The voices of Tax Policy Center's researchers and staff
GOP presidential hopeful Ted Cruz’s aggressive plan to shift the tax code from a mostly income-based system to one based on consumption would slash federal revenues by $8.6 trillion over the next decade, according to a new Tax Policy Center analysis. Including interest costs, it would add $10.2 trillion to the debt over 10 years unless Cruz offsets his tax cuts with unprecedented reductions in federal spending. By 2036, Cruz’s plan would add nearly $30 trillion to the debt.
TPC found that the Cruz plan, which would create a flat 10 percent individual income tax rate and replace both the corporate income tax and the Social Security and Medicare payroll tax with a 16 percent Value-Added Tax, would overwhelmingly benefit high- income households.
TPC estimates that in 2017, Cruz would cut taxes by an average of about $6,000, or 8.5 percent of after-tax income. However, he’d slash taxes by an average of $1.9 million for those in the top 0.1 percent (who will make $3.8 million or more), raising their after-tax incomes by 29 percent.
By contrast, Cruz would cut taxes by an average of $46--or 0.4 percent of after-tax income-- for the lowest-income households (who make $23,000 or less). Middle-income households would receive an average tax cut of about $1,800, or 3.2 percent of their after-tax income.
In 2025, the lowest-income households would face an average tax increase of $116, thus reducing their incomes by 0.6 percent, while those in the top 0.1 percent would receive a $2.2 million tax cut, boosting their incomes by 23 percent.
The Cruz Plan
Cruz would collapse the current seven individual tax rates to a single 10 percent rate. He’d repeal the Alternative Minimum Tax, the estate tax, and the 3.8 percent Affordable Care Act tax on investment income for high-income taxpayers. He’d increase the standard deduction from $6,300 to $10,000 for singles and from $12,600 to $20,000 for couples filing jointly.
He’d eliminate all credits except for the child tax credit and the earned income tax credit and all deductions except those for charitable gifts and mortgage interest. However, TPC estimates that only a handful of taxpayers would itemize deductions. Households could deduct up to $25,000 annually for contributions to a new Universal Savings Account, thus for nearly all Americans returns to savings would be exempt from tax. Withdrawals would be taxable, as with today’s Individual Retirement Accounts.
Cruz would repeal both the Social Security and Medicare payroll taxes and the corporate income tax. He’d replace them with a 16 percent Business Flat Tax, effectively a “subtraction-method” VAT imposed on sales (including the VAT) less purchases from other businesses. It would apply to governments and non-profits as well as all businesses, including pass-through firms such as partnerships.
Employers could not deduct wages. Investments would be expensed in the year they are made and interests costs would not be deductible, thus normal returns to investment would be tax free. Employers could continue to deduct their contributions to worker retirement accounts and employer sponsored health insurance.
Multinational firms would pay a 10 percent tax (payable over 10 years) on unrepatriated foreign income. Their future overseas income would not be taxed by the U.S.
Effects on the Debt
TPC’s analysis assumes that people and firms change behavior in response to tax changes, but does not attempt to calculate macroeconomic effects (dynamic scoring). Like other GOP tax plans, the Cruz proposal could increase returns to work, savings, and investment and thus could boost economic growth.
However, unless Cruz could find a way to cut spending to pay for his big tax cuts, potential economic benefits would be offset—or perhaps even more than offset-- by higher interest rates.
Those spending cuts would have to be enormous. For example, the Congressional Budget Office projects that total spending in 2025 will be $5.3 trillion. Just to prevent his plan from increasing the deficit that year, Cruz would have to convince Congress to cut planned spending by 18 percent, or $935 billion.
How could he do that? He could cut projected Medicare and Social Security spending by about one-third. Or he could cut the rest of government (not including interest costs) by two-thirds. And remember, that would only offset the lost revenue from his tax cut. It would not reduce the projected baseline deficit of $1.2 trillion by one penny. Yet Cruz has also vowed to balance the federal budget.
That goal will be even tougher for Cruz to meet since he has also promised to “rebuild” the military and crack down on illegal immigrants, initiatives that would increase government spending. While he has proposed to eliminate the IRS and the departments of Education; Energy; Commerce; and Housing and Urban Development, those changes wouldn’t come close to paying for his tax cuts. Indeed, if he eliminated all domestic discretionary spending, which CBO estimates at about $700 billion in 2025, Cruz would fall more than $200 billion short of paying for his tax cuts. He has vowed to raise the eligibility ages for Medicare and Social Security to 70, but those changes would offset only a small fraction of his tax cuts.
Cruz’s tax plan follows what has been a disturbing pattern this election season: Candidates sabotaging their own interesting and potentially growth-enhancing tax changes by refusing to confront the consequences of the trillions of dollars in revenue they’d lose.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
AP Photo/Matt Rourke