AT A GOP debate in which candidates struggled to defend the math in their tax-cutting plans, Sen. Ted Cruz (Tex.) insisted that he can lower income tax rates to a flat 10 percent and still make “the numbers add up.” In fact, Mr. Cruz’s proposal is not so much a flat-tax plan as it is a more ambitious restructuring of how the government raises revenue — and, in effect, of the U.S. economy. This makes it interesting — but the numbers still don’t add up.
Though Mr. Cruz provides crucial details that others leave out, including which tax deductions he would eliminate and estimates of how much his plan would cost, those details lead to a familiar conclusion: Mr. Cruz’s plan would reduce federal revenue in order to give huge tax cuts to the wealthy at a time when the government has to retire the baby boomers — and do much more.
Mr. Cruz explained Wednesday that he would create “a simple flat tax” for individuals under which “a family of four pays nothing on the first $36,000.”
“After that you pay 10 percent as a flat tax going up,” he continued. “On top of that, there is a business flat tax of 16 percent.” Moreover, he claimed, “it costs, with dynamic scoring, less than a trillion dollars [over 10 years]. Those are the hard numbers.”
Well, sort of. As Mr. Cruz admits, his figures rely on a “dynamic” estimate of the tax plan’s cost, which attempts to calculate the effects of increased economic growth that changes in tax policy might spur. The gap between the dynamic estimate of his plan’s cost and the more traditional “static” one is a cavernous $2.8 trillion, suggesting that Mr. Cruz is betting on spectacular economic results.
Even if these speculated results panned out, the fiscal implications still would be scary. According to a dynamic analysis from the Tax Foundation, Mr. Cruz’s plan would cost the government $768 billion over 10 years. That’s not quite as expensive as Jeb Bush’s plan, which would cost about $1.6 trillion, according to another dynamic estimate. But both would nevertheless blow huge holes in the federal budget.
Spending cuts can’t fill these gaps. In its latest budget deal, Congress implicitly admitted that the experiment with tight “sequester” budget caps on discretionary spending was a dangerous failure that threatened crucial defense and domestic programs. Money can and should be saved by reforming entitlements such as Medicare and Social Security, but, with old-age costs projected to rise significantly, the fiscal challenge should not be underestimated.
The reason Mr. Cruz’s plan doesn’t look much worse is some tricky marketing on his part. The Texas senator makes his plan sound like a simple flat-tax scheme, when in fact it calls for a radical move away from taxing income. He would make up for a lot of the revenue lost in income tax receipts with his “business flat tax,” which is not akin to the current tax on corporate profits. It is an effective 16 percent tax on consumption, promoting saving and investment instead.
As with Mr. Bush’s tax proposal, Mr. Cruz’s plan deserves some serious discussion. How could it be made more progressive and raise needed revenue? How would it affect a world economy dependent on U.S. consumption? But, as it stands, Mr. Cruz’s plan could only be a starting point for further negotiations that would bring it in line with reality.