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Flat Taxes and Gold: A Few Thoughts on Ted Cruz’s Economic Plan
U.S. Senator Ted Cruz, Republican of Texas, speaks at the First in the Nation Leadership Summit in Nashua, NH, April 18, 2015. Andrew Cline / Shutterstock.com
Full disclosure: I have written critically of the flat tax and gold standard as appropriate policy choices for the modern US economy. Frequently, in fact.
So there goes Ted Cruz in Wednesday’s debate endorsing both policies (kind of regarding the gold standard): “If you want a 10 percent flat tax where the numbers add up, I rolled out my tax plan today. … And I think the Fed should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.”
Some thoughts:
1) Cruz has momentum in the betting/prediction markets. Now that may have mostly, if not entirely, to do with his sharp attack on the media. But I can see how his economic plan would score well with many GOP primary voters who (a) think the tax code is hopelessly broken and (b) fret that the Fed’s “money printing” will lead to surging inflation or financial crisis.
2) To be fair, Cruz didn’t specifically say “gold standard.” I suppose you could just make Fed policy more dependent on what gold is signaling about inflation without returning to late 19th, early 20th century monetary system.
That said, here is the great free-market economist Milton Friedman on the gold standard (thanks to economist Roger Farmer for the pointer) in Capitalism and Freedom:
Even during the so-called great days of the gold standard in the nineteenth century, when the Bank of England was supposedly running the gold standard skillfully, the monetary system was far from a fully automatic gold standard. Even then it was a highly managed standard. And certainly the situation is now more extreme as a result of the adoption by country after country of the view that government has responsibility for ‘full employment.’ [A gold standard] is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States.
Again, I think the consensus GOP take on monetary policy is misguided.
3) My AEI colleague Alan Viard wrote a must-read post yesterday on the Cruz tax plan, which combines a low flat income tax with a value-added tax — though Cruz doesn’t use that term. A key bit from Viard:
A VAT is much more growth-friendly than the income tax because it does not penalize saving and investment. However, it places more of the tax burden on those who are less well off. And, giving the government another major revenue source might make it harder to restrain entitlement spending growth.
The concern about spending growth is heightened because Paul’s and Cruz’s proposed VATs would be hidden from public view – their plans do not include either of the two steps that can be taken to make VATs visible to the public .A VAT can be split into a business cash flow tax and a wage tax, with the wage tax collected as an employee payroll tax that shows up on workers’ pay stubs. Or, the total VAT collected from businesses along the production chain can be listed as a separate line item on the final customer’s receipt, the way state and local retail sales taxes are listed. But, the Paul and Cruz plans would collect the VAT from businesses without listing it on customer receipts, ensuring that neither workers nor consumers would ever see the tax.
It’s a politically clever plan that allows Cruz to offer a super-low flat income tax at a rate not seen for a century. But it doesn’t lose the sort of revenue one might think because of the VAT. The Donald Trump plan, for instance, would lose $12 trillion ($10 trillion on a dynamic basis), according to the Tax Foundation, with a progressive tax code and 25 percent top rate. The Cruz plan would lose just $3.6 trillion statically, $800 billion dynamically. (Not that those revenue losses aren’t still pretty big.)
As the Tax Foundation’s Alan Cole explains:
It’s a powerful tax that captures pretty much all of the income in the country. … Ted Cruz has proposed combining the corporate income tax, the payroll tax, and some of the income tax into a single, larger, broader tax assessed on businesses. … The Cruz plan would give us a rate of equivalent to 19 percent, by the invoice credit method. Furthermore, if you counted sales taxes levied at the state and local level, this plan would put our consumption tax rate at around 26 percent, tax-exclusive. That is actually towards the high end of the range of ordinary OECD countries. For example, in Denmark and Sweden, the overall consumption tax rates are in the mid to high twenties. In Australia, the rate is ten percent, and in Japan and Switzerland, the rate is in the single digits. With this high VAT revenue (and much lower government spending than other OECD countries) the U.S. could sustain low income tax rates, such as the ten percent proposed by Senator Cruz.
4) Indeed, if one assumes the future US tax burden will need to rise for demographic reasons, the VAT provides an efficient mechanism for raising taxes in a less economically harmful way. Some Democrats talked about a VAT after President Obama’s 2008 election to pay for healthcare reform.
I would guess Cruz’s primary opponents will attack his VAT as enabling bigger government, especially given its “hidden” nature. But it does have some big economic merits, deficits aside.
Published in Economics
A couple of random thoughts.
In what way, exactly, does an income tax, particularly a flat tax, penalize saving and investment? The only way any tax “penalizes” these things is the same way any tax penalizes any other thing: through the opportunity cost of money committed to paying taxes is money not available to save or invest. Or, the tax penalizes saving and investment by taxing those differently than other money uses are taxed–which isn’t a flat tax. This strikes me as a bogus beef.
I’ve not seen any coherent analysis of flat taxes–that is, truly flat taxes–and its effect on much of anything. For example, a back of the envelope calculation based on 2007 numbers we made, as a nation, $17.8 trillion in individual and business income from all sources, and paid after a plethora of deductions $1.15 trillion in income taxes. Including Warren Buffet’s ability to deduct and loophole his income to a level that left him paying fewer taxes than his secretary, who did not have access to his deductions and loopholes.
A 10% flat tax would collect more in Federal revenue. By quite a bit. That’s just a static analysis; it doesn’t do dynamic scoring.
Gold standard? Just tying currency to gold’s signaling? All currency is fiat currency, whether it’s unbacked or backed by some thing. The problems with backing a currency with something–gold, say–are numerous. Two, for instance: today, [gold] has too many other purely economic uses (industrial, for instance) for a government to successfully use it to back a currency. Plus, gold used to back a currency–especially in a modern economy, where the metal has vasty other uses besides as a store of value–has two values: the value the market says it has, and the value government says it has. And as FDR demonstrated when he stole everyone’s gold by EO and then revalued it to suit his interests, government will revalue gold capriciously. At least with an unbacked currency, a more traditionally recognized fiat currency, the market–the users–have a more direct say in the currency’s value.
I’ve not seen any tax regime on offer that makes the case for restoring our tax code–any tax code–to its intended use of funding government and eliminating its pernicious use for social engineering.
Eric Hines
< non-economist making an ill-informed suggestion mode = on >
How about a constitutionally-set federal prime interest rate of, say 1%, so that no matter what else ever happens in the economy people can always count on one monetary constant that cannot be altered by legislative or executive action?
It seems to me that the impetus for supporting a gold standard is the desire for a single constant in the economic system … any constant. Sometimes it would be a benefit and sometimes it would be a curse, but at the very least it would still be a constant.
< non-economist making an ill-informed suggestion mode = off >
People will find a way around the limit. Islam bans charging interest at all on loans because it’s wrong to profit from another’s misfortune, so lenders charge fees, for instance, and profit from another’s misfortune.
I’d rather let the free market operate. Can’t have constancy and freedom at the same time, anyway. The only way government can enforce this or that is to take a measure of this or that away from us. And the tighter the constraint applied by government, the more it must take away from us in order to maintain that constraint.
Too, governments in the end are populated by people, not angels. People every bit as noble and venal as we are. With increasing emphasis on venal as power gets more concentrated.
Eric Hines
Its usually a terrible idea to think you can dictate something about a system that is composed of millions of individual actors. Interest rates should be set by the market. Period.
That would merely be the prime government rate. Of course banks and other lenders would be allowed to charge more.
But what if the market dictated that the rate should dip below 1% (unlikely but possible)?
I think he means that if you invest and earn income from those investments, you’ll pay taxes on that income.
In case it’s unclear, this is a post about Cruz’s “flat” tax, which does not work this way. It has deductions, starting at a minimum of $14k, and tax credits for kids, mortgages, and such.
The Buffet story is a bogus progressive lie. Also, odds are that the claims made to support it would be just as true under the Cruz plan.
Presumably, the government would either have to stop lending until the market rate went up again, or else the government could keep lending but at a loss.
As I wrote earlier, it wouldn’t be a panacea. It would merely be a constant.
What’s the value of a prime rate when the market moves around it from free market forces? Today’s version of the Prime has little usefulness, too, except as a signal of the Fed’s thinking on the economy, a signal that would be lost if the prime were set by (Constitutional) fiat. And the Fed’s signalling is useful.
Eric Hines
I was surprised to hear Cruz harken back to the gold standard at the debate. I imagine it served as a dog whistle for his base that espouse such a return.
You make an excellent point that it would have to be used a bell-weather of inflation. Still, it sounded hokey to me. I love Ted Cruz. I love listening to him and I’m horrified at how ugly the attacks from the Bush family, and all the power elites have been. It’s as though he’s the dorky guy who can’t get a bid to the popular frat and is being bullied. Seems very churlish to me.
I believe him when he speaks about his conservative convictions, and I’m in awe at his facility with language. I worry he can’t win because he isn’t telegenic, but then I see how many people absolutely love him across this country.
Maybe it’s the elites who tell us he cannot win because they fear that he can?
Perhaps, they just want to keep their money flowing and their channels of influence don’t include Ted or his right wing caucus.
I’m failing to see the point here.
The flat tax would still tax income from investments. The VAT on the other hand just taxes consumption. Thus it hits spending harder than savings, which the VAT doesn’t tax at all, thereby encouraging investment.
That’s actually Pethokoukis’ point, not mine. I don’t entirely agree with him about gold’s usefulness as an inflation signaler, either; there are a potful of useful signals for that.
Eric Hines
This is a great proposal. The main problem with the flat tax is that it must kick in at some level of income and it is always possible to raise the rate and raise the level at which it kicks in so it doesn’t escape the problem of populist demagoguery to tax the rich and exempt low income. Big deal, there is no escape from such demagoguery. The attractive part of Cruz’s tax proposal is the VAT. It is a cash cow and can eliminate the payroll tax and the profits tax. It also has the advantage of taxing internet sales without some explicit fight to the death tax being imposed and promises to eliminate the deficit and most importantly the external debt. Indeed, the rate is high for the long run. I’d tie it to the flat rate with x number of years at the higher rate until the deficit is eliminated. This makes it more difficult to raise either rate. As designed it is hidden but it could be made explicit and included on sales receipts if that’s a deal breaker, but the payroll tax, the profits tax and other taxes paid by companies are hidden so that the net shifted forward will be lower with far less shifted back to workers. As to gold, it’s just a commodity rule, and gold is a good one. Yes it’s still a fiat system but the alternatives are not on the horizon.
Business investment is still spending/consumption and would still be hit by a VAT.
Oh really? I must be missing something. Please explain.
By this I mean things businesses invest in in order to grow. New equipment, materials, space, etc., all of which are hit by a VAT.
Of course. But he hasn’t shown why a form of income should not be taxed as income. Creating special treatments for some forms of income is every bit as much social engineering as are deductions/credits from taxes.
Yup. And I was raising a competing straw man.
You’re citing Atlantic‘s cite of ABC’s claim. There are other views of Buffet’s claim.
Eric Hines
I gotcha. Investing in businesses wouldn’t be taxed but businesses investing that money would be.
When I think about investment I tend to think about it in terms of the component of GDP. Savings to me encompasses investing in businesses for savings purposes.
I think that’s (one of) the point(s) that the gold standard enthusiasts dispute.
The
problemchallenge, of course, is that I’m unaware of any jurisdiction that has replaced their income tax with a VAT, as opposed to simply slapping a VAT on top of their income tax.Up here in the Great White North, I fully expect the federal government to raise the rate of the GST as more baby-boomers retire (thereby reducing their taxable income).
The point is that, in essence, those who favour the gold standard simply desire one, single, small aspect of the economic system which is outside of government interference.
Therefore, the argument isn’t really about the gold standard per se, but rather a) about the utility of using any sort of mechanism to shield one, single, small aspect of the economic system from government interference, and b) if such an idea does have utility if there could be a simpler and/or more effective mechanism for achieving that goal.
Shamelessly putting words in their collective mouth: they don’t like the Fed at all, seeing it as unnecessary: a gold backed currency would obviate the need for a Fed, and of Fed signalling.
Given that we have a Fed, though, its signalling is a window into its thinking of where the economy is and is going. Since its mandate to maintain stable pricing and full employment means it impacts our economy, its signalling has intrinsic importance. That’s also the push to make the Fed more transparent, a move that the Fed is embracing, if slowly: to make Fed signalling clearer.
Eric Hines
I don’t follow your motivations for asking the question. Who is advocating special treatments for some form of income in this thread?
I apologize for failing to spot either of your rhetorical moves.
I was citing citing Megan McCardle’s. You’ll note if you compare the two that McCardle’s is more informed, and that the liberal politifact cites the wrong part of the liberal tax policy center’s paper. The relevant income is $60k, which the TPC suggests is equivalent to a 14.9% effective rate, which is lower than 17.4%.
You’ll note that the suggestion by Politifact that the megarich pay less is not supported by the TPC chart, just as it is not in reality. Buffet pays an unusually low rate (although apparently more than his secretary) because he has gone to unusual effort to shield his earnings from tax.
I find a lot of the discussion is using perfection to oppose a radically improved system. There is no such thing as perfection. This is the best anyone has proposed for many many decades. All taxes hurt and distort and most government spending has a negative impact, but a proposal that reduces government power, reduces crony deals, lowers the distortions, raises the incentives to save and invest and simplifies all of it so much that small business is put on a more level playing field is great. The anti gold arguments have been dealt with by the Austrians many times, but Cruz is only proposing a gold rule, which is merely a restraint on the political drift of the Fed and is good.
Cruz is, with his deductions, as cited in OP.
Well, I’m not always crystalline….
Eric Hines
Absolutely. Five (?) Republican candidates have proposed plans for major tax code overhauls, each of which represents a major improvement over what we have.
A question I’d like to see asked in a debate–with around five minutes allotted to each answer–is for each one with a proposal to say why he thinks his idea is better than the others’ (not why the others’ are worse).
Eric Hines
Which forms of income does Cruz treat specially through the use of deductions?
OK, let me see if I can follow.
1. Cruz institutes a 10% flat tax on income. Payroll, graduated personal income taxes, and corporate income taxes go away
2. He adds a VAT that is hidden. It is equivalent to something like 19% when state and local taxes are included.
3. Our deficit is now down to $440 billion.
4. Cruz’s plan will add only $3.6 trillion in lost revenues over the next 10 years after dynamic scoring.
Are those the facts?
So, does this hide the cost of government by only taxing business?
Does it introduce a new revenue stream, VAT that can be raised as income taxes are later raised from 10%?
Will the annual deficit be $800 billion today with this plan?
Why is this good again?