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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
We can put all discussions like this on hold until after the current arrangements implode.
Since the complete severance of any link of our currency to gold, our national debt has gone from around $400 billion to over $18 trillion with no sign of stopping. It’s increased under Democrat and Republican administrations, including under the legendary conservative leadership of Ronald Reagan. The latest debt “deal” is sailing through more easily than ever, indicating that the last vestiges of popular opposition to unlimited debt no longer have significant political clout. The Federal Reserve, as it has for the last seven years, keeps threatening to raise interest rates from zero but never will, since they know but can’t say that any hike would crush us.
We will ride the fiat based debt explosion to its inevitable conclusion in an unprecedented financial and currency crisis. At that point, the discussion about what money really is can truly begin. It’s all blather until then.
These tax plans – all of them – are deck chair rearranging.
If Ted is the “true conservative,” where is the detail on his spending cuts? A fuzzy tax plan, sort-of VAT, hidden from view, and opening up a new gold vein to suck money out of the economy is not a good idea unless you turn off the income tax entirely – kill it, stomp on it, burn it, bury it and then send the shovel towards the sun. These systems are vampires waiting to run amok. It is the spending cuts we should be hearing from Tea Party Ted instead of “10%,” “10%.”
Now back to reality. Gold standards are fine until the cost of gold production rises so fast money supply growth is constrained below economic growth, then you have deflation and recession. See the US experience in the late 1800’s. Tying a currency to a thing – say Golden Retrievers – just devotes enormous effort to breed and raise Golden Retrievers. The better thing to do, assuming we live in a world of some reasonable data, is to grow the money supply in line with underlying economic growth, adjusting over time to make sure the central bank does not over shoot or undershoot. Central banks should not be full employment insurance, political cover for deficit spending, or liquidity pumps. They should be currency managers – over time. Some inflation targeted at less than half the current target might result because if you undershoot money supply growth, you choke things off. 1% would be tolerable.
If we want to bail banks out and pump up liqidity in a crisis – the government can create vast self-liquidating insurance pools to cover the liquidity of all bank held investments – like mortgage backed securities, just like we do with deposits. The premiums could be paid by the banks (depositors and shareholders), would cover the losses – which is what will happen if you allow the market to choke up, losses to occur and the economy to contract and eventually reach a bottom – and the insurance system would eventually go away … self-liquidate at a sunset time and the premiums would cover the losses. This is the emergency ejection lever that can get the Fed out of fiddling with liquidity recessions that might become depressions.
Calling for a gold standard or some imprecise gold managed currency is an act of frustration that many people resort to – It is understandable, but an act of frustration nonetheless (though I love Golden Retrievers, they don’t fit in my wallet). Money supply growth should equal economic growth – give or take.
Ted – you can push sales and income taxes around all you want – show me the money, honey. Cut spending or cut out.
And Congress should control spending, curb bureaucratic growth, and limit regulations. But it doesn’t.
Let us base our policy on what central banks actually do and not what they should do. Central banks are always created with the promise that they will do nothing but defend the value of the currency and be the lender of last resort. And they end up being what central banking skeptics fear they always become – debt monetizers. Like every other form of central planning, monetary central planning founders on the realities of human nature.
There are probably more comments on this post than all of JP’s previous combined.
I’d be more upset by the problems with this cycle’s tax plans, but it appears that no candidate is proposing tax plans that might actually pass, so it seems fine to me.
One of the key lessons of the last cycle was that the universal response to any plausible tax plan is to pan it as tepid, so candidates aren’t bothering with that. I think that, given the purposes these are being released for, Cruz’s is the smartest for winning the primary.
Happily, the substantive and plausible reforms (eg.) being put forward look pretty good. Although Fiorina said that tax reform was always an objective of Republicans, but never happened, it happened under every GOP President since Ford. It’s fine if this administration sees more emphasis on other reforms than on taxes.
Indeed!!!
The thing that amazes me is the most ardent “Tea Party,” Freedom Caucus or what have you, will declaim high and low that deficits are bad. Then they propose unpaid for tax cuts. They just cut away on taxes in campaign rhetoric.
This is hooey until they tell me they want to cut this with specific amounts, timetables, and closing costs. Then we can take Ted Cruz, et. al., seriously.
Right. It sounds ridiculous because it is ridiculous.
Gold has never been a harbinger of anything worthy of note in financial markets. It’s allure has many facets to many cultures, but primarily in America it is sold to those who fear currency devaluation/end of world scenarios, or just enjoy owning the shiny metal coins as collectors.
Ted was ringing that bell for his many constituents who are doomsday preppers and fear any number of financial cataclysms.
Let’s Be Honest About Gold: It’s a Pet Rock http://on.wsj.com/1e4YoQg via @WSJMoneyBeat
Jason Zweig at intelligentinvestor@wsj.com
“Gold is two things, neither of which is easy to price: a commodity and a currency….
Gold is often viewed as a hedge against inflation, and it has outpaced rises in the cost of living—but not as robustly as the alternatives.
Since 1975, the beginning of the period in which private ownership of gold has again been legal in the U.S., the metal has returned an average of 0.8% annually after inflation, compared with 5% for bonds, 8.3% for stocks and even 1.1% for cash, according to Christophe Spaenjers, a finance professor at HEC Paris business school. “It can be very difficult to rationalize the price movements of gold, even with the benefit of considerable hindsight,” he says.”
Friedman supported a rules based monetary policy and suggested that monetary policy be decided by an algorithm – not by the discretion of the Fed or the Treasury. He never would have supported the dollar devaluation that has been going on for the past two administrations. That devaluation is still supported by some Reformicons.
Did the economy improve after we left the Bretton-Woods gold standard?
The only period of prosperity we’ve had since we left the gold standard was during the 80’s and 90’s, when the price of gold was relatively stable.
That should tell you something.
I’m glad to hear that Ted Cruz supports sound money. I would love to know where the other candidates stand on that.
To clarify comment #69, a rules-based monetary policy or a gold standard would be a good thing.
The end result would be about the same, notwithstanding some of the a-historical statements about gold in the comments.
It would seem you didn’t read my whole post, I included a note that there would have to be some sort of accommodation for low-income folks.
I see it as taking power from the government in that once you get past necessities I can decide what I spend on, and therefore how much I pay in taxes – I’m incentivized to save.
I don’t have as much freedom when it comes to income taxes.
I have a little bone to pick with this, which is quoted from your Tax Foundation friend, “it places more of the tax burden on those who are less well off.” The whole point of Conservatism as a movement is to grow the tax base so that more people are aware that they are being taxed and thus become more cognizant of where their money goes, at least that is how I have always understood it.
If we are going to have a system where the actual bulk of yearly outflows from the Treasury go to the lower income spectrum, then shouldn’t they have some skin in the game? I think putting them into the “getting taxed” category through how they consume would be perfectly reasonable. Who knows, maybe they become more aware of what they spend money on and discover a better way to save that money and actually move out of poverty. After all, if it is a consumption tax, won’t they be deciding when they get taxed?
Also, one last thought, isn’t the Lottery basically the same thing here? Aren’t lottery players mostly those who make up the, what was it your friend said, “less well off”?
James, serious question here, isn’t any tax on business activity shifted to the consumer? At the end of the day what one chooses to charge for a good or service is going to have the cost of taxes calculated into it.
So on the whole is this author saying that Cruz’s plan really isn’t that bad? Finally a somewhat positive word about Cruz from someone on Ricochet who isn’t named Robert.
That’s why I said that tax incidence, working out what changed costs are paid by which parties as a result in changes in the tax code, is a really complicated topic.
So, if we lived in a world of platonic classical economics, yes. There’s quite a lot of issues, though. There’s a fairly good introduction to some of the microeconomics issues here. If consumer demand is inelastic, even in the short term, a tax hike is likely to lead to price increases. If the consumer demand is highly elastic, it will be a better idea from the investor’s perspective to take more of the hit on profits. There can also be responses that involve lowering costs.
It’s also helpful from the business perspective when the tax is transparent; people seem much happier to pay 10% more when they know there is a 10% sales tax and can see it on their receipt than they are to pay more on the assurance that there are tax reasons for the hike.
As the videos note, the strongest case of harm comes for companies that are exporting goods with competitors based abroad. They often cannot raise prices in line with the tax. With a new VAT of this scale, it seems likely that the outcome would often be bankruptcy.