Wednesday, November 04, 2015
Ted Cruz: How To Reform The Tax Code For Economic Growth
This is Ted Cruz's Plan for reforming the tax code for economic growth. Let's look at it:
Imagine 4.9 million new jobs. Imagine, instead of President Obama’s income stagnation, average wages rising 12.2% over the next decade. Capital investment rising 43.9%. And Americans at every level of the economy enjoying double-digit increases in after-tax income.
Imagine exports and manufacturing jobs booming. The trade deficit falling as the tax bias against American-made goods is eliminated. Imagine a 10% income tax. Every American filing his or her taxes on a postcard or an iPhone app. And abolishing the IRS as we know it.
All of this is possible if we learn from the past and follow the example of what works.
In July 1981, Democrat Tip O’Neill, who was then House Speaker, drew a line in the sand: He was going to stop the Reagan tax cut, and he had enough Democrats to do it, with a 20-vote cushion. But President Reagan took his case to the people. Calls and letters flooded Congress, the speaker’s 20 Democrats jumped ship, and Reagan signed the tax cut into law.
President Reagan knew that after years of economic stagnation the country was ready for a big change, and he knew that he would win if the people had their say.
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And the people were right. The Reagan tax cut led to what the late Robert Bartley, then editor of The Wall Street Journal, dubbed “The Seven Fat Years”—the period from 1983-89 when the economy soared by an average of 4.4% a year, including one year by 7.3%. The economy grew by nearly a third, disposable income increased 20%, and 18 million new jobs were created.
Meanwhile, despite lower tax rates, government revenue in the 1980s increased 27%, and the share of federal taxes paid by the top 10% rose to 56%, from 49%.
Now we’re living through the Eight Lean Years. From 2008 to today, the economy has grown 1.2% a year on average, with the weakest postrecession recovery in 75 years. The Joint Economic Committee estimates Americans are almost $3 trillion poorer today than we would be if the economy had grown as quickly as during the Reagan years.
American workers are the most creative and dynamic people in the world, if they aren’t shackled by Washington. As President Reagan showed—and before him, President Kennedy in the 1960s (average annual growth of 5.3%) and Presidents Harding and Coolidge in the 1920s (4.7% growth)—tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again.
That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.
In constructing my plan, I had several requirements. The plan should: spur robust economic growth and job creation, while raising after-tax income for all Americans; be dramatically simpler, to allow working people to file their taxes with a postcard or phone app; and shrink Washington by getting rid of the rat’s nest of complex tax requirements, credits and loopholes.
With these goals in mind, based on a structure suggested by President Reagan’s tax adviser, Arthur Laffer, my Simple Flat Tax plan features the following:
• For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income.
• Above that level, a 10% flat tax on all individual income from wages and investment.
• No death tax, alternative minimum tax or ObamaCare taxes.
• Elimination of the payroll tax and the corporate income tax, to be replaced by a 16% Business Flat Tax. This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. Simple, efficient, fair.
• A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.
Today, the U.S. taxes American producers that export goods, but it imposes no burden on imports. My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods. By shifting to a territorial tax system that doesn’t tax income earned overseas twice, my plan will reverse the incentive for U.S. companies to relocate overseas. Instead, businesses will be relocating to America.
Giant corporations will lose their loopholes and instead pay the exact same Business Flat Tax as small businesses. And billionaire hedge-fund managers will no longer pay a lower rate than working men and women.
To keep the tax burden fair, my plan includes a $10,000 standard deduction and a $4,000 personal exemption, which means a family of four pays nothing on their first $36,000 of income. It ends the payroll tax altogether (while maintaining full funding for Social Security and Medicare). It maintains the current child tax credit and expands and modernizes the earned-income tax credit, with greater reforms to prevent fraud and encourage marriage.
The Simple Flat Tax also keeps the current deduction for all charitable giving, and includes a deduction for home-mortgage interest on the first $500,000 in principal.
The 10% income tax covers ordinary income and investment of all varieties. The virtue of a single tax rate is that the rate doesn’t rise as people work more and invest more. This means better incentives to increase output, and fewer distortions. Compliance costs are minimized and capital flows to where it is most efficient—creating the most jobs—rather than where the tax burden is minimized.
To get companies investing in worker productivity again, the Simple Flat Tax allows full and immediate expensing of business equipment, which will especially benefit heavy industry, mining, energy, farming, ranching and manufacturing.
My plan also improves treatment of savings by creating Universal Savings Accounts. Any adult can save $25,000 a year with taxes deferred, like in an IRA, and savers can use those funds at any time, for any purpose. This will help create the next generation of capitalists by encouraging younger workers to save and invest.
According to the nonpartisan Tax Foundation, my tax plan would boost the size of the economy above current projections by 13.9% over a decade, add 4.9 million jobs and increase average wages by 12.2%. Every income group would get a double-digit wage increase.
Along with other pro-growth policies—repealing ObamaCare and Dodd-Frank, rolling back burdensome regulations, restoring sound money and restraining spending—the Simple Flat Tax will help the economy soar again.
Reagan did it in 1981, and we can do it again. I intend to take it to the people: a simple flat tax, to benefit every American.
A lot of this makes excellent sense.
I personally was never a flat tax advocate until recently, when it became apparent that an awful lot of Americans as well as many here illegally pay no taxes whatsoever. There's an inherent problem in that.What you don't pay for, you don't value. And if it's not coming out of your wallet, you ordinarily have little or no interest in government waste or corruption.
On the other hand,when you do pay for something, you value it immensely and you want your money's worth. There's no more casual attitude about waste and corruption.
So, let's look at the plan itself.
The first thing that pops out in my mind is that unless there's border control coupled with a solution to America's illegal migrant problem and H1B visa abuse, wages are unlikely to go up and the job growth isn't likely to be as robust as Senator Cruz thinks. Unless these problems are dealt with, employers will simply hire from the stream of cheaper labor available from outside America, which will negate some of the growth. It will improve, but not nearly as much as Senator Cruz says it will unless this problem is solved, and solved now.
I also wonder if it would be better to allow businesses to expense equipment or to depreciate them over time. Every business is different, and rather than mandating expensing, I'd probably lean towards allowing a choice.
I'd also be interested in what Senator Cruz's plans are for entitlement reform. That's the 5,000 lb gorilla no one wants to tame, although I have to give credit to former President George W. Bush for at least trying to raise the issue. A certain amount of the problem can be solved by real crackdowns on Medicare, SSI and Social Security fraud, which account for literally billions of dollars. But the system still isn't taking in enough, and that dates back to when President Johnson and the majority Democrat congress first raided the Social Security trust fund to pay for the War on Poverty.
Social Security was originally a sound idea when FDR created it during the Great Depression. The banks had failed, and the country had 13 million seniors who had lost all of their retirement savings and were destitute, as well as a number of widows with dependent children in the same fix. Giving them some money was not only humane but sound economic policy because as they spent it, it helped the economy somewhat.
At that time there was no other way to make it work but as a Ponzi scheme of sorts, but that wasn't the problem it is now because there were a lot more workers per recipient. Now, the system is paying out more than it's taking in.
The obvious answer to me is grandfathering people above a certain age whom have paid into the system for years and allowing other American below that age to either stay in the existing system or to use all or part of their contributions to fund private retirement accounts, which is something like what Cruz is proposing with the $25,000 tax deferred accounts he mentions. Among other things, this would be a tangible asset that people could leave to their heirs if they desired.
All in all though, a sound plan. Tweaked a bit here and there, I think it would definitely help restore American prosperity provided action is also taken on some of the other issues I mentioned.
Like I've said before, the man is scary smart.
- Selah -