Over the weekend, the pro-Ted Cruz super PAC "Keep the Promise I" released a pro-Cruz ad concerning his tax plan ahead of the Florida primary:
It pairs with an older one with similar content.
The short ad makes several claims which I'll go through one by one.
"Marco Rubio wants to raise taxes for the middle class as high as 35%."
This is a complete falsehood and totally wrong. It's the tax version of yelling "fire" in a crowded theater.
Rubio's plan cuts the top marginal income tax rate from 39.6% today to 35%, the same top rate level that existed during the 2000s. In only a handful of years in the last hundred has the top personal tax rate been lower than 35%. So it's a low top rate, and a cut from where we are.
Furthermore, it's inaccurate to say that this rate falls on anything like the "middle class." It starts at $300,000 of taxable income for a married couple, half that for all others. The IRS says that over 95% of all tax returns reported less income than this. As you might expect, the top tax bracket only applies to very high income taxpayers, not the middle class.
According to the Census Bureau, a median income family of four (the best proxy there is for "middle class") makes about $72,000 per year.
"A 10% flat tax will help relieve the tax burden from American families."
Cruz's plan creates a new 10% flat tax on all forms of personal income. It has a standard deduction of $20,000 for a married couple (alternatively, they can deduct mortgage interest and charitable contributions) and personal exemptions of $4000 for each family member. It also leaves in place the child tax credit and the EITC. New savings are deductible.
If that was the end of it, that would be a fantastic tax cut for people. But it's not.
"His 16% business flat tax will promote growth in the economy."
Here's where Cruz hides the ball. First, his "business flat tax" is actually a subtraction method VAT (value added tax). It doesn't matter how many times it's denied by the candidate and his supporters--no serious tax expert of any partisan or ideological stripe says it's not a VAT.
Because it's a VAT, wages are not deductible from the business tax base, as they are under the corporate income tax this plan displaces. What that means is that wages are taxed twice under the Cruz plan. First, they are taxed by the VAT. Then, they are taxed again on the personal level. Put those two wage taxes together and you have an integrated/cascaded wage tax of 24.4%.
According to my calculations, including both the VAT tax on wages and the flat tax on wages results in higher total taxes for a median income family of four, not lower taxes. By contrast, Marco Rubio's plan would result in a tax cut of thousands of dollars for this family, despite keeping the payroll tax in place.
A VAT tax base (business income minus payments to businesses) is different from business profit tax bases (business income minus all expenses) in ways besides the double taxation of wages. VAT bases also tax employer provided health insurance and other fringe benefits, pension and 401(k) contributions, new houses sold, churches, charities, colleges, hospitals, and more. Depending on how it's designed, a VAT might even result in the government paying taxes to itself. These buckets of revenue are not touched today by the corporate income tax, but they probably would have to be under the Cruz VAT plan to make the numbers add up.
"Ted Cruz will repeal the payroll tax, the death tax, and the Affordable Care Act [Obamacare]."
All true. It shows how damaging the VAT double tax on wages is, by the way, that the Cruz plan can create a 10% flat tax and eliminate the payroll tax and still have a higher total tax burden on a median income family of four than today.
"Ted Cruz will abolish the IRS."
This is the second most outlandish claim of the plan (the first being that the plan's VAT is not a VAT). How are you supposed to collect a VAT on millions of businesses without a revenue agency? How are you supposed to process 150 million income tax returns without a revenue agency? Is he just going to re-name the IRS the "Department of Taxation" or similar? It's a matter of semantics.
Ronald Reagan opposed a VAT because it would require greatly increasing the number of full-time employees of the IRS. It's not credible to call for the elimination of the IRS when you're putting in place a very audit-intensive tax system at the same time.
