Numbers tell the truth, but the White House doesn’t always want to hear it.
The Penn Wharton Budget Model has made a name for itself as a nonpartisan budget-modeling outfit crunching economic analysis of fiscal impact from public policy, housed at the Wharton School of the University of Pennsylvania.
That ticked off the Biden administration, which claimed the measure was revenue-neutral. An administration spokesperson lashed out at the Penn Wharton team, questioning its math and dismissing it as right-wing.
Kent Smetters, the leader of the Penn Wharton group, has heard it all before, noting that past estimates also came under fire from the previous administration.
“We’re an honest broker, regardless of the party in power,” said Smetters, a professor in Wharton’s Department of Business Economics and Public Policy.
Indeed, the Wharton group got some support late last week when the Congressional Budget Office released its widely anticipated estimates of the bill and also found big deficits.
The CBO put the Build Back Better measure’s deficit at $367 billion over the years 2022 to 2031. But, Smetters noted, the CBO didn’t include revenue expected from increased IRS enforcement of tax laws.
In fact, the CBO forecasts a deficit over 10 years of $160 billion with the additional IRS enforcement.
“By tradition, a score does not include IRS enforcement effects since the score already assumes that people comply with the law,” said Smetters who worked for the CBO from 1995 to 1998. Hence the different numbers.
The White House then immediately claimed on Friday that the CBO analysis confirms a 10-year surplus — but also acknowledged that it replaced figures for IRS enforcement that it didn’t like from the CBO with its own figures, said Smetters.
Penn Wharton’s estimate included IRS enforcement to reach its 10-year deficit of $274 billion. It didn’t provide an estimate without IRS enforcement.
“I’ve worked with [Kent] and we’ve coauthored papers together. And it’s a good sign that he’s being abused by the White House no matter who is in power,” said Laurence Kotlikoff, a Boston University economist and author of the new book Money Magic.
Trump also didn’t like Penn Wharton’s estimates
The Penn Wharton team received similar lashings from the Trump administration for its analysis of his tax cuts in 2017, Smetters noted.
In 2017 Penn Wharton’s model also differed somewhat from the Joint Committee on Taxation and the CBO, before the passage of Trump’s Tax Cuts and Jobs Act.
Smetters notes: “The JCT and CBO revised their economic forecast and technical assumptions after the law was passed and came up to our estimate.”
The House on Friday passed the Build Back Better package and sent it to the Senate.
The bill would expand social programs such as child care, universal preschool, access to broadband, and affordable housing. It would add $555 billion in climate change measures to encourage the purchase of electric cars, electric heat pumps, solar panels, and wind farms. In terms of health, the bill would give Medicare recipients a new hearing benefit and empower the government to negotiate prices on some prescription drugs.
The bill would raise the federal tax deduction for state and local taxes from $10,000 to $80,000, helping more affluent taxpayers in New Jersey and Pennsylvania. At the same time, the measure would raise taxes on high earners and create a 15% minimum tax on profits from companies that report over $1 billion in profits to shareholders. Companies would also pay a 1% tax on stock buyouts.
Republicans quickly castigated the bill, which could be revised in the Senate.
“This analysis from the Congressional Budget Office is a clear indictment of the Democrats’ tax-and-spending agenda and the false promises that have gone along with it,” said Rep. Jason Smith of Missouri, the top Republican on the House Budget Committee.
In the Senate, Democrats control the 50-50 chamber with Vice President Kamala Harris’s tie-breaking vote.
Economy expected to grow
Despite its far-reaching social effects, the bill would not have much of an economic impact in the short term. And that kind of quick growth isn’t the main point of the measure, said FS Investments chief economist Lara Rhames.
“The goal is really to have a long-run impact through jobs, direct spending, and productivity through investments in, for example, broadband access. That could really help with other things like education that boost GDP in the long run,” Rhames said.
“This bill is peanuts compared to the amount of money Trump was spending,” added Kotlikoff. “But is it making the deficit a lot worse or a lot better? Neither.”
Finally, the White House can argue Build Back Better is revenue-neutral all day long.
“But the CBO hasn’t said that. Penn didn’t say that,” said Tony Roth, chief investment officer at Wilmington Trust. “The White House can say whatever it wants, but no one believes it.”