The Tax Foundation has provided an update on its General Equilibrium Model, also known as the Taxes and Growth (TAG) Model. This model is designed to simulate the effects of government tax and spending policies on the economy, as well as on government revenues and budgets. It can produce both conventional and dynamic revenue estimates of tax policy, assess impacts on macroeconomic aggregates like GDP, wages, employment, investment, consumption, saving, and the trade deficit, and evaluate how different tax policies affect the distribution of the federal tax burden.
The TAG Model consists of three main components: a tax simulator for conventional revenue and distributional estimates; a neoclassical production function for estimating long-run output changes; and an allocation model that forecasts various economic components such as GDP and GNP.
Recent updates to the model include incorporating baseline data from the Congressional Budget Office's January 2025 projections. This new baseline reflects larger tax and economic variables compared to previous baselines. The model retains its capability to simulate tax policy changes within the 2025-2034 budget window.
Another improvement involves integrating a matched database using data from the Current Population Survey (CPS), which enhances demographic information like age and gender. This allows for better modeling of payroll taxes and simulating policy proposals that convert nonfilers into filers.
Additionally, changes have been made to improve measurement in distribution tables by expanding income definitions beyond adjusted gross income (AGI). Updates were also completed regarding user cost of capital calculations, distinguishing between business returns and individual savers' required rates of return.
The Tax Foundation has developed a more detailed corporate federal tax liabilities model using IRS and Bureau of Economic Analysis data. This allows for capturing profit shifting responses, general business credits, subpart F income treatment, global intangible low-taxed income (GILTI), foreign derived intangible income (FDII) deductions, corporate alternative minimum tax (CAMT), stock buyback taxes enacted in 2022, depreciation deductions by asset type, among others.
Despite these enhancements in detail concerning corporate models or cross-border investments' economic/revenue effects remain uncertain due partly due assumptions about stable foreign taxation policies being necessary factors affecting outcomes simulated under this framework according to foundation representatives.
