“Businesses now will have to pay a tax, both on the money they make, but they also have to pay taxes on the money that they pay their employees,” Rubio said. “And that’s why they have it in Europe, because it is a way to [blindfold] the people, that’s what Ronald Reagan said.”
Cruz shot back that his proposal is not a VAT but a flat tax, an idea beloved by many conservative think tanks, that has the endorsement of former Reagan economic adviser Art Laffer.
The exchange underscored how fiercely Rubio and Cruz, who are battling to be the main challenger to Donald Trump as Republicans begin choosing their presidential candidate in the coming weeks, are trying to show they are the true conservative in the race.
Whether primary voters will have much patience for a debate over a topic that is wonky even by tax policy standards is unclear, it has gotten the attention of economists who have been focused on the issue for years and were gleeful to see it pop up in a presidential debate.
A version of a VAT is common in most of Western Europe, but has been repeatedly rejected by policymakers in Washington. The idea is to tax the sale and consumption of goods to bring in more revenue. Some economists say VAT-style consumption taxes are an efficient way to fund government policies, while critics charge that low and moderate income workers pay a larger portion of their total income under a VAT system than higher income workers.
In Cruz’s plan, a business would pay a 16 percent tax on the money they receive from selling a good, minus the cost of buying supplies to make the good. Cruz calls this plan a business flat tax.
Rubio argues that Cruz’s system is a VAT that hides the true tax rate individuals and businesses pay because “basically, businesses now will have to pay a tax, both on the money they make, but they also have to pay taxes on the money that they pay their employees.” Eventually these costs, Rubio argues, will be passed on to consumers in the form of higher prices.
So who’s right?
Most tax experts said Cruz is proposing a form of VAT known as a subtraction method VAT, where the tax is applied to the difference between the amount a product is sold for and cost of buying the goods from another business to create the product.
“Anyone who does tax policy knows that you can call it whatever you want but it is a subtraction method VAT,” said Ryan Ellis, a conservative tax expert and former Tax Policy Director at Americans for Tax Reform.
Ellis said Rubio is right to point out that Cruz is proposing a VAT but he said the headline should have been that Cruz’s plan actually costs taxpayers a lot more money than they expect.
“The effective rate is 24.4 percent under Cruz,” Ellis said. “It makes it sound like you can fund the government at these teensy taxes but what really you’re doing is funding it on the consumption side.”
Leonard Burman, director of the Urban-Brookings Tax Policy Center, said, however, that what Cruz has proposed different from the type of VAT often used in Europe and his plan would get rid of several other taxes currently in effect, making taxes far lower than in Western Europe.
“It’s also important to point out—as Cruz did in the debate—that his plan also repeals the payroll and corporate income tax,” he wrote in a blog post.
For his part, Cruz also touted that he would reduce taxes on individuals by imposing a 10 percent flat tax, arguing his plan would make filing so easy to navigate that there would be no more need for the Internal Revenue Service.
“Mine gives every American a simple, flat tax of 10 percent,” Cruz said. “Marco’s top tax rate is 35 percent. My tax plan enables you to fill out your taxes on a postcard so we can abolish the IRS.”