Cruz Plan Falls Flat

Most every conservative loves Ted Cruz. You just don’t hear criticism of him from talk radio or TV’s talking heads. He does well in debates, is smart and has risen some in the polls.

However, before getting everyone’s endorsement, you might want to know a little bit about his tax plan.

Christopher Chantrill writes in the

Ted Cruz has unveiled his Simple Flat Tax plan that includes a single low, low personal income tax with a single rate of 10%. He also wants to eliminate the federal corporate income tax and the employee payroll tax, and replace them with a 16% Business Flat Tax. But according to Larry Kudlow and the Tax Foundation, he is really talking about a value added tax, a VAT. Here is what the Tax Foundation says about the Cruz plan.

It’s actually pretty simple: there’s profits that go to shareholders, and there’s wages, salaries, and other compensation to workers. Both get taxed at the same rate: in this case, sixteen percent.

In that sense, a subtraction-method value-added tax is actually just a simple combination of a sort of corporate income tax and an ordinary payroll tax. (Fittingly, Senator Cruz’s plan uses this VAT to eliminate the corporate income tax and the payroll tax.)

In a way, you could say that nothing changes. Corporations still get taxed on their profits and workers will still get taxed on their labor; that’s because under Cruz’s plan a business gets taxed on its gross revenue less costs like stuff bought from other businesses and equipment to expand the business. And under his plan labor costs wouldn’t be deductible.

But there are three big differences between today’s world and Cruz world, and they might transform the labor market.

First, if a business is taxed on its labor costs then the advantage for hiring labor “off-the-books” goes away. Think of the possibilities with respect to illegal immigrants.

Second, there is health insurance and other “benefits.” As I see it, in Cruz world these would be taxed like any other labor expense. Same thing for corporate pensions. All of a sudden it would pay businesses to offload all the benefits and just pay their employees in cash.

Third, the removal of the payroll tax will reduce the marginal tax rate on nearly all workers and particularly low-wage workers struggling to get off welfare. Right now, the marginal tax on welfare recipients that work is about 50 percent, because every dollar they earn is taxed with payroll taxes and also results in reduction in their welfare benefits.

On top of that, I worry about the end of the link between the payroll tax and Social Security; it might make it more difficult to reform Social Security into a real savings program. Democrats will start agitating for more taxes of business to pay for higher Social Security benefits. I don’t like that at all.

These are pretty dramatic changes in the world of work for wages, but Cruz isn’t talking up the drama. He is just saying that there is nothing to see here but his Simple Flat Tax plan. Not exactly, Ted. Not when you are talking about the most significant change in taxes on work in my lifetime.

This sort of politics flying under the radar bothers me, although I understand why it is necessary. In today’s high-tax high-benefit state almost any policy change is going to have big winners and losers, so you want to put the losers to sleep, as in “you can keep your doctor.”

I would like a world in which we walk into the future with our eyes open. That would mean the ability for culture leaders to talk to the American people before the politicians got to issue their tax plans. We know why this is impossible: liberals. Jonah Goldberg:

Hollywood is liberal. The music industry is liberal. The fashion industry is liberal. Publishing is liberal. The mainstream media are liberal. Silicon Valley is liberal. Believe it or not, most corporations and the overwhelming majority of charitable foundations are liberal.

Since the first thing that liberal babies learn in their cradles is how to trash conservative ideas as racist, sexist wars on women, conservative ideas don’t get much of an airing in America. And that means that politician Ted Cruz has to fly his ideas under the radar.

Larry Kudlow doesn’t like Cruz’s VAT tax, whether it is flying under the radar or not. When taxes are paid by businesses, he warns, “the true costs for workers and consumers are hidden” and thus are easy for politicians to raise.

But if you ask me, the main problem with the Cruz Business Flat Tax is that it will dramatically change the rules for business. Austrian economics tells us what happens next: a period of adjustment for the liquidation of the malinvestments revealed by the new tax regime. After all, some businesses will benefit enormously from the change. Others will go to the wall.

That’s why I predict that the first result of the Cruz tax reforms will be a short, sharp recession. Only then will the boom resulting from lower marginal taxes rates begin.

I hope other candidates will point this out, because no one is talking about this right now and it needs to be examined.

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