U.S. Senator and GOP presidential candidate Ted Cruz likes to discuss his tax plan which calls for a 10% flat tax on personal income, a much lower rate than what currently exist. What he doesn’t enjoy talking about is the 16% business flat tax, an amount that would generate more than the amount needed to offset the revenue lost from repealing corporate and income tax.
According to a report issued by the Tax Foundation, Ted Cruz’s income tax plan would generate $8 trillion over a decade and his business tax plan would generate an additional $25 trillion over a decade.
When adding everything together the plan would lose a few trillion dollars in revenue as a result of his income tax cuts. Although that is a lot, it is still much less than other candidates’ tax plans, such as Trump’s plan.
Senator Cruz’s plan, although he doesn’t like to mention it for good reasons, is based on the Value-Added Tax concept. The Value-Added Tax concept is a tax on “value added” in the economy. Employers collect the tax on their total revenue after business expenses are subtracted. When you look at it from a broader perspective, it is equivalent to a broad sales tax on goods and services. Most other countries use this method to collect tax form employers, with the exception of some sectors of the economy such as health care and education. Ted Cruz says he would not allow exceptions to the tax, which is why his plan is capable of generating so much revenue even with a low 16% rate.
Some argue conservatives would not be happy once they understand it is essentially a Value-Added Tax because conservatives view such tax proposals as a way for the government to efficiently and silently over tax people. On the other side of the political spectrum, liberal oppose the flat tax strategy because they argue that the poor end up losing. They apply the flat tax to consumption and highlight that the poor would consume more of their income than the rich.
But some people are confused about the consequences of a Value-Added tax strategy. They assume that the tax will be passed on to the consumer causing a hike in the cost of services and goods. That could happen, but only if the Federal Reserve allowed inflation to rise.
Sure, the cost of doing business would rise but in general the prices would only increase if the central banks adopt a monetary policy that would enable prices to rise. For example, throughout the last decade advance countries and the U.S. had fiscal policies that sharply fluctuated, including some changes in tax rates but a stable and low inflation. The reason for that is because the link between the prices and tax is not automatic.