The Corner

Rubio, Cruz, and Revenues

It seems a little beside the point to be writing about the details of the tax plans offered by Senators Cruz and Rubio today, but here goes anyway:

In the past, I’ve written that between these two plans, I prefer Rubio on the tax structure and Cruz on the tax level. I like the fact that Rubio recognizes that the current tax code, while overtaxing everyone, particularly overtaxes parents; and I dislike the way Cruz’s plan renders more of the tax burden invisible to the people who bear it. That’s what I mean when I mention the tax structure. But the Cruz plan seemed more realistic when it came to revenue levels. The Tax Foundation concluded that, leaving aside any positive effects on economic growth, Cruz’s plan would cause revenue to come in $3.7 trillion below current projections over ten years while Rubio’s would cause it to come in $6.1 trillion below projections. It seems to me unwise to cut taxes so sharply and count on vague promises of economic growth and spending cuts to make up the difference. Voters might well feel the same way in November. But between the two plans, as I said, Cruz’s plan looked more fiscally responsible and realistic.

The Tax Policy Center has, however, come up with a very different estimate of the effect of the Cruz plan. It says that Rubio’s plan would reduce revenues by $6.8 trillion; much of the difference may result from their looking at a more recent version of the plan than the Tax Foundation did. But it estimates that Cruz’s plan would reduce revenues by $8.6 trillion. So not only is the estimate larger, it reverses the rank order between Rubio and Cruz. On the TPC’s estimate, it’s Cruz’s plan that threatens a bigger increase in the deficit.

Why the difference? I reached out to Kyle Pomerleau of the Tax Foundation to find out why the two organizations reached such different estimates. He said it’s a result of the most controversial feature of Cruz’s plan: The “business flat tax,” which most people are describing as a value-added tax. The Tax Policy Center assumed that the Cruz plan would allow employer contributions to retirement accounts to escape the business flat tax/VAT. The Tax Foundation didn’t. The Tax Policy Center also assumed that imperfect compliance with the new tax would bring down revenue levels. “All told, this is 3 trillion from the tax base per year, or about 35 trillion from the base over a decade,” Pomerleau emailed me. “Multiply that by 16 percent and you get $5.6 trillion in revenue.”

Trump’s proposal would have an even bigger impact on revenue. The Tax Foundation estimates that, again leaving aside effects on economic growth, it would reduce revenue by $12 trillion over ten years; the Tax Policy Center estimates that it would reduce revenue by $9.5 trillion.

I have a very hard time seeing tax cuts of anything like these magnitudes passing Congress and getting signed by a president in 2017, but perhaps I’m just not being imaginative enough.

(disclosure)

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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