Ted Cruz’s plan for overhauling the federal tax code would mean a $3.6 trillion tax cut, according to an analysis released Thursday morning by the Tax Foundation.
That lost revenue, however, would be offset to a large extent by increased economic growth in the Tax Foundation’s model, which is based on the model used by the U.S. Congress to estimate the cost of tax legislation. Including the revenue feedbacks from the growth that Cruz’s plan would spur, the tax cuts would add $768 billion to the deficit over 10 years.
The Texas senator’s proposed tax reform, laid out in a Wall Street Journal op-ed published online Wednesday night, is as aggressive a plan to cut and simplify taxes as any of the supply-side plans introduced by other Republican presidential hopefuls.
Cruz would get rid of the current federal income tax code, which features a 39.6 percent top rate, and replace it with a 10 percent flat tax.
He would also eliminate the current corporate income and payroll taxes, and replace them with what he calls a “Business Transfer Tax,” which tax analysts would also describe as a value-added tax.
In its broad outlines, Cruz’s plan is similar to the one proposed by Kentucky Sen. Rand Paul, who is also vying for the support of fiscal conservatives in the GOP primary.
By shifting taxation away from corporate profits, Cruz’s plan would increase the rewards for companies to invest in their businesses, while eliminating credits and deductions that distort incentives. “The taxation of investment would significantly decline, which would greatly increase incentives to save and invest,” the Tax Foundation analysis said.
Because of the value-added tax, taxes would fall more heavily on consumption than on investment and work. Overall, the impact would be to increase investment by over 40 percent, and generate nearly 5 million new jobs.
Because the plan shifts revenue away from the progressive income tax and from corporate profits that benefit owners of companies, Cruz’s plan would tilt the tax code in a regressive direction, cutting taxes for the rich and raising them for lower-income earners. But he mitigates that effect by boosting the income that isn’t taxed, claiming in his op-ed that “a family of four pays nothing on their first $36,000 of income.” He would also expand the earned income tax credit, an antipoverty provision that subsidizes work for low-income earners.
Even with those provisions, the biggest tax cuts would go to the top 1 percent of earners, who would see a boost in their after-tax incomes of about 30 percent. Accounting for the extra economic growth in a dynamic analysis, average after-tax incomes would go up by about a fifth, with a 15 percent increase in the earnings for the lowest decile of earners.
