(Bloomberg) — Presidential candidate Ted Cruz’s tax proposals, which include cutting taxes for most individuals and replacing the corporate income tax with a flat 16 percent business tax, would reduce federal revenue by $8.6 trillion over a decade and “almost surely depress the economy over the long run,” according to a policy study and its authors.
Cruz’s plan would benefit wealthy taxpayers “dramatically” and raise taxes slightly for some people in the bottom fifth of low-income taxpayers, according to the report by the Tax Policy Center, a research group in Washington, D.C. The center is a joint project of the Urban Institute and the Brookings Institution.
The Republican senator from Texas proposes to refashion the U.S. regime as a consumption tax system, spurring the growth that many economists say comes from eliminating tax-driven barriers to saving, working and investing. But if interest rates rise and Congress fails to enact either “extraordinarily large cuts in government spending or future tax increases,” the plan would create “persistently large, and likely unsustainable, budget deficits,” the report states.
The Cruz campaign, which has described the plan as so simple that all Americans will be able to file their taxes “on a postcard or an iPhone app,” didn’t immediately respond to a request for comment.
Prior analyses of Cruz’s tax plan reached varying conclusions regarding its cost over a decade. The conservative Tax Foundation found it would cut revenue by $3.6 trillion, while the liberal Citizens for Tax Justice said it would produce a $16.2 trillion shortfall.
Len Burman, director of the Tax Policy Center, said Cruz’s plan was “a major tax reform” and “a fundamental change,” calling it “the simplest plan we’ve analyzed” from Republican candidates so far. But Burman added that it “would almost surely depress the economy over the long run.”
Cruz’s plan would cut revenue by $12.2 trillion more in its second decade through 2037, the report said. Combined with increased debt and deficits, the losses would increase the federal debt by 68.8 percent relative to gross domestic product. “This is unprecedented territory,” Burman said.
Cruz would replace the corporate income tax, now at a top rate of 35 percent, with what he calls a “business flat tax.” It’s a value-added tax of 16 percent on all businesses, from corporations to partnerships to pass-throughs. Under current law, these entities do not pay federal income taxes and pass their profit directly to individuals. Nonprofits and government entities, including state governments, would also be subject to the tax.
Businesses would be allowed to lower their taxes by using unclaimed depreciation, net operating losses and other credits accumulated through 2016. The value-added flat tax would apply to wages paid by nonprofits and by federal, state and local governments.
The tax would also disallow exemptions or deductions on business sales to nonprofits or governments. Also, the VAT would apply to imports, but not to exports, meaning that profits generated abroad wouldn’t be taxed. Businesses would also have an incentive to boost offshore income.
Cruz proposes to transition to the new system by imposing a 10 percent tax on profit accumulated by foreign subsidiaries of U.S. companies through 2016. U.S. companies have deferred taxes on an estimated $2.1 trillion of such earnings. The 10 percent tax would be payable over a decade.
Cruz’s business tax plan stirred conflict during a Republican debate last month, when Florida Senator Marco Rubio said it would lead to higher prices for consumers and act as a hidden tax. Many conservatives say value-added taxes aren’t as transparent as other forms of taxation. At the time, Cruz disputed Rubio’s description of his plan.
“My proposal is not a VAT,” the Texas senator said during the Jan. 14 debate in North Charleston, South Carolina. “A VAT is imposed as a sales tax when you buy a good.” Yet the Tax Policy Center’s analysis, like others from across the political spectrum, concluded that Cruz’s business tax plan is indeed a value-added tax.
“The base of this new tax would be the difference between a firm’s sales and its purchases from other businesses, which is equal to the value-added of the business,” according to the analysis.