Ted Cruz’s Tax Plan

You might want to take a look at Louis Woodhill’s commentary at RealClearMarkets on Ted Cruz’s tax reform plan. I referred to the Tax Foundation’s analysis of the plan while I was reading it.

The Reader’s Digest version of Sen. Cruz’s plan is that it:

  • Replaces the present individual income tax with a 10% flat tax.
  • Imposes a 16% subtraction method VAT.
  • Eliminates the payroll tax.
  • Eliminates the corporate income tax.
  • Eliminates all personal deductions except the charitable deduction and the home mortgage interest deduction.
  • Increases the exemption for dependents and the Earned Income Tax Credit.
  • Depends heavily on growth assumptions for solvency.
  • Would result in a federal revenue decrease of $768 billion over 10 years.

My observations about it are:

  1. I agree with Mr. Woodhill about the objectives of a tax system.
  2. The plan seems to be a solid one. You will note that it incorporates a number of things I’ve advocated here over the years.
  3. Finding offsetting cuts at the level required should be easy.
  4. If you can’t find the cuts, the plan will, ironically, become a poorly-constructed Keynesian stimulus plan.
  5. It would be a more effective way of discouraging tax avoidance schemes by corporations, e.g. inversions, than anything that Sen. Sanders or Sec. Clinton have proposed.

I also note that it will be extremely difficult to enact because of the large number of sacred oxen it will gore. Opposition to the plan will be fierce and will come from all directions.

40 comments… add one
  • michael reynolds

    You’re endorsing a plan that “Depends heavily on growth assumptions for solvency” and “Would result in a federal revenue decrease of $768 billion over 10 years?” Seriously? You think we’re going to need three quarters of a trillion dollars less? In what alternate universe? And how many times are we supposed to fall for the magical thinking of rose-colored “growth assumptions?”

    This represents a gigantic tax cut for me, at a minimum 100k, which I would use to travel overseas and spread largesse among bellmen and waiters. Not quite sure how that’s going to help the economy in Illinois or California, but I’m sure hoteliers in Provence would be grateful.

  • That’s three quarters of a trillion over 10 years or $76 billion a year. You could take that out of DoD and it would hardly be noticed.

    I wouldn’t say I endorse it. All that I endorse is tax reform. I also believe that introducing a VAT, and eliminating the corporate income tax are good moves. Eliminating FICA is a pretty bold step but I think it’s smart. It’s what makes our system regressive.

  • Modulo Myself

    The Tax Foundation says this:

    Senator Cruz’s plan would cut taxes by $3.6 trillion over the next decade on a static basis. However, the plan would end up reducing tax revenues by $768 billion over the next decade when accounting for economic growth from increases in the supply of labor and capital and the much broader tax base due to the new value-added tax.

    And Bloomberg says this:

    Prior analyses of Cruz’s tax plan reached varying conclusions regarding its cost over a decade. The conservative Tax Foundation found it would cut revenue by $3.6 trillion, while the liberal Citizens for Tax Justice said it would produce a $16.2 trillion shortfall.

    Here’s the thing–the plan is going to be difficult to enact because very few people who are not committed conservatives are going to believe this time and this plan are different than the plans that ruined Louisiana and Kansas.

  • Here’s the thing–the plan is going to be difficult to enact because very few people who are not committed conservatives are going to believe this time and this plan are different than the plans that ruined Louisiana and Kansas.

    Louisiana and Kansas have a VAT? News to me. Don’t ignore that VAT. It’s an important step in modernizing our tax code.

    I agree that it’s going to be difficult to enact. Any reform of the tax code is difficult to enact. That’s why we haven’t done it in 30 years. The tax code is like a ship. You’ve got to bring it in to drydock and scrape off the barnacles every once in a while.

    I’d oppose any cut in the personal income tax that isn’t accompanied by adding a VAT.

  • Modulo Myself

    I’m referring to the unshakable confidence in huge tax cuts being offset by huge growth. It’s the same shtick every election. Tax cuts, growth, blah blah blah. Whenever it actually happens as conservatives want you get disaster, as Louisiana and Kansas have proved. Why is Cruz’s different? Because he has a VAT?

  • Yes. The VAT is important. He’s not just cutting taxes. He’s proposing cutting personal income taxes while adding a consumption tax (that’s what a VAT is). That won’t just allow rich people to retain a larger proportion of their income as a straight tax cut does. It changes the incentives which has an effect throughout the economy.

  • michael reynolds

    The payroll tax is only regressive because of the cap. Taking SS out of general funds would turn SS from a perceived pension program (yes, I know) into a perceived welfare program, with predictable results. Raise the cap and you could cut the rates and still stay at par. That makes it less regressive without subjecting it to the next phony budget balancing fight.

    As for corporate taxes, I have a corporation and this would thrill me. I could pile up money in my corporate account and use it as a sort of massive retirement account. I could wait until retirement (or my income drops) and take it as income at a much lower tax rate. So I’d save the corporate tax and reduce the rate on my personal income tax and accomplish what, exactly for the society at large? Is there some great result from me stashing a couple million in my corp? Is that going to create jobs?

    Let me be clear on this: it’d be amazing for me. I could probably cut my work load in half. I could buy a nice little place in London and another in the Algarve (for the sun). But I’ll be damned if I see how this does anything to address any problem not related to my desire to sip vinho verde while gazing out over the straits of Gibraltar.

    I’m sorry, but this is just the standard Republican rich-get-richer plan. It would do nothing at all for working people, it would increase the concentration of wealth at the top, bleed SS, and generally drive home to working people that the system is even more rigged and more unfair than it already is.

  • michael reynolds

    And, by the way, anyone with a hundred bucks can form a corporation, and anyone self-employed could funnel all their income through a corp and suck hundreds of billions out of the tax system. You’d quickly see a whole lot of salarymen suddenly wanting to be independent contractors.

  • You’ve established that you’re hostile to any form of tax reform that cuts marginal personal income tax rates, eliminates the corporate income tax, or eliminates FICA. Now explain why Hillary Clinton’s or Bernie Sanders’s tax reform proposal will be great for the economy.

    Here’s what the Tax Foundation says about Bernie Sanders’s plan:

    According to the Tax Foundation’s Taxes and Growth Model, Senator Bernie Sanders’s tax plan would reduce the economy’s size by 9.5 percent in the long run. The plan would lead to 4.3 percent lower wages, an 18.6 percent smaller capital stock, and 6.0 million fewer full-time equivalent jobs. The smaller economy results from higher marginal tax rates on capital and labor income.

    and what they say about Hillary Clinton’s plan:

    According to the Tax Foundation’s Taxes and Growth Model, Hillary Clinton’s tax plan would reduce the economy’s size by 1 percent in the long run. The plan would lead to 0.8 percent lower wages, a 2.8 percent smaller capital stock, and 311,000 fewer full-time equivalent jobs. The smaller economy results from somewhat higher marginal tax rates on capital and labor income.

  • Modulo Myself

    Taxpayers in the bottom decile would see a 4.3 percent increase in after-tax income due to the expansion of the Earned Income Tax Credit, which more than offsets the impact of the new value-added tax. The next six deciles (the 10th through 70th percentiles) would see increases in after-tax adjusted gross income (AGI) of between 1.2 and 2.4 percent. High income taxpayers that fall in the highest income class (the 90-100 percent decile) would see an increase in after-tax income of 17.4 percent. The top 1 percent of all taxpayers would see a 29.6 percent increase in after-tax income.

    So the people at the bottom get a little more money. The 1% get new homes in the Hamptons. Growth does not pan out, because it never will, and what the bottom depends on is slashed. End result? The rich win and most lose.

    This is why Trump is controlling the GOP base. It’s because he’s not Baxter G. Feltcock III, the bow-tied chump who really believes this type of plan is going to benefit everybody. Trump has been adamantly clear: he wants his taxes cut so he can buy planes, yachts and diamonds for the explicit purpose of fucking women who would not otherwise fuck him. People respect that more than they respect Baxter Feltcock.

  • michael reynolds

    Dave:

    I wonder what those clever economic models predicted for California before we raised our state income tax? Because we jacked it up pretty high. (13% top rate) Our unemployment has dropped and our state GDP has gone up. Silicon Valley did not decamp en masse. Despite the scare stories we have steady population growth and our budget is in balance while our credit rating has improved.

    But I’d be willing to bet the modelers would have (and surely did) predict disaster. Just as I’m sure those modelers would have seen happy days ahead for Louisiana. Interestingly Florida – with a 0% state income tax rate – has basically the identical UE rate as California, and they aren’t coming off five years of record-setting drought. And how’s Illinois doing with a tax rate a fraction of what Californians pay.

    I don’t think economists have a clue what this tax plan or that one will do. It’s amazing to me that any small deviation in a global warming model is seized on as proof the entire scientific field is useless, while the constant failure of economics models somehow is ignored. We don’t know what a tax plan will do to the economy, we just don’t. Things involving humans cannot be reliably predicted.

  • michael reynolds

    Dave:

    In 2015 alone the drought cost California 21,000 jobs and 2.7 billion dollars. Not taxes, nature.

    Illinois has not suffered a drought, was not as badly hurt by the RE bubble, and has a top income tax rate about a quarter of ours. So how come we’re in so much better shape?

    State income tax is a pretty good marker for tax rates generally since the fed rate remains the same while the net cost to taxpayers fluctuates fairly dramatically by state. So it ought to be possible to present a case that states with low income taxes do better than those with higher rates. The ten states with the highest rates:

    California 13.3%
    Hawaii 11.0%
    Oregon 9.9%
    Minnesota 9.85%
    Iowa 8.98%
    New Jersey 8.97%
    Vermont 8.95%
    District of Columbia 8.95%
    New York 8.82%
    Maine 7.95%

    I’m not seeing a coherent picture of economic devastation in that list.
    States with the lowest state income tax rates (all zero):

    Wyoming
    Washington
    Texas
    South Dakota
    Nevada
    Florida
    Alaska

    Not seeing universal wealth and happiness in that list, although it helps (helped) to discover oil. High tax Oregon and Minnesota are both outperforming no tax Nevada and Florida.

    If low tax rates equal growth, why are we not seeing a clear picture of high tax states doing poorly while low tax states do well? Oregon out-growing neighboring Washington state despite a nearly 10% difference in marginal tax rates. They both have lousy weather, so they can’t claim the special California sunshine exception.

  • TastyBits

    In Louisiana, a substantial portion of tax revenue comes from the oil and gas industry. There are taxes at the wellhead, in the pipeline, and at the refinery or chemical plant. The oil and gas industry does not work according to the usual Republican and conservative theories.

    It does not matter how much you cut taxes on oil refining, you will not generate more revenue. There are no refineries being built or expanded, and the existing refineries produce based upon demand. Chemical plants are similar. Furthermore, oil and gas prices are based upon futures contracts.

    Governor Jindal is another professional politician who is an idiot. He has never done a real day’s work in his life. He takes the pablum he has been fed by his Republican betters and tries to apply it anything within sight.

    “The reason a chicken crossing the street is an example of the Laffer Curve at work.” “A bear shits in the woods because of government regulations.” “The Pope is Catholic because of trade restrictions.”

    The idea of expanding the economy is ludicrous. Republicans want to export as much manufacturing as possible in order to import the cheapest goods possible, and somehow, the lost jobs plus the lost manufacturing will equal an increase in total economic activity.

    The stupidity is on full display for anybody with a few brain cells, but there are still those who would insist that a few tax cuts will change the formula. I would like one of these geniuses to explain what exactly is going to change. (Note: This is not a question of the aptness of taxes in general or any specific rates.)

    Applying Newtonian physics to subatomic particles is not a really smart idea. So too, applying sound money theory to unsound money practices.

    When the sum is greater than the parts, 1 + 1 > 2, and in that case, regular arithmetic does not apply. Think about it. Anybody quoting Adam Smith is either an idiot or a swindler.

  • So how come we’re in so much better shape?

    There are any number of reasons. California is a destination state. Illinois isn’t. Illinois has a high sales tax (Chicago’s is the highest of any major city). Illinoisans pay the highest property tax per capita of any state in the U. S. Keep in mind that having anything other than a flat tax would require a constitutional amendment in Illinois.

    Property values in Illinois didn’t rise as much during the boom as in California, it was harder hit by the recession than California, and it hasn’t recovered as well from the recession as California. Illinois politicians made the mistake of increasing income taxes during a recession which affected Illinois differently than it might have California.

    IMO this is basically the argument in favor of federalism, i.e. not centralizing everything in Washington, DC. One size doesn’t fit all. Maybe California can do just fine as a state with high taxes. Maybe Illinois can’t. Let the states be different and specialize.

  • michael reynolds

    Or it’s not about taxes and tax rate increases or decreases cannot be effectively used to cause particular outcomes. Because that’s sure what it looks like. Neither the country as a whole, nor individual states, appear to have economic outcomes dictated by tax rates.

    Look, I am happy to keep more of my money, but if you imagine that I’ll be spurring economic growth, think again. I’ll stick it in a box somewhere and spend it later or pass it on to my kids. If you want more economic activity would it not make more sense to take some of my money and give it to people who can be counted on to put 100% of it right back into consumption? What is the larger economic logic of enriching a 61 year old man rather than, say, subsidizing the wages of a 25 year-old clerk at Target?

    In my case – admittedly atypical – I’d work less, creating less economic activity at my end, while the 25 year-old will spend it all buying a car or shoes or food. 100k to me creates no additional economic activity, while 100k spread across a couple of working families will create economic activity. So, logically, and at risk of committing class treason, the sensible thing to do would be to put more in the hands of a working stiff.

    I would note the following: The median annual Economist (Corporate) salary is $120,168, as of February 22, 2016, with a range usually between $99,092-$147,295.

    So the guys who make ten times as much as a minimum wage worker conclude that their own economic cohort should be keeping a lot more money. And Ted Cruz, whose last estimated annual income was $1,253,159, agrees that his cohort should have more money. Millionaires and billionaires and the well-paid professional economists they support, agree the rich should get richer. Surprise! Because: science! Riiiight.

  • The tax code is only thing that’s important or the tax code is completely unimportant aren’t the only choices. I think reforming the tax code is necessary because what we have is too complicated, creates deadweight loss, has bad incentives, and it generally too loaded to favor those who can game the system.

  • PD Shaw

    @Tastybits, the guy who graduated at the top of my lawschool class had a house-painting business in N.O. He eventually couldn’t withstand the oil bust of the 80s, everybody waited an extra year to get their house repainted, then an extra two, then three, etc. I thought it was pretty cool that he could do so well after interrupting his education and he’d done something tangible, most of us hadn’t. (Real diversity)

    Anyway, I think he probably would have appreciated a bit of slack from the government, but the vortex of the oil-and-gas boom-and-bust cycle draws everything in. I’ve not read much about Louisiana that seems that different than what’s happened before, except Jindal gave tax cuts and Edwards spent it.

  • steve

    Do the following and it wouldn’t be so bad. Keep the estate tax. Increase the base tax rate so you are not dependent upon growth assumptions that never happen. Eliminate the charitable deduction and mortgage interest deduction. Increase the personal exemption.

    Overall, the Cruz plan as proposed, looks like an incredibly regressive plan. It provides a bonanza for the top 1% and we know that making them richer in the past has not made the economy grow. That said, the Europeans cope with a similar system, broadly, and it seems to work, though they do so by more support for the lower income groups. Don’t see that happening with Cruz.

  • Andy

    While interesting, I don’t take it at all seriously. Congress, from both sides of the aisle, would oppose this plan.

  • TastyBits

    @PD Shaw

    While the rest of the country was living it up, the 1980’s were a bad time for the oil patch. Tourism carried the city, but a lot of companies moved to Houston.

    Edwin Edwards gets a bad rap. He did a lot of good for the state, and he balanced the budget every time he was in office. Even his political opponents agree he was railroaded by the federal prosecutors.

    I have said before that if he were governor during Katrina things would have been a lot different. First, there would have been no crying. Second, he would have gotten Bush, Cheney, Rumsfeld, etc. out on the levees filling sandbags, and he would have had them gambling on who could fill the most. After, he would have started fundraising for the state by hitting up private companies and governments.

    At one time, I thought the same way as most people, and then, I began reading and learning about him. He is from a different era, but I have yet to be impressed with the present one.

  • TastyBits

    Consuming products does not increase the wealth of a nation. It does not add value to anything. Production adds value. (Cutting costs does not add value.) Getting cute with the numbers does not change anything. If it did, the country would be rip roaring along, but alas, the economic theories have been total failures. Well, except for the space invasion. Maybe we could try that one.

    Whether a 25 year old spends a government check, a student loan, a $15/hr pay check, a credit card, or an allowance from mommy and daddy, it matters not. Unless the goods were produced in the US and the money to purchase did not come from a source that would have increased the production capacity, it is beside the point.

  • Guarneri

    The plan is probably as good as you can get out of the political world, and if it only brought simplification it would be worthy.

    But in addition, apparently several of you don’t understand the dynamics of present values. Tiny changes in growth have very large PV effects because of time. To ignore this while attempting to make your case by citing inherently different local economies with crude measures of multiple moving variables makes no sense. It would be like comparing the range in economic outcomes of an author, to that of a waiter down the street, to that of a big name Hollywood starlet in LA and concluding taxes don’t matter. And yet every single day investments are priced using DCF s that incorporate taxes, people cross borders to purchase goods with different tax levies, and people pick up and move due to property or income tax differentials. As for growth specifically, remember the yacht tax that was going to stick it to the rich? You got fewer yacht purchases, fewer yacht-makers employed, less growth and less sales tax revenue. Bravo.

    If the cost of any raw material used to make widgets, or the utilities, labor or any other expense item on a P&L goes up there are economic reactions and shakeout. Most notable, pricing or economizing by the producer, level of purchases by the consumer, capital investment decisions by owners. Nothing just stands still, and those are growth issues. Now you want to tell me, unlike all those other expense items, the expense item that happens to be called taxes won’t matter? It’s the triumph of ideology over microeconomic behavior, if not common sense.

  • michael reynolds

    What is clear is that we don’t really know much if anything about the effects of income taxes. State taxes are in effect an increase in marginal rates, and we see no obvious effect. So basically we’re all a bunch of children twisting a Rubik’s cube, pretending we know what we’re doing and yet somehow never quite getting any of the colors lined up. Economics has roughly the same predictive power as astrology.

    In the absence of science, why not fall back on common sense? We have a 4 trillion dollar a year bill. It needs to be paid. How about if the people who can afford it pay more and the people who can’t afford it pay less? Eliminate all the deductions including charity which is nothing but a back door subsidy for organized religion and high culture. Graduated tax with rates from nominal for the poor to colonoscopy for the rich.

    If we can’t raise enough that way, we can impose a one time tax of, oh, let’s say a couple trillion dollars on the financial industry for fucking the country to line their own pockets.

  • PD Shaw

    @Tasty, I wasn’t really taking a pot shot at Edwards, but from a thousand mile perspective, a politician using oil money to spend or to cut taxes is doing close to the same thing.

  • steve

    “But in addition, apparently several of you don’t understand the dynamics of present values. Tiny changes in growth have very large PV effects because of time. ”

    Oh no, we understand this. We just don’t see the evidence that cutting taxes for the wealthy has actually produced growth.

    Steve

  • We just don’t see the evidence that cutting taxes for the wealthy has actually produced growth.

    or, apparently, that tax cuts and increased benefits for the working poor will produce any growth.

  • jan

    If we can’t raise enough that way, we can impose a one time tax of, oh, let’s say a couple trillion dollars on the financial industry for fucking the country to line their own pockets.

    And, just who comprises the “financial industry?”

    Somehow, I think this solution would only mask the underlying problems, producing a short-lived “fix” to long term bad habits, which have led to our fiscal and economical shortfalls. It’s similar to losing a lot of weight by some highly touted weight loss program, merely to gain it all back (usually piling on more) because intrinsic lifestyle patterns haven’t been addressed and changed.

  • Guarneri

    To tie several recent comments together, it is true that our gross measurement tools fail us. The US economy is simply too uncontrolled an environment. Further, the whole point of the PV approach is to illustrate how large the effect of policy is over time, even if a point measurement gets lost in the shuffle. One is left, then, to asking whether observed effects of taxation can be seen in a variety of settings and transaction.

    Each of the examples I cited happened and happens. Whether the yacht tax, avoidance of near border sin taxes, relocation, corporate and personal expense management or the capital markets. It happens every day. You could make a list hundreds of pages long if you were so inclined. In the capital markets alone it measures millions of transactions a day. It happens.

    Are there counter examples? Of course. I really don’t think Bill Gates or Mark Zuckerbergs deliberations included taxes. Taxes were dominated by other considerations. Michael might take a few extra trips to Europe. But sorry folks, the overwhelming preponderance of transactional behaviors follow standard microeconomics.

    As I noted, if for simplification alone the Cruz plan comes out best. One wonders why the left would object. As for the other objections, they sound ideological and not pragmatically results based. I would note that Michael proposed an uncapped payroll tax. That’s a flat tax. Yet I strongly suspect he would be horrified at the notion of a flat general income tax……..especially if proposed by a Republican.

  • Ben Wolf

    Growth is not the purpose of an economy; increasing the well-being of society is the purpose. You want growth? Then you need full employment. You want more production? Then you need full employment. You want rising wages and falling poverty? I won’t mention what you need (full employment).

    The only relevant question is how will changes to the tax code increase employment rather than leaving ten percent of our people in idleness. Tax cutting at the top is the heart of supply-side theory introduced by academics in the 1960s. The theory was coherent, logical and put to the test during the Reagan administration on the premise increased rate of saving by the wealthy would necessarily lead to increased investment. Note that no one in the academy is making this argument any more.

    There are good reasons for tax reform but growth isn’t one of them.

  • jan

    Ben,

    If “growth,” which encompasses full employment, more production, rising wages and falling poverty, is not the purpose of an economy, while increasing well-being is the purpose of an economy, how can you achieve well being without the meaningfulness of employment and the ability to pay for what one wishes to consume by being appropriately compensated?

Leave a Comment