Tonight Senator Ted Cruz ended his presidential campaign after a long Republican presidential primary. While Cruz will remain in the Senate, working on policy at the federal level, it is unlikely that his taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan will become legislation any time soon. However, the plan, first unveiled in late October, was innovative and worthy of examination, and it provoked some interesting discussions about tax policy.
Cruz’s plan earned some well-deserved praise for its pro-growth elements. Chief among these were that Cruz found not one, but two different ways to reduce the tax code’s bias against saving and investment while still conforming to the principle that all income should be taxed at the same rate. The first of these was the use of 401(k)-style Universal Savings Accounts, which allow taxpayers to deduct contributions, but pay ordinary income tax on withdrawals. The second of these was the use of his business flat tax, which made investment immediately deductible from its tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .
If you look closer at these two fixes on the individual and business levels, they are actually the same trick: making investment deductible and taxing the returns at ordinary income rates. This represents a much more politically palatable way of achieving a low service price of capital than reducing capital income tax rates. Through careful structure, capital income taxes can be levied without harming the incentive to invest. Senator Cruz took that lesson to heart and incorporated it in multiple ways when crafting his plan.
Cruz also earned some well-deserved criticism by promising to abolish the IRS, which made little sense. His tax proposal, like any other, would require tax collectors.
In addition, his plan spurred some ongoing discussions in tax policy that are worth having. Do less-transparent taxes, levied at the business level, result in a public more open to tax increases? And when should we say that tax burdens fall on the producers of goods and services, and when should we say they fall on the consumers of goods and services? These and other important questions will continue to be debated in the days ahead.
Tax Foundation analyzed the Cruz proposal here.Share