December 29, 2015
By Tim Worstall
I think it would be safe to say that I’m unlikely to be a great support of Ted Cruz. Not only because I’m a foreigner and it’s not my election but also because there are very definitely parts of American conservatism that I don’t sign up to. However, looking at the economics of his tax plan there is indeed much to like: most especially the fact that he seems to have actually listened to economists in his structuring of that tax plan. This does not mean that his plan is necessarily politically feasible, nor that it’s perfect in every respect. But he does have the right idea at the core of it. Abolish two bad parts of the tax system and replace them with a much less bad one. Abolish the corporate income tax and the payroll tax and replace it with a business value added tax.
Josh Barro has a useful overview here:
So how does this big tax work? A VAT is a tax on “value added” in the economy. Businesses collect it on their total revenues, minus the cost to buy the stuff they resold. A retailer pays the tax on sales to consumers, minus what he paid wholesalers for product. A wholesaler pays on his sales to retailers, minus what he paid to manufacturers. A manufacturer pays on his sales after the cost of parts, and so on.
When you add it all up, it’s equivalent to a very broad sales tax on all the goods and services in the economy. Most other advanced countries have a tax like this, with exceptions for favored sectors like education and health care. Mr. Cruz says he would tax everything, which is how he could raise so much money with a rate of 16 percent.
Some people contend this tax is likely to be very unpopular once people figure out what it is, and that’s probably true. Conservatives tend to dislike a VAT because it is a quiet, efficient way for the government to tax a lot. (“VAT is a French word for Big Government,” the anti-tax activist Grover Norquist tweeted in 2014.) Liberals object that these taxes disproportionately hit the poor, since they apply at a flat rate to consumption, and the poor consume more of their income than the rich do.
There’s one important word in that description there: “efficient”. Yes, we’re going to have government come what may and thus we’re always going to have taxes. But we should also want to raise that necessary tax money in the manner that destroys the least other economic activity. For each and every tax does destroy some economic activity simply by the existence of the tax. This is known as the “deadweight loss” of taxation. A reasonable rule of thumb is that the loss is from one fifth to one third of the amount raised in tax at around our current levels of taxation.
Read the full article at Forbes.com: Amazingly, Ted Cruz Seems To Have Actually Listened To Economists About His Tax Plans