On Cruzonomics

The centerpiece of Ted’s economic plan is a radical revision to the tax code that goes far beyond that of his rivals.  I don’t have the ability to model the proposal to determine its impact on the economy or the deficit, but some of its implications are fairly clear.

The key components of the plan are as follows:

  1.  The adoption of a 16 percent VAT (he denies it’s a VAT, but that’s what it is);
  2.  The abolition of the payroll tax;
  3.  The abolition of the estate tax;
  4.  The abolition of the corporate tax;
  5.  The progressive income tax would be replaced by a flat tax over a specified income threshold; and
  6.  It appears that capital gains and wages will be taxed at the same rate.

The winners and losers from these amendments would be as follows:

  1. Big losers:  The non-working poor; the elderly; and charities.  If you don’t work, you will have to pay the VAT, but you won’t get any benefit from the elimination of the payroll tax.  Charities will lose because the value of charitable deductions will fall significantly.
  2. Big winners:  The wealthy.  Anyone who doesn’t have to use most of his income for consumption is a winner here.  All of the taxes that are paid primarily by the rich are being reduced or eliminated altogether.
  3. A wash:  everyone else.  For working middle-class Americans, the reduction in some of the income tax rates and the elimination of the payroll tax would be offset by the VAT.

On its face, I have to think that overall tax revenues would go down substantially, and that the deficit would rise pretty dramatically.  I don’t know that for sure, however.  I also can’t determine how Cruz proposes to tie Social Security benefits to contributions in the absence of the payroll tax, although I would have to applaud his efforts to eliminate the link between work and the funding of the welfare state.

This plan appears to assume that the biggest economic problem facing our country is a lack of saving and investment.  If you had asked me about that 20 years ago, I probably would have agreed.  We live in an environment in which corporations are piling up mountains of cash due to inadequate aggregate demand, however, so I think the assumptions behind the plan are out of date.  Fortunately, it is too radical to pass even in a Republican-dominated Congress.