By James Kwak

I haven’t been commenting on Republican tax plans this season because, well, it takes a lot to impress me when it comes to absurd tax cut proposals. Ted Cruz has done it.

The major components of Cruz’s plan amount to this:

• A flat 10% tax on individual income (labor and investments)—down from top rates today of 43.4% on labor and 23.8% on capital gains and dividends
• No payroll taxes (15.3% for most people today), corporate income tax (average rate about 13% today), or estate tax
• A 19% value-added tax (16% of gross business receipts, including the tax)

There are two big things that are crazy about this plan.

The first is that it eliminates an enormous amount of tax revenue: $3.6 trillion over ten years, according to the right-wing Tax Foundation’s “static” analysis—that is, before the growth fairy waves her magic wand. To put that in context, that’s more than we plan to spend on the military over the next ten years.

The second is the astonishingly naked handout to the very rich:

60% of the tax cut goes to the top 1%.

That leaves only 40% for everyone else.

This number is so embarrassing that you won’t find it in the Tax Foundation’s analysis. Unlike the Tax Policy Center, which typically shows how the dollar impact of a tax proposal is distributed across the population, the Tax Foundation only provided the percentage impact of Cruz’s plan on the after-tax income of each income group. What they tell us is that the tax cut will increase after-tax income by 1.2% to 1.5% for households between the 40th and 60th percentiles; by 29.6% for households above the 99th percentile; and by 9.2% for all households on average. But with a little arithmetic we can figure out the missing number.

Thanks to the World Top Incomes Database, we know that the top 1% receive about 21% of all income, including capital gains. The average total federal tax rate today is 19.8%; the average rate for the top 1% is about 30%, and the average rate for everyone else is about 17%. So for every $100 of pre-tax income, the 1% get $21 and the 99% get $79; after taxes, the 1% get $15 and the 99% get $65, for a total of $80. Since after-tax income goes up by 9.2% on average, total after-tax income goes up by about $7.40 in Ted Cruz’s world. But for the 1%, after-tax income goes up by about $4.40—just under 60% of the total.

Why this is should be obvious. A value-added tax is a tax on consumption. So if you’re in the middle class and need all your income for living expenses, you pay a 10% tax rate on money as you earn it (after the standard deduction and personal exemptions) and another 16% on money as you spend it.

The claim that a family of four pays no tax on its first $36,000 of income is basically a lie, since they will pay 16% when they spend the money.

If you’re a gazillionaire and can’t possibly spend all your money (real estate counts as investment, not consumption), you only pay 10% once—and you can defer most of your income by not taking capital gains. This makes Cruz’s tax system “flat” in name only; it’s actually highly regressive. This is also why any serious advocate of a value-added tax, and there are many, favors some provision for restoring progressivity.

What about the loophole fairy? Cruz, like most tax reformers, claims that he will eliminate those loopholes that big corporations and rich people benefit from. The problem is that he keeps all the big, distortion-creating loopholes: the deduction for charitable donations, the mortgage interest deduction, the exclusion for pension contributions, and the exclusion for employer-provided health care. Everything else is small potatoes.

Finally, what about that growth fairy? According to Cruz, lower tax rates will spur economic growth because of stronger incentives to work and save. It’s Economics 101, after all. But first, there’s less here than meets the eye, even on paper. The true marginal tax rate for most people will be 26%, not 10%; if you don’t save, and most people don’t, a consumption tax is virtually identical to a tax on labor income. Second, the growth fairy just doesn’t exist. Most empirical studies find very small or nonexistent effects of tax rates on labor force participation or on the propensity to save. Third, the Tax Foundation’s rosy economic projections assume that the tax cuts will be “appropriately financed”—which can only mean that government spending will be reduced to completely offset the losses of tax revenues. Yet at the same time, Cruz proposes to guarantee funding for Social Security and Medicare.

This is taking puppies and rainbows to 11.

Of course, none of this should be any surprise. Republican tax proposals became completely divorced from reality long ago. More importantly, the Republican nomination lies in the hands of a handful of donors who are in the 0.001%, so the rational thing for any candidate to do is pander to them as enthusiastically as possible.

The only policies we have that limit the transmission of wealth from generation to generation are the estate tax and taxes on investment income. Eliminating one and slashing the other, as Ted Cruz proposes, is the single biggest step we can take toward becoming an aristocracy of inherited wealth. As a member of the 1%, that would be good for my grandchildren—but it would be bad for the country.

Also posted at Medium.

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