When is a VAT not a VAT?
Art Laffer, famed member of President Reagan’s Economic Policy Advisory Board, has co-authored, with Stephen Moore, an article for Investor’s Business Daily in which they assert that Rand Paul and Ted Cruz have the “best” tax proposals.
They begin with a bit of a warning to those serious about tax reform:
All the GOP tax plans look good to us — though some are admittedly better than others. The danger now is that too many conservatives have formed a circular firing squad and are shooting down nearly all proposals on purity grounds or attacking trivial differences.
This is the surest way to derail tax reform altogether.
If Ronald Reagan, Jack Kemp and Bill Bradley had held to such a “my way or the highway” approach, the epic 1986 tax reform that collapsed tax rates to 15% and 28% never would have happened.
That said, Laffer and Moore continue by narrowing their focus to Rand and Cruz:
Which brings us to Rand Paul and Ted Cruz. The two of us helped craft their low-rate flat tax plans.
The plans are similar: Paul’s rates are 14.5% on business net sales and wages and salaries. Cruz has a 16% business net sales tax and a 10% wage and salary tax.
These would be the lowest tax rates since the income tax was devised 100 years ago. Both are estimated by the Tax Foundation to grow the economy by a gigantic $2 trillion in extra GDP per year after 10 years.
Both eliminate almost all deductions and special-interest carve-outs. (Against our wishes, they retain the tax write-off for charitable organizations and have family deductions that are too big. But no one’s perfect.)
They completely kill the corporate tax, the estate tax and the FICA payroll tax.
Watch Cruz discuss his simple flat tax plan:
One of the “circular firing squad” arguments to which Laffer and Moore refer is the accusation that Cruz and Rand are proposing a VAT (value-added tax).
Cruz and Paul propose to rip up the current tax code and replace it with individual income taxes at low, flat rates — Cruz at 10 percent and Paul at 14.5 percent. Their plans would repeal the estate tax and corporate income taxes, while reducing the overall tax load. So far, so good.
But then we come to the VAT, which the candidates hide behind innocuous names — “business flat tax” for Cruz and “business transfer tax” for Paul. Actually, Paul’s title is accurate, because these taxes would “transfer” trillions of dollars into government coffers unseen by most citizens.
The tab for taxes collected from businesses is ultimately passed through to individuals in the form of lower wages, reduced dividends, or higher prices. So for transparency, the best thing would be to scrap business taxes altogether, and collect the full tax load from individuals at a flat rate. That way, people could accurately perceive the full cost of government.
It is true that the VATs proposed by Cruz and Paul have modest rates — 16 and 14.5 percent, respectively. The problem is not the rates, but the tax bases. VATs have huge bases. That’s because — unlike income taxes — they do not allow businesses to deduct employee compensation when calculating the taxable amount. So both labor income and capital income are taxed at the business level under VATs.
The result would be that tax revenues from businesses under the Cruz and Paul VATs would be enormous. While the plans would abolish the corporate income tax (CIT), the new VATs would have corporate tax bases at least four times larger than the CIT. So every rate increase in the VAT that future politicians might push would raise vastly more than the same rate increase on current business income taxes.
However, according to Laffer and Moore, neither Rand nor Cruz is proposing a European-style VAT “add-on.”
Economists at the Cato Institute have joined with Larry Kudlow to complain that the business tax is a value-added tax (VAT). Such a dreaded tax, they fear, would be a giant new source of revenue and lead to government gone wild, as has happened in Europe.
That’s the last thing we want.
But nearly all leading flat-tax plans have some form of VAT to replace the god-awful corporate income tax. If these plans didn’t eliminate the corporate tax entirely, and the new tax was a European-style add-on VAT, we’d be standing shoulder-to-shoulder with Kudlow in denouncing them.
Watch Laffer discuss Rand’s simple flat tax plan:DONATE
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