Penn Wharton budget model: Trump tax cuts hike gov't debt by $5T by 2040

The recent Trump tax cuts for individuals expire at the end of 2025, and the Wharton Budget Model on Thursday projected that extending those tax cuts would increase U.S. government debt by over $5 trillion by 2040 and would reduce GDP, rather than prompting growth.

"Penn Wharton Budget Model's dynamic analysis projects that extending the individual tax changes in the TCJA increases federal debt relative to current policy. In the near term, effects on GDP are small, but negative. However, in the long run, economic growth is more moderately reduced," wrote Wharton professor Kent Smetters, who regularly updates the budget model.

So why would individual tax cut extensions actually contract the U.S. economy? The potential positive benefits to the economy from extending the individual-side tax cuts are smaller than the negative effects associated with more debt, Smetters said.

"Indeed, some of the individual-side tax extenders considered in this brief, such making the Child Tax Credit permanent … actually reduce labor supply without providing any strong incentive to increase saving for investments. In contrast, some of the business tax cuts in the original TCJA legislation provided additional incentives to save and work," he added. The full model can be found on Wharton's website.