Why Ted Cruz is Dangerous: Econ Edition

It’s obvious that our presidential campaigns too often focus on non-substantive issues. It is amazing that so little attention is paid to the explicit tax plans offered by the candidates, particularly the Republican candidates, since if they were to be elected, they would presumably have some chance of actually passing something.

In this regard, there is no doubt that Ted Cruz is an exceptional candidate. The conservative-leaning Tax Foundation has excellent and detailed account for all of the major Republican contenders' plans. And all of them amount largely to the same thing: a flat or two-tiered income tax rate, significant changes in corporate and capital taxation, a larger initial exemption, and (of course) abolition of the estate tax. There are minor differences, of course. But the Tax Foundation agrees on one thing: they’d all add massively to the deficit. For example, they estimate Donald Trump’s tax plan would cut revenues by over $10 trillion – yes, that’s over a $1 trillion deficit every year.

All of them, that is, except Ted Cruz’s. Cruz’s plan, with the generous assumptions about economic growth that the Tax Foundation gives to all the plans, only reduce revenues by $768 billion over 10 years. And yet at the center of Cruz’s proposal is a flat 10 percent income tax, abolishing all deductions except charity and home mortgage interest, and providing for an expansion of the exemption and child tax credits. Thus, Cruz is prepared to campaign on a 10-percent flat tax, and to promise that he is not going to explode the deficit doing it.

Magic? No. The true centerpiece of Cruz’s plan—and the reason why he is able to add revenue—is a 16-percent “business transfer tax, or subtraction-method value-added tax” that will replace the corporate income tax. His rival, Marco Rubio, has already tried to saddle Cruz with the idea that he is introducing a VAT tax, but Cruz denies it. And, according to the Tax Foundation, Cruz is (kind of) right. In fact, what Cruz is proposing is described as a kind of hybrid tax, which will apply to both business transactions (like the VAT does) and to business payrolls—basically, to anything a business spends, other than investment and profit.

I do not know who developed this plan, but it is an extraordinary act of political cleverness, for two key reasons. Cruz knows that in fact he must look like he is cutting taxes, while still managing to raise enough revenue to avoid charges of irresponsibility. And he has found the formula to do so, by proposing a tax that is mostly (a) invisible, and (b) incomprehensible. Since the tax will be collected on the business end, most people won’t see it. It will be like the “invisible” half of FICA and Medicare taxes that employers pay. It will not suddenly appear in consumption transactions as a “new tax.” Businesses will pass it along, of course, but people won’t see it. And so they won’t get as mad about it. (Never mind that most economists think non-transparent taxes are the worst kind economically, because they don’t properly incentivize behavior – politicians like them!)

They especially won’t get mad about it because it will be incomprehensible to many people. I do not know how Cruz’s opponents will manage to get their opposition to it in a 30-second sound bite. Instead, Cruz will make it about opposing his 10% flat tax. Cruz has managed what seemed impossible: follow the standard line of “simplifying the tax code” and at the same time, present something complicated enough to raise revenue without people figuring out what is happening.

And of course, the cleverness of this proposal is exactly what makes it so dangerous. It isn’t “clever” in the sense of accomplishing anything other than the usual Republican playbook: huge tax cuts for the top brackets, a few peanuts for the bottom brackets, and virtually no real change for the vast majority of working people in the middle. But it is clever in the sense that Cruz has made opposition to it much more difficult. If this is how he works policy-wise, those who value our system of progressive taxation as fair and consistent with the distributive justice required by Catholic Social Teaching should beware.

David Cloutier is an associate professor of theology at the Catholic University of America and the author of Walking God’s Earth: The Environment and Catholic Faith.

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