Presidential primary season is ebb and flow, and no one knows for sure who the Republican nominee will be, but it is becoming all too apparent of who stands the best chance: Ted Cruz, Donald Trump or Marco Rubio. Rubio represents the establishment wing of the Republican Party, while Cruz and Trump compete for the grassroots conservative crowd that is tired of politics as usual.
Cruz faced intense scrutiny from Trump and Rubio during the South Carolina debate that took place on Thursday, but he still stands a chance, and the idea of a Cruz presidency is not out of the question. He aims to advance the economy through repealing the Affordable Care Act (Obamacare), reforming the tax code, reducing regulations on business and energy and auditing the Federal Reserve to ensure dollar stability and transparency. His tax code is gaining plenty of attention, and it is a core part of his campaign for improving the economy.
The Flat Tax
Like many Republican candidates, Cruz proposes the idea of a flat tax, stressing a 10-percent rate for all Americans and a 16-percent business tax for businesses. A flat tax is a constant percentage applied to all taxpayers regardless of income bracket, replacing a progressive tax system, which imposes higher taxes as a person earns more money. Here are key taxes that would be repealed under a Ted Cruz flat tax:
* Payroll tax
* Death tax
* Corporate income tax
* Alternative Minimum Tax
* Affordable Care Act Taxes
Under his plan, he claims it would add 4.9 million full-time jobs to the economy, grow GDP by 13.9 percent and raise wages by 12.2 percent, with capital investment rising 43.9 percent. On the issue of tariffs and trade, Cruz argued that his tax scheme is border adjustable, meaning that exporters would no pay taxes, benefitting such sectors as farming and manufacturing.
Moreover, importers from other countries would pay the 16-percent flat tax, which would lower the trade deficit and foster job growth. In addition to job creation, a Cruz tax plan could benefit average Americans in the following ways:
* 9.2-percent tax reduction by end of the decade on a static level
* 14-percent tax increase in post-tax income but only if the economy grows as planned
* Simple filing where Americans can fill out their taxes on a post card
* A family of four would pay no taxes on their first $36,000 in yearly income
An opponent may claim that Cruz's plan forces low-income Americans to pay more taxes, but his plan allows certain exemptions for people in low and middle-income brackets, including a standard $10,000 deduction and a $4,000 personal exemption. Taxpayers could deduct mortgage interest and charitable donations, and the plan would maintain the Earned Income Tax Credit and Child Tax Credit. Americans would also have the chance to save up to $25,000 a year annually in a savings account called the Universal Savings Account (USA), and Social Security and Medicare would still exist in a Cruz administration.
Many fear that a republican would naturally gut Social Security and Medicare, but seniors and workers approaching retirement would be happy to know that both institutions would supposedly be preserved and sufficiently funded under the new tax scheme.
Another issue that would delight most Americans is the abolishment of the IRS, and Cruz claims this would be achievable through his tax plan, while adding enough revenue to the treasury to fund the government. The right-leaning Tax Foundation notes that the elimination of corporate, estate and payroll taxes would subtract the government's revenue stream by $17.3 trillion over the next decade and degrade revenue by another $11.8 trillion, but the business flat tax alone would add $25.4 trillion back to the treasury.
If the economy expands as Cruz anticipates, the revenue loss would be less substantial, as the federal government would lose $768 billion over the next decade, with a $700-billion loss in the area of personal income taxes.
Detractors maintain that the proposed rate is not high enough, but Cruz is relying on his business tax as a primary revenue source, and his proposal brings in more income than Trump's tax plan. Another criticism is the risk of increasing taxes on the working class, despite Cruz's exemptions. In an economy where many people do not have enough disposable income and are working multiple jobs, a tax hike would burden many people who are struggling to get by.
Is it a VAT?
The problem with Cruz's overall plan is the likelihood of a flat tax being implemented in addition to the current tax system, and Rubio alluded to this criticism during the debate by labeling Cruz's plan a hidden value-added tax (VAT). A VAT is a tax that applies during each stage of production and sale, but it faces heavy criticism by American conservatives for giving the government the power to grow and spend, while many liberals peg it as a system that disproportionally affects the poor since working-class people tend to consume more than the wealthy.
VAT appears in places such as Europe and Canada, and it is a useful tool in funding social welfare programs. Governments of those countries routinely impose a tax on the amount an employer pays to workers, which is one of the reasons why Rubio links Cruz's ideas with a European-style VAT.
A Cruz VAT differs from Europe's in some respects, but no one is certain how much his plan would impact profits and wages because he plans to replace many other forms of taxation. However, Rubio is correct about the hidden VAT because of separate taxes on profits and wages at 16 percent under a Ted Cruz presidency.
The VAT is a key component that would eliminate the need for a corporate income and payroll tax, and one can argue that Cruz is consolidating the tax code, but the slight difference is that no organization is exempt from the flat tax, much in the same way as the payroll tax. The problem is that the plan would shift a greater tax burden to businesses, which could translate to wage cutbacks and a reduction in job growth.
The primary group it would hurt most is shoppers because retailers may offset the additional taxation by charging higher prices, but one could avoid price hikes if the Fed lowered inflation. Since profits are taxable, this could have a negative impact on the amount of income shareholders receive, potentially reducing stock value. Higher unemployment and a recession would be worst-case scenarios, but the largest problem with Cruz's plan is whether his tax plan could pass in Congress in the first place.
The flat tax is a divisive issue, and democrats will fight to preserve the progressive system, so the onus is on Cruz to explain how he plans to get his proposals through Congress.
While Cruz champions himself as a reformer who will shake up the very foundation of Washington, D.C., he will inevitably get a hard dose of reality if he ever gets the chance to face Congress. Taxation falls under congressional jurisdiction, and a divided Congress that barely finds common ground on most issues would pick apart his plans.
At the end of the day, his solutions could appear drastically different then what he originally proposed on the campaign trail, and even though Republicans retain a majority in Congress, this could change in the future, and Cruz may not be able to accomplish as much as he claims.
In addition, Cruz has repeatedly been at odds with the Republican establishment, so he may face roadblocks from within his own party, and he would need all the political muscle he could muster to achieve his primary end-goal of abolishing the IRS.
On the issue of IRS elimination, it is a proposal that is wildly popular within the Republican base, including many other Americans of all political stripes, but Cruz has failed to explain what would take the organization's place, including a tax enforcement body that would manifest under his administration.
The idea of eliminating the IRS seems unlikely, given that Republicans have failed to do away with the maligned agency for decades, so one can cynically surmise that Cruz is simply pandering to voters by telling them what they want to hear as opposed to painting a realistic picture of what he could truly accomplish in the White House.
Barack Obama campaigned on a similar platform of changing the nature of D.C. politics, but after nearly eight years in office, the system remains virtually unchanged, and Obama ultimately never lived up to many of his promises. Given the culture of gridlock and systematic obstacles in American politics, Cruz's presidency could follow the same political fate, as his predecessor, but only time would tell.