Whaddya Think Of Ted Cruz's Flat Tax Plan?
From the WSJ:
• For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income.• Above that level, a 10% flat tax on all individual income from wages and investment.
• No death tax, alternative minimum tax or ObamaCare taxes.
• Elimination of the payroll tax and the corporate income tax, to be replaced by a 16% Business Flat Tax. This would tax companies' gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. Simple, efficient, fair.
• A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.
Today, the U.S. taxes American producers that export goods, but it imposes no burden on imports. My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods. By shifting to a territorial tax system that doesn't tax income earned overseas twice, my plan will reverse the incentive for U.S. companies to relocate overseas. Instead, businesses will be relocating to America.
Giant corporations will lose their loopholes and instead pay the exact same Business Flat Tax as small businesses. And billionaire hedge-fund managers will no longer pay a lower rate than working men and women.
To keep the tax burden fair, my plan includes a $10,000 standard deduction and a $4,000 personal exemption, which means a family of four pays nothing on their first $36,000 of income. It ends the payroll tax altogether (while maintaining full funding for Social Security and Medicare). It maintains the current child tax credit and expands and modernizes the earned-income tax credit, with greater reforms to prevent fraud and encourage marriage.
The Simple Flat Tax also keeps the current deduction for all charitable giving, and includes a deduction for home-mortgage interest on the first $500,000 in principal.
The 10% income tax covers ordinary income and investment of all varieties. The virtue of a single tax rate is that the rate doesn't rise as people work more and invest more. This means better incentives to increase output, and fewer distortions. Compliance costs are minimized and capital flows to where it is most efficient--creating the most jobs--rather than where the tax burden is minimized.
To get companies investing in worker productivity again, the Simple Flat Tax allows full and immediate expensing of business equipment, which will especially benefit heavy industry, mining, energy, farming, ranching and manufacturing.
My plan also improves treatment of savings by creating Universal Savings Accounts. Any adult can save $25,000 a year with taxes deferred, like in an IRA, and savers can use those funds at any time, for any purpose. This will help create the next generation of capitalists by encouraging younger workers to save and invest.
According to the nonpartisan Tax Foundation, my tax plan would boost the size of the economy above current projections by 13.9% over a decade, add 4.9 million jobs and increase average wages by 12.2%. Every income group would get a double-digit wage increase.
Along with other pro-growth policies--repealing ObamaCare and Dodd-Frank, rolling back burdensome regulations, restoring sound money and restraining spending--the Simple Flat Tax will help the economy soar again.
A commenter at the WSJ:
Bruce Barr
I agree with the principle entirely. But, it will never happen. Too many CPAs put out of work, and let's not even get into what the tax Attorneys will try and sabotage. Imagine, cutting the IRS employment bloat by 1/3, never happen. Wasn't it Marx who said that a bureaucracy will do anything to insure it's existence. Nope, I'd say we're stuck with mediocre economic gains and insolvency as a Nation.
I think there's a great deal to be said for simplifying the tax code.
However, I'm not so sure about his second sentence:
> Imagine, instead of President Obama’s income stagnation, average wages rising 12.2% over the next decade.
Compared to income stagnation, 12.2% is better, but 12.2% over ten years? That's income stagnation, or worse depending on whether he thinks that 12.2% is before or after inflation.
But also, given the current economy we have, I see nothing in his plan for growing the economy that would suggest businesses would give any amount of that growth back to their employees as wage increases. They aren't doing that now.
There is a great deal I like about the plan that's written up at the WSJ. I am glad you posted a link to it here, and I hope (and doubt) that pundits in the media will address it seriously, but I hope they do.
> Above that level, a 10% flat tax on all individual income from wages and investment.
Is he saying he is going to get rid of the long term capital gains rate? If so, that's terrific. If not, well the devil's in the details.
Wish he would get rid of the home mortgage, but perhaps that is too much to figure out even for a supergenius like Cruz.
And I wish he would address a basic income which seems to be economic policy that Friedman economists as well as Krugman economists seem to agree is a good thing, and may be required as we deal with "the end of work" in the robot age.
jerry at October 29, 2015 11:35 PM
I'll add a critique that was relevant when Steve Forbes proposed a back of the envelope flat tax, which was that the Forbes flat tax didn't do away with accountants and CPAs.
Once the income was determined, Forbe's flat rate made the calcuation of tax simple, but income itself could still be "adjusted" in all sorts of ways by clever schemes.
jerry at October 30, 2015 12:10 AM
Real wages have been declining since well before Obama, so an actual increase would look pretty good to most Americans.
MarkD at October 30, 2015 3:49 AM
There is no such thing as a simple flat tax. Proposing a rate is the easy part. As jerry eluded to: what is the rate applied to? Income and revenue are not the same thing. Why do charities and housing get a break? What about medical costs?
And this does nothing to address all the different state and local taxes.
Goo at October 30, 2015 5:27 AM
I love it with one exception. Everyone should have to pay some tax, even a family of four with an income of 36,000. It doesn't have to be much, but everyone needs to have skin in the game.
Beth Donovan at October 30, 2015 5:28 AM
It's ridiculous to argue that the main opposition to this will come from CPAs or the IRS.
The main opposition will come from those billionaires who aren't paying the same percentage tax as their secretaries, or those big companies that are exploiting the existing loopholes.
Andrew at October 30, 2015 5:43 AM
I agree with Beth, if lots of people are exempt from taxes (and lots aren't), it creates a two-tiered system with some people paying for others. I think it devalues the system and makes a swath of people not care how the money is being spent (and always requesting more uses of that money).
I also wonder how existing stuff would be handled. Would my Roth IRA withdrawals still be tax free in retirement, for instance? I put the money IN because the growth will be tax free, but I don't know how this is handled.
Obviously, they can't give every scenario, but what about families of 2 or 3, or seven? At what point do they pay taxes?
Do the changes in payroll taxes impact Social Security? How about how benefits are calculated?
I'd also like to know about exemptions for state taxes. Right now, folks in high-tax states get to write that off their federal tabs (imagine if people in CA couldn't do that!). I'd like to see this go away, but I don't know what happens to it in this plan.
Regarding Goo's point, it doesn't address the state and local taxes, but this is a federal-level plan, and nothing at the federal level CAN address state/local taxes. It does, however, add to the point that these are minimum rates proposed.
Shannon at October 30, 2015 5:49 AM
We've gotten poorer for the last 4 years (despite raises). I'd LOVE to see some wage growth!
Something has to be done with the tax system. This sounds "fair". I'm more in favor of a flat 10% federal sales tax, though, personally. Mostly because it would mean my family personally would pay less taxes that way. But I'd take this over the current mess, for sure.
I too doubt it will ever actually be changed. Its too huge and oversweeping. Paradigm shifts are rare, and too many people make their living by understanding the tax code for others.
momof4 at October 30, 2015 5:50 AM
Jerry, There is nothing the fed can do to make companies increase salaries. Only a shortage of workers can do that.
I also agree with Beth, exempting 40% of the population from the income tax is a recipe for eventual failure. Of course we are already there.
Personally I would much rather see a national sales tax. It slots in to current law much better. All of your tax free plans stay that way but no longer get preference because the income tax is 0 for everyone. Compliance is much easier since there are many fewer businesses than there are customers or workers. A 10% sales tax gives everyone skin in the game and generates the same revenue without the compliance costs while minimizing distortions. The biggest worry is having both a sales tax and an income tax.
I fanatically oppose a VAT tax. The VAT is the only way to get taxes above 20% of GDP and they are economy murderers. A VAT tax could easily end the US in 50 years.
But Cruz is right that we need to go to a territorial tax system, that we need to reduce compliance costs, and that we need to tax imports the same as domestic production.
Ben at October 30, 2015 6:13 AM
Here's Cruz in action:
http://thefederalist.com/2015/10/28/epic-watch-ted-cruz-completely-dismantle-cnbcs-debate-moderators/
Amy Alkon at October 30, 2015 6:14 AM
A 16% gross receipts tax would be a catastrophe for businesses that provide mostly services (think about the entire high tech industry, as just one of many examples). There is a huge difference between taxing profits (what you have left after expenses) and taxing gross receipts. 16% tax on gross receipts would put many businesses out of business. Whoever is advising Cruz is an idiot.
Joe Malone at October 30, 2015 6:21 AM
I came to say what others have already stated:
Everyone needs to have some skin in the game; even if you only earn $100 a year, you need to pay something.
Sure, it is harder for that family of 4 to pay their share than for the wealthy. But, so what? Maybe by everyone paying tax maybe they will be less likely to vote for the politician's who promise them "free" stuff.
Sadly, I also agree with WSJ commenter, Bruce Barr, in that it isn't going to happen. There are too many people who are so invested in the current system that will cause them to fight even the slightest change; there is no way we could accomplish a massive overhaul.
charles at October 30, 2015 6:27 AM
There is nothing the fed can do to make companies increase salaries. Only a shortage of workers can do that.
Hmmmm...I wonder how the vast numbers of undocumented migrants have modified that?
Oh, yeah, there's a reason why the Chamber of Commerce loves undocumented migrants: they drive down wages.
Keep that in mind when you hear candidates speak. What is their stance on open borders?
I R A Darth Aggie at October 30, 2015 6:56 AM
My preference would be for a consumption-based tax, but this could work. A few thoughts: Jerry has a point about wage growth, but the underlying problem is that labor is very much a buyer's market now. As long as companies are getting 1000 applications for every job opening, wage growth isn't going to happen. What has to be done there is to start removing barriers to economic growth. There are a lot of things that have to be done beyond just the tax system, but one of the points of Cruz' plan is that the current tax code, and the IRS' use of it to maintan a reign of terror, is itself an economic activity inhibitor.
Yes, I think Cruz' plan eliminates the long-term capital gains preferential tax rate. That's probably a good thing. What it does not do, as near as I can tell, is eliminate the double taxation of dividends.
Like Joe Malone above, I worry about the effects of pegging the business tax to gross receipts. I fear that it wil put a lot of struggling and low-margin businesses (which includes most small businesses) under, if it makes them pay taxes that exeed their profits. I understand the motivation; it's a lot harder to play accounting games with gross than it is with net. But if it suppresses start-ups, it may have the opposite of the intended effect; crony capitalists and monopolists would happily accept it as the price of keeping competition out. I do like the ability to immediately write down capital expenditures, instead of having to stretch them out over lengthy depreciation schedules which often exceed the useful life of purchased equipment.
I agree with the commenters who state that there needs to be minimum rate on the first dollar, ever if it's only a fraction of a percent. Everyone needs to be reminded. I would go further and say that welfare and government transfer payments should be counted as taxable income. If someone is pulling down $60K in benefits, there is no reason why they should be getting a tax free ride when working people who make less are having to pay taxes.
Despite the fact that I'm a homeowner who benefits from the mortgage interest deduction, I see the necessity of eliminating it eventually. I think it would have to be a phase-out over some period of time; there would be too much of an economic impact on the housing market (which is already very depressed in most of the country) to just do it at one whack.
All of the exemption, deduction, and bracket amounts need to be either indexed to inflation, or just have it written into law that they go up by, say, 3.5% per year. Doing the latter would eliminate the government's ability to play games with the CPI to make it look like there's no inflation, like they are doing now.
Cousin Dave at October 30, 2015 6:57 AM
For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income.
How about for a family of one, or two?
Or, for that matter, five or six?
Kevin at October 30, 2015 9:19 AM
12.2% wage increase over the next ten years is less than half the rate of inflation, which, for all I know is what Ted Cruz has in mind. (When I was in the Army, our annual raises were 1% less than the rate of inflation, which is exactly what Congress intended.)
Also, capital gains is income. As such, it should be taxed like income. And don't hand me any cock-and-bull about how that deincentivizes people to invest. Since work is taxed higher, then obviously the higher tax rates deincentivize people to, you know, work.
The fact that capital gains is money without working for it is sufficient incentive for people to invest. Which would you rather get? Money you work for taxed at 30%? Or money you didn't work for taxed at 30%?
Patrick at October 30, 2015 9:19 AM
What I would do is ax all corporate taxes.
And all requirements that business provide health care.
Then I would charge a flat 25% income tax on all individual earnings.
5% to the fed, 5% to the state, 5% to the county, 5% to your local municipality (which would go to the county if you live in an unincorporated area) 5% to a mandatory retirement account.
This would be on ALL earnings, not just income. But the cash value of any heath insurance offered by employers, the cash value of used expense accounts, stock options, interests payments on bank accounts and net earnings on investments.
Property taxes would be based on unimproved land values, and it would be illegal for cities, counties, states, or the federal government to offer tax breaks on property taxes.
There would be no tax breaks, no tax credits, no loopholes, no exceptions, no deductions for charitable donations.
No VATs, 0% taxes on foodstuffs such as sugar, flour, raw meats, cheese, produce, ie all unworked foods and staples.
Packaged, precooked things, such as seasoned raw meats, deli meats, corndogs, tv dinners, hot pockets, fast food and other restaurants at 10%.
Consumer goods taxes should be set by local municipalities.
And no federal luxury taxes ever, all they do is kill jobs
lujlp at October 30, 2015 9:25 AM
Exactly.
When you're only a receiver of funds from the government, your worry is getting your funds.
When you have "skin in the game," you worry about how the government spends your money.
I doubt you could sell a flat tax to the Democrats in Congress, even if a flat-tax president wins in a landslide.
And, if Obamacare taught us anything, it's that for a program to last beyond the president or Congress that passed it, it needs to be bipartisan. So you're going to have to compromise and include some tax brackets and some degree of wealth transfer in the final product.
Our current tax code is 73,000 pages long. Simplifying it with fewer exemptions and a more straightforward implication will only benefit us in the long run.
Conan the Grammarian at October 30, 2015 10:02 AM
Personally, I prefer a consumption-based tax (not a VAT!). That way consumption is taxed, not enterprise or savings.
Our current tax code discourages savings by taxing interest income and discourage enterprise by elevating the taxpayer into higher bracket. Meanwhile consumption is encouraged with the write-off for state sales taxes. That's the fault of the Keynesians and their demand-side economics (where ludicrous ideas like stimulus bills come from).
But a consumption tax won't sell as it will be seen as putting the tax burden on consumers and letting corporations of the hook.
Conan the Grammarian at October 30, 2015 10:08 AM
I'm open to the ideas here, but I've looked on Cruz' website as well as at half a dozen analyses of what his tax plan means, and I can't find one explanation for the "family of four" benchmark.
What does this mean for people with fewer children? More children? No children? Single people?
There are more single people in America than married people — much less families of four.
Can anyone spell out for me what Cruz intends to do for the majority?
Kevin at October 30, 2015 10:22 AM
Ben, Cousin Dave,
> There is nothing the fed can do to make companies increase salaries. Only a shortage of workers can do that.
I agree, which is why I noted that in the immortal words of
Commander Stinger Jordan,
"Cruz, son, your ego is writing checks your body can't cash."
And yes, cutting down on illegal immigration, H-1B visa bullshit is what I want to hear from a candidate along with plans on how to return jobs and companies to the US AND how to deal with a very likely "end of work" scenario.
jerry at October 30, 2015 10:33 AM
Kevin,
> Can anyone spell out for me what Cruz intends to do for the majority?
Exactly! Which is one reason I'd like to see home mortgage deductions go away.
jerry at October 30, 2015 10:36 AM
Exactly! Which is one reason I'd like to see home mortgage deductions go away.
Yup. And "Papa's little deductions" too.
Kevin at October 30, 2015 11:10 AM
"And yes, cutting down on illegal immigration, H-1B visa bullshit is what I want to hear from a candidate along with plans on how to return jobs and companies to the US AND how to deal with a very likely 'end of work' scenario."
Y'know... I used to be a free-trader. And I stil am, with respect to trade between countries that are economically similar (and have reciprocal policies to ours). But that's not what is happening now. What's happening now is that American workers are being put out of jobs by products made in countries where workers work in conditions of near-slavery. Or, as Jerry points out, workers who are brought in on H-1B visa under what amounts to indentured servitude. (And the Americans they replace are compelled to train them...) Guess who has been out in front on this issue? Trump. There, I said it.
Free trade wasn't supposed to mean economic suicide. If that's what is happening, it needs to be fixed. At some point you have to put philosophy aside if it gets in the way of what works. This doesn't mean the comeback of $50/hour unionized jobs for unskilled workers; we can't afford that. But it does mean that the American worker should not have to compete with foreign workers who are essentially enslaved.
(As for the "end of work" scenario... I think that's very premature at this point. I don't expect to see it come about in the lifetime of anyone who is alive today.)
Cousin Dave at October 30, 2015 11:11 AM
Tax wealth, not income.
Gog_Magog_Carpet_Reclaimers at October 30, 2015 11:49 AM
Nope. Encourage the building of wealth through tax policies designed to let people save their money.
Conan the Grammarian at October 30, 2015 12:23 PM
I think you guys are missing what revenue less costs means. This is the same profit tax as we already have. It is not a revenue tax. But I will admit this was poorly written.
Also, the $36,000 exemption for a family of four is 2x $10k exemption per adult plus 4x $4k per person. So a family of one gets $14k exemption. A family of two adults gets $28k. But a family of one adult, one child gets $18k. One of three, two adults one child, get $32k. Yada yada.
As for a wealth tax. That's a great way to make sure we have the powerful but no wealthy. I.e. concentrate power into a Washington based minority. Which ends much of how the US works.
Ben at October 30, 2015 1:08 PM
Ben..."I think you guys are missing what revenue less costs means. This is the same profit tax as we already have. It is not a revenue tax. But I will admit this was poorly written."
It's not a revenue tax, true, but it does not appear to be a profit tax, either. It is a value-added tax, where value-added is defined as revenue minus purchases from other businesses....whereas a profit tax also subtracts money paid to employees for their services.
And if that's the real intent, there's a big problem with this. Consider a company that now has:
Revenue $1,000,000
Purchased Materials $400,000
Wages $500,000
Pretax Profit 100,000
With the VAT, they will be paying the 18% rate on $1 million minus $400K purchased materials, which is $600K. Their taxes would go up considerably, as would generally be the case for employee-intensive businesses.
Also, it is not clear that applying the VAT to imports is really practicable. To assess the VAT on a container of products from Country X, we would have to take their word for the purchased-materials content. How likely is that to be trustable?
David Foster at October 30, 2015 2:14 PM
It's impossible to say for sure how much money is stashed away in offshore tax havens, but guesstimates by World Bank and such range from $16 trillion to $32 trillion, of various countries' money. That represents the very life-blood of the world's economies. Bringing that money home and placing it back in use would eliminate the need to pay ANY taxes.
jefe at October 30, 2015 3:37 PM
I'm a tax professional, and I would vote for Cruz' plan. But if I were writing it myself, mine would be somewhat simpler than his. Here's my plan.
1. Eliminate all payroll taxes other than the income tax (which are horribly regressive because they hit even people making so little they don't owe income tax).
2. Increase the personal exemption (now $3,950 for 2015) by a factor of ten, while continuing to index the amount to inflation. This will make it around $40k per person -- so the bottom 70% or so of wage earners will no longer have to file or pay income tax. (When the income tax was introduced, they promised that only the top 5% would ever have to pay it.)
3. Eliminate the "floors" that prevent you from deducting the full amount of each thing that appears on Schedule A. Except --
4. Eliminate the mortgage interest deduction, and the ability to exclude tax on gain from the sale of a home. Both of these are subsidies of the rich by the poor and therefore unacceptable.
5. Eliminate the lower tax rates for capital gains -- but for all property held long-term, increase the owner's basis in the property by an inflation factor (so he only has to pay tax on real gain and not on inflation).
6. Increase the tax rate for all brackets by some percentage such that the entire package of changes *increases* revenue by just enough to make Social Security and Medicare solvent. I estimate that this percentage increase will be less than 10%.
jdgalt at October 30, 2015 3:53 PM
I agree David that if this excludes wages as a cost it is a terrible plan. It would massively drive mechanization and force the unskilled out of the labor market. And I agree applying taxes to foreign goods is filled with problems.
Jefe, did you ever wonder that that is why that money is hiding off shore? Like most mirages it disappears the moment you try to grab it.
And Jdgalt, you can never make SS and medi solvent. There will always be a desire to increase payouts. Also, without a VAT you cannot increase taxes above 20% of GDP. When you raise taxes people change their behavior and you end up with the exact same percentage of GDP. Increasing taxes will not increase revenue. So if you want SS and other programs to become solvent you must cut costs.
Ben at October 30, 2015 4:44 PM
1) The fixed tax rate should be FIXED and gradually reduced year by year. There is no point in having a flat tax if the government is able to increase the rate (like the debt limit) ...
2) The current tax system has been completely detached from the things it is actually paying for. Citizens should know how much of their taxes are for Education, Health care, Military, Debt Interest, ad nauseum.
Lower the taxes and let each citizen pay for the services they truly want or stop paying for the services they don't want.
It's the only way to eliminate the many boondoggles that are easy to hide in the huge pool of tax revenue.
EarlW at October 31, 2015 2:39 PM
Arguments about taxes are the closest thing to fruitless Internet ranting I can imagine. Why? Because most of those arguing don't know anything about money other than somebody is getting "theirs".
They have no idea why some people make lots of money and they don't, that "money" is NOT JUST CASH.
They're so easily confused they didn't even know they hated those racist bastards, the Dukes of Hazzard, until CNN told them they did.
Meanwhile. This isn't going away as long as there is pork to be had - and until the number of people that think money comes from the government approaches zero.
Radwaste at November 1, 2015 1:33 AM
Even if the tax plan eliminates some need for CPAs as far as taxes go, companies will still want to know how they are doing financially, have accurate job costing, and banks will still require financial statements and reviews/audits for any loans. There will still be plenty of jobs for accountants. Where I work, we also have to provide audited/reviewed financials for most of our contractor licences in various states. I would like to see the tax codes simplified though; it's ridiculous to have to hire a professional (or buy a program) to do your personal taxes.
TempestTcup at November 1, 2015 5:33 AM
Cruz proposes: • Above [the first $36,000 of income], a 10% flat tax on all individual income from wages and investment.
Someone with an income of $200,000 would pay $20,000 in taxes and someone with an income of $60,000 would pay $6,000 in taxes. The person with the income of $200,000 has a greater ability to pay than the person with the income of $60,000; therefore he/she pays more - $14,000 more -- in taxes. So Cruz -- and anyone else who supports a flat tax rate agrees with Marx (and other socialists, and Blanc): from each according to his ability. A flat tax rate isn't as progressive as progressive tax rates but it is still progressive taxation: the more you make, the more you pay in taxes. You are paying according to your ability to pay.
The same argument that flat tax rate supporters use against progressive tax rates -- that progressive tax rates are unfair because they "punish people for their success" -- can be used against a flat tax rate. In the example above, the person earning $200,000 is being "punished" -- to the tune of $14,000 -- for being more successful than the person earning $60,000. The only way to avoid "punishing people for their success" is to have a flat tax: the person earning $200,000 and the person earning $60,000 would both pay the same amount in taxes.
JD at November 1, 2015 5:32 PM
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