Ted Cruz And The Inconspicuous VAT

This article can also be found at Tremr.

Ted Cruz is a man with a plan. A tax plan, that is. His plan is “concrete and detailed,” and involves tax cuts like any Republican voter would hope for. He wants to abolish the IRS – an idea many Americans could rally behind – and to create jobs and increase economic growth. Upon first glance, the plan seems reasonable.

Nevertheless, economists have not reached a consensus on his plan. Some are convinced the plan will thrive, while others believe it will eventually come crashing down in flames.

According to his campaign website, Cruz’s plan would reignite growth of the economy via fundamental tax reform, or what he calls the “simple flat tax.” The current seven rates of personal income tax will be consolidated into a single 10% rate, through which he asserts that lower and middle-income people will have better opportunities. For businesses, corporate income tax will be eliminated and replaced with a 16% “business flat tax.”

Through his plan, Cruz maintains, the simple flat tax will boost gross domestic product by 13.9%, increase wages by 12.2% and create over 4 million jobs in the first decade. Doing one’s taxes will eventually be such a simple task that it can be completed on even the smallest smart phone screen. Through the business flat tax, businesses would deduct capital purchases immediately and pay a 16% rate without having to subtract from wages.

The plan would also, in theory, reward people for self-sustainability rather than consumerism, consequently leading to economic growth.

But in reality, Cruz’s master plan may not play out as he asserts, or even play out at all. The “business flat tax” is actually code for what is internationally known as a “value-added tax” (VAT). This means that taxes are imposed on a company in every stage of production, and they are passed along until they ultimately reach the consumer, who pays the tax through the price of the good. In essence, 16% of each product purchased would end up going to the government in the form of the VAT.

The unsuspecting consumer, however, will for the most part remain blissfully unaware of the VAT, as the plan is designed to hide the percentage of money that will ultimately go toward the government in taxes.

Cruz does not refer to his plan explicitly as a VAT for a very specific reason: conservatives do not trust VATs and they argue that it might set the stage for higher taxes in the future, should a democrat take office again. They simply see it as another way for the government to impose more taxes on people.

The plan could also end up giving poorer people the short end of the straw in the long run. The Tax Policy Center says that the plan could end up cutting taxes by $8.6 trillion, and as a result “poor households could see lower incomes by 2025.” It could also increase the average federal tax burden for the bottom fifth of Americans by .6%, while the top 1% would receive a 14.1% cut. In addition, the plan has invoked general concern about the deficits it may create.

Although Cruz has expressed an interest in abolishing the IRS, his plan would likely still require a significant amount of monitoring, meaning the IRS would still be a necessity.

Cruz likely had good intentions and dreams of economic growth upon creating his tax plan, but there are too many drawbacks associated with it that he just hasn’t addressed. VATs work in places like Europe in part because they purposefully put a lower burden on poor people, an idea that Cruz hasn’t proposed. Under his plan, the prices of goods could potentially increase by 12% for everyone, regardless of socioeconomic class.

Perhaps the component that will cause the most backlash, however, is the element of secrecy that Cruz employs, as the tax would be hidden in the price of all products. As the Washington Post puts it:

“If the United States is to have a VAT, it should be adopted in the light of day, not snuck through as a ‘business tax.’”

VATs might work in another time and place, should Cruz apply significant transparency and take into more consideration socioeconomic class, but as it currently stands, his plan just doesn’t measure up.

Photo courtesy of The Fiscal Times

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