Senator Cruz has released a tax-reform plan that cuts tax rates and promotes growth. It’s similar to Rand Paul’s plan in being a flat tax plus a value added tax, but the rates are different. Cruz’s flat tax is set at 10 percent and his VAT
effectively at 19 at 16 percent.* (Paul sets both rates at 14.5 percent.) It has a similar fiscal effect too. Cruz’s plan would cause the federal government to collect $3.6 trillion less in revenue over the next ten years without accounting for added growth; if it generated as much growth as the Tax Foundation thinks, it will collect $768 billion less.
The advantage of a VAT is that it is an efficient way of raising revenue because it falls on consumption rather than investment. Many conservatives have worried, though, that a VAT is in a sense too efficient: that because it’s a hidden tax, it’s easy to raise.
The VAT would among other things replace the payroll tax. As in Senator Paul’s plan, that creates two problems that can be solved but are a little awkward. First, the swap would necessitate a change in Social Security benefit formulas, which are currently based on lifetime earnings subject to the payroll tax. Second, as Alan Viard has explained, moving to a VAT would require a temporary increase in inflation if we want to avoid large-scale unemployment–which runs against the hard-money views of both Cruz and Paul.
Update: If you’re comparing the VAT to a sales tax, 19 percent–the “tax-exclusive” rate–is the right number to quote. Since I’m comparing it to Paul’s VAT, I should have gone with 16 percent to get an apples-to-apples comparison.