Wharton finds Senate, House tax bills offer GDP pop in 2018, fizzle thereafter

APTOPIX Mnuchin Currency
Treasury Secretary Steven Mnuchin, right, and his wife Louise Linton, hold up a sheet of new $1 bills, the first currency notes bearing his signature, Wednesday, Nov. 15, 2017, at the Bureau of Engraving and Printing (BEP) in Washington. (AP Photo/Jacquelyn Martin)

The Wharton School estimates that America’s economy will benefit from current House and Senate tax reform bills, but how much? The answer might surprise you.

The school maintains what’s known as the Penn Wharton Budget Model, a dynamic analysis project that tracks tax and budget changes in real time. Right now, Penn Wharton Budget Model is tracking the Tax Cuts and Jobs Act, and scoring how it changes federal tax revenue in both the short and long run.

Wharton’s model’s conclusion: In the near term, the House and Senate bills offer a short-term jolt — a boost to GDP next year — but growth fizzles over time.

In 2018, under the House version, Wharton found that GDP grows 0.50 percent higher than with no tax changes. But by 2027, Wharton’s model estimate GDP grows between 0.33 and 0.83 percent — not much more than under current policy.

Why? Bigger deficits down the line.

“This initial GDP growth boost fades over time as more debt accumulates,” said Kimberly Burham, managing director of legislation and special projects, who oversees the Penn Wharton Budget Model.

By 2040, today’s tax cuts are essentially a wash: Wharton estimates GDP growth could drop by 0.25 percent, vs. GDP growth under current tax policy.

Wharton’s take? “Tax cuts are creating less growth than was advertised,” Burham said.

Ahoy, budget and tax nerds! You can access Wharton’s model for yourself here: http://budgetmodel.wharton.upenn.edu.

Treasury Secretary Steven Mnuchin insisted last week that “our view is that this will pay for itself,” according to an interview he gave the Wall Street Journal.

Meanwhile: what’s the nitty gritty for the rest of us? Yes, there are similarities with the House bill, but the Senate bill has key differences, according to the Citrin Cooperman accounting and tax advisory firm in Center City:

For Wall Street, there’s a bizarre insert in the Senate version: investors would be required to sell their oldest shares first, instead of choosing which shares to sell for tax purposes.

Known as first in, first out (FIFO) accounting, investors would be forced to use this method to sell securities and then when calculating capital gains taxes, according to Parametric Portfolio chief investment officer Paul Bouchey.

“The sponsors of this bill assert that this change would raise an estimated $2.7 billion in tax revenues over 10 years. This sounds like a lot, right? Well, not really, when you consider that this is just a small drop in the $1.5 trillion in tax revenues that are projected to be lost over the same time frame as a result of the overall tax proposal,” he noted.

FIFO takes away flexibility—instead of choosing the most favorable tax lot to sell, we have to sell the oldest tax lot first. For individual investors, this could prove a logistical nightmare, and poses the question of who keeps track — the mutual fund, the custodian or mom-and-pop savers?

We’ll keep you updated on whether this provision survives.

Property Taxes: Should You Prepay in 2017?

By state and local taxes, we’re talking about income taxes, and real estate taxes for your home. Previously, we got to deduct state and local taxes on our federal tax return.

Now, the House and Senate are scrapping or cutting those state and local deductions.

Does it make sense to prepay this year? Prepaying your property taxes is primarily beneficial when these taxes are deductible on your federal income tax return. That may no longer be the case under the new legislation.

If the current bills become law, it may make sense to prepay property taxes in 2017 — down to a level at which they are still deductible in 2018 – possibly $10,000 or less.

CFA Society of Philadelphia Event

The CFA Society of Philadelphia, along with FPA Philly, will host the ninth annual High Net Worth and Family Wealth Conference on Nov. 30 at the Convene Cira Center, 2929 Arch St. The panels will feature speakers for local firms including Pitcairn, Hawthorn, Hirtle Callaghan, FS Investments, Vanguard, and Glenmede. For more information, visit CFA Society of Philadelphia’s website: www.cfasociety.org/philadelphia