Dynamic Analysis of the House GOP Tax Plan: An Update

This paper presents estimates of the macroeconomic effects, and resulting dynamic impact on revenues, of the House GOP tax plan announced in June 2016. The estimates were produced in two ways. One set of estimates uses a combination of TPC’s Keynesian model (to project short-run effects on output relative to its full-employment, or potential, level) and TPC’s Neoclassical model (to project longer run effects on potential output). Those models are based on reduced-form relationships between aggregate variables, derived primarily from historical correlations. A second set of estimates is based on the Penn-Wharton Budget Model, which explicitly models the effects of incentives on individual households. Both methods find positive dynamic effects on output and revenues over the first few years, and negative effects in later years.