Update March 9th, 2016: We have since revised downward our analysis from $16.2 trillion to $13.9 trillion, to reflect that Ted Cruz's staff has informed the media that the actual VAT rate will be 18.56 percent, rather than the 16 percent that he had been advertising.
During Tuesday’s Republican presidential candidates’ debate, Sen. Ted Cruz (R-TX) made a claim that, in theory, shouldn’t be too hard to live up to. He said his tax plan is less irresponsible than plans put forth by his competitors, and he claimed the ten-year cost of his plan is less than a trillion. “It costs less than virtually every other plan people have put up here,” Cruz said.
Being less irresponsible than Jeb Bush, Marco Rubio and Donald Trump—each of whom have proposed tax plans that would cost $7 trillion or more over the next decade—is a low bar to hurdle. Yet contrary to his assertions, Cruz’s plan would be more costly than any of the other plans put forth by his competitors. A Citizens for Tax Justice (CTJ) analysis of the Cruz tax plan finds that it would cost $1.3 trillion in its first year alone and a staggering $16.2 trillion over ten years.
Cruz’s plan would eliminate the corporate income tax, the estate tax, and the payroll tax, digging an $18 trillion hole in federal revenues over a decade. He also proposes to sharply reduce the personal income tax, replacing the current graduated rate system with a flat-rate 10 percent. Cruz’s plan would repeal most itemized deductions and tax credits, but it would leave the mortgage interest and charitable deductions largely intact, along with the Child Tax Credit and the Earned Income Tax Credit. On balance, these personal income tax changes would lower income tax revenues by 60 percent and add another $12.8 trillion to the plan’s 10-year cost.
Cruz proposes making up for the $31 trillion in lost revenue by introducing a regressive value-added tax (VAT), and, it seems, a healthy dose of magic pixie dust.
Cruz’s claim that his plan would cost “less than a trillion” depends critically on raising an enormous amount from his 16 percent VAT, which would apply to almost everything American consumers purchase. The remaining revenue shortfall would, in Cruz’s estimate, be offset by a supposed economic boom based on the discredited supply-side magic that has been part of the far right’s economic fantasies for decades.
But Cruz’s math has a gigantic hole in it. He wouldn’t just make consumers pay his VAT, he would also make the government pay the tax (to itself) on all of its purchases, from warplanes to paper clips and the wages it pays to its employees. Cruz’s claim that the government can raise money by taxing itself accounts for a third of the alleged yield from his VAT.
Without this sleight of hand, Cruz’s overall plan would cost more than $16 trillion over a decade and reduce total federal revenues by well over a third.
Even this enormous amount may be a low-ball estimate since Cruz insists that he would “eliminate the IRS.” If he really means that, then he would apparently reduce total federal revenues by closer to 100 percent. After all, without a tax collection agency, why would anyone pay taxes?