42
that budget as to what we call
pay for its revenue raisers." But
00:04:46
then what about all the spending
in that budget that she hasn't
00:04:49
talked about yet? Will she
suddenly walk away from those?
00:04:53
And so we can't just take one
part based on one comment and
00:04:57
not the other part. Presumably,
she agrees with the entire
00:05:00
budget, but she needs to confirm
that. And then she -- the campaign's
00:05:03
also said some things like they
are -- they're open to extending
00:05:06
the Tax Cuts and Jobs Act, but
only for people making less than
00:05:09
400,000. If that were the case,
that would be a big additional
00:05:13
spend right there. And so
ultimately, you know, we have to
00:05:16
be disciplined, and we can't
just be rumor chasing. We have
00:05:20
to say, this is what the
campaign said, this is what
00:05:22
they've actually released, and
that's what we're going to look
00:05:26
at. We're not going to give, you
know, fake money. We're not
00:05:29
going to give, you know, just
free money so that does -- the
00:05:34
score can look better. - There's
also discussion, and I don't
00:05:37
know if this is putting into the
dynamics of what you looked at
00:05:41
with the Harris campaign, about
the potential of taxing
00:05:44
unrealized capital gains. - Yeah,
yeah. And that is part of the
00:05:47
President Biden '25 year -- fiscal
year '25 budget. And so we're
00:05:56
-- we, and as the Penm Wharton
budget model, and the Joint
00:05:59
Committee on Taxation are the only
ones that do a kind of full
00:06:04
analysis of the President's
budget every year. We release
00:06:08
ours in May. Usually the JCT
will come out in late fall with
00:06:12
their analysis. And in
particular, both JCT and us
00:06:17
agree on one thing, and that is
this particular tax that the
00:06:21
President has talked about,
which you also include in the
00:06:24
fiscal year 2024 budget, that's
about the only thing we refuse
00:06:28
to score. And the reason is, is
that there's no details about
00:06:34
it. What has been released
really doesn't -- is not coherent
00:06:38
at all. They call that
billionaire tax. It's not even
00:06:41
actually focused on billionaires.
And I think the reason why they
00:06:44
want to kind of shy away from it
is they don't want to have the
00:06:49
conversation about, like, you
know, if your parent owns owns a
00:06:53
business, and that -- how is that
privately held business going to
00:06:58
be evaluated every year? Because you're
going to need some government
00:07:00
agency to agree on the valuation
of that business. And then how
00:07:04
are they going to pay taxes on
the unrealized gains on that
00:07:08
business, where they don't have --
they're not liquid? So are they
00:07:10
going to give shares of that
business to the government? Then
00:07:12
how does that regulation come
about? Because unless it's SEC
00:07:17
registered, that would be very
challenging. So the Trump
00:07:20
administration played games with
the budget. The Biden
00:07:23
administration plays games with
the budget. This is definitely
00:07:26
one way they're doing it, in the
sense that they want to take a
00:07:29
revenue from it. They said they
got from Treasury doing the
00:07:34
estimate. We have no idea how
they could have possibly come up
00:07:37
with that number. There's no
details. Then, but at the same
00:07:41
time, they'd never want to talk
about it in any type of detail as
00:07:44
well, because it would lead to
all these sorts of issues. - How
00:07:47
much can you correlate the
potential cutting of taxes in
00:07:51
certain areas, like, let's use
the Social Security component as
00:07:54
as the example here, of seeing
the cut in taxes there, and
00:07:59
what that would mean potentially
for growth? You know, obviously
00:08:02
individuals having a little bit
more money in their pocket.
00:08:05
- Yeah, yeah. So there's
definitely ways that you can use
00:08:10
a dollar of deficit to stimulate growth,
and then there's ways that it
00:08:13
just doesn't stimulate growth.
And in fact, it does the
00:08:16
opposite, by adding more debt
that reduces private investment.
00:08:21
So something -- let's take an
easier example, say the
00:08:24
corporate income tax. You know,
those on the far right are going
00:08:27
to say, you know, whenever you
reduce the corporate rate, it
00:08:30
always pays for itself. Well,
that mathematically can't be
00:08:33
true. But in fact, it's not even
close to be true. You definitely
00:08:37
lose revenue, which we estimate
in the case of the Trump reduction.
00:08:43
On the other hand, those on the
left who say, you know, oh,
00:08:46
the corporate rate has no impact
on the economy. And of course,
00:08:49
that's absolutely not true
either. It's something in the
00:08:52
middle is definitely more true
in the terms of the corporate
00:08:55
rate. In the case of Social
Security benefits, not taxing
00:08:58
that, that's going to have very
little effect on the economy.
00:09:02
Yes, it's going to leave a
little bit more money in
00:09:05
people's pocket for consumption,
but that's not the main growth
00:09:11
part, or the growth engine of
the economy. That's not the main
00:09:14
growth factor. The main growth
factor is actually stimulating
00:09:18
investment. That's the thing
that gives you these compounded
00:09:20
returns over time. And that is
reducing the taxes on benefits.
00:09:26
It's definitely not going to do
that. And so I think it is one
00:09:31
of those things that it's mostly
debt causing, mostly crowding
00:09:34
out private investment, very
little stimulus in terms of new
00:09:38
investment. And whereas the
corporate rate tax, you know, at
00:09:44
least has more stimulus in terms
of investment. - Can you also
00:09:48
start to think about, when you're
doing assessments like this,
00:09:53
with some of the components that
each candidate would want to
00:09:56
bring about, the component of
Congress and passsing some of these
00:10:00
bills, and whether or not they're
not even realistically factors
00:10:04
in the mix moving forward
because of the congressional
00:10:07
makeup. Obviously, we won't know
more about that until the
00:10:10
November election, but obviously
with some of these policy plans,
00:10:13
it does become a factor.
00:10:15
- That's right. And in particular,
the scoring process or the -- even
00:10:20
the economic distributional
analysis or the economic growth
00:10:23
analysis always has to be done
under an as if condition. In
00:10:29
particular, we can never just
say, you know what, we don't
00:10:33
think this is realistic, so
therefore we're only going to give
00:10:36
it, you know, 30 percent weight. Why
would it be unrealistic? Maybe
00:10:40
it's because under the as if
condition, as though it were
00:10:44
done, Congress says, we don't
want to do that because of the
00:10:48
as if. And so, like any
accounting exercise, we have to
00:10:52
just say, suppose those were
done, what would that -- what
00:10:56
would the impact be? Now,
otherwise, you get in these
00:10:59
circular arguments very, very
quickly, and will also put us in
00:11:02
the role of playing politics.
But it is true that how a bill
00:11:09
gets passed can sometimes
materially impact things. For
00:11:12
example, one thing is regulation.
Does the -- is the federal
00:11:16
government just using regulation
to get something done? That could
00:11:19
be scored a little bit
differently than if they didn't use
00:11:22
regulation. Or if they are, you
know, passing something as
00:11:26
what's called budget resolution
subject to the Byrd Rule, versus
00:11:30
not using that, but having a
true tax bill which could be
00:11:34
subject to a filibuster. - So I'll
wrap it up here. I mean, looking
00:11:39
at the data that you've
collected for both candidates
00:11:42
right now, what do you think are
the most important takeaways
00:11:45
from the numbers we see so far?
- Yeah, everybody wants to focus
00:11:49
on the relative. Who's better? I
think that's missing the big
00:11:52
picture. The big picture is one
of this explosive debt path
00:11:56
right now, and that is going to
eventually accumulate. It's in
00:12:01
the form of some type of major
problem, either sharp increases
00:12:07
in taxes in the future,
sharp decreases in spending, or
00:12:12
if those don't get done, sharp
increases in inflation. We've
00:12:15
had this experience with higher
than normal inflation. We can
00:12:20
get back to two percent inflation for a
few years. But if Congress
00:12:23
doesn't do anything, the only
thing that can be done is to
00:12:27
monetize the debt, and that -- and
so you could be talking about
00:12:32
four or five percent inflation going on
for a couple of decades, is one
00:12:37
of the realistic outcomes. So that's
the current law. Both candidates
00:12:42
are doing the same thing.
They're adding to that debt.
00:12:46
They're both going to contract
the economy. And then on top of
00:12:51
that, here's what they're both
missing, is that we are in a
00:12:55
position right now where we
could actually bring down debt
00:12:58
while actually growing the
economy. On the on the Penn Wharton
00:13:01
budget model website, we
have three different major
00:13:04
options. We don't call them
liberal, conservative, and
00:13:06
moderate, but essentially that's
what they are, bundles one, two,
00:13:09
and three. And there are
definitely ideas that are consistent
00:13:13
with each kind of worldview out
there that can bring down debt
00:13:16
while actually growing the economy,
and neither -- but it requires
00:13:20
making tough choices, and neither
candidate is willing --
00:13:23
really willing to do that. - Ken,
always great to get your
00:13:28
thoughts and your insight. All
the best, sir.
00:13:30
- Thank you, sir.
00:13:31
- You got it. Kent Smetters, who's
Professor of Business Economics
00:13:34
and Public Policy here at the
Wharton School, and also faculty
00:13:37
director of the Penn Wharton
budget model.
