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Flat taxes and gold: A few thoughts on Ted Cruz’s economic plan

Pethokoukis, Political Economy

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Full disclosure: I have written critically of the flat tax and gold standard as appropriate policy choices for the modern US economy. Frequently, in fact.
So there goes Ted Cruz in Wednesday’s debate endorsing both policies (kind of regarding the gold standard): “If you want a 10 percent flat tax where the numbers add up, I rolled out my tax plan today. … And I think the Fed should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.”
Some thoughts:

1) Cruz has momentum in the betting/prediction markets. Now that may have mostly, if not entirely, to do with his sharp attack on the media. But I can see how his economic plan would score well with many GOP primary voters who (a) think the tax code is hopelessly broken and (b) fret that the Fed’s “money printing” will lead to surging inflation or financial crisis





.2) To be fair, Cruz didn’t specifically say “gold standard.” I suppose you could just make Fed policy more dependent on what gold is signaling about inflation without returning to late 19th, early 20th century monetary system.
That said, here is the great free-market economist Milton Friedman on the gold standard (thanks to economist Roger Farmer for the pointer) in Capitalism and Freedom:

Even during the so-called great days of the gold standard in the nineteenth century, when the Bank of England was supposedly running the gold standard skillfully, the monetary system was far from a fully automatic gold standard. Even then it was a highly managed standard. And certainly the situation is now more extreme as a result of the adoption by country after country of the view that government has responsibility for ‘full employment.’ [A gold standard] is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States.

Again, I think the consensus GOP take on monetary policy is misguided.
3)  My AEI colleague Alan Viard wrote a must-read post yesterday on the Cruz tax plan, which combines a low flat income tax with a value-added tax — though Cruz doesn’t use that term.  A key bit from Viard:

A VAT is much more growth-friendly than the income tax because it does not penalize saving and investment. However, it places more of the tax burden on those who are less well off. And, giving the government another major revenue source might make it harder to restrain entitlement spending growth.

The concern about spending growth is heightened because Paul’s and Cruz’s proposed VATs would be hidden from public view – their plans do not include either of the two steps that can be taken to make VATs visible to the public .A VAT can be split into a business cash flow tax and a wage tax, with the wage tax collected as an employee payroll tax that shows up on workers’ pay stubs. Or, the total VAT collected from businesses along the production chain can be listed as a separate line item on the final customer’s receipt, the way state and local retail sales taxes are listed. But, the Paul and Cruz plans would collect the VAT from businesses without listing it on customer receipts, ensuring that neither workers nor consumers would ever see the tax.

It’s a politically clever plan that allows Cruz to offer a super-low flat income tax at a rate not seen for a century. But it doesn’t lose the sort of revenue one might think because of the VAT. The Donald Trump plan, for instance, would lose $12 trillion ($10 trillion on a dynamic basis), according to the Tax Foundation, with a progressive tax code and 25% top rate. The Cruz plan would lose just $3.6 trillion statically, $800 billion dynamically. (Not that those revenue losses aren’t still pretty big.)
As the Tax Foundation’s Alan Cole explains:

It’s a powerful tax that captures pretty much all of the income in the country.  … Ted Cruz has proposed combining the corporate income tax, the payroll tax, and some of the income tax into a single, larger, broader tax assessed on businesses. … The Cruz plan would give us a rate of equivalent to 19 percent, by the invoice credit method. Furthermore, if you counted sales taxes levied at the state and local level, this plan would put our consumption tax rate at around 26 percent, tax-exclusive. That is actually towards the high end of the range of ordinary OECD countries. For example, in Denmark and Sweden, the overall consumption tax rates are in themid to high twenties. In Australia, the rate is ten percent, and in Japan and Switzerland, the rate is in the single digits. With this high VAT revenue (and much lower government spending than other OECD countries) the U.S. could sustain low income tax rates, such as the ten percent proposed by Senator Cruz.

4) Indeed, if one assumes the future US tax burden will need to rise for demographic reasons, the VAT provides an efficient mechanism for raising taxes in a less economically harmful way. Some Democrats talked about a VAT after President Obama’s 2008 election to pay for healthcare reform.
I would guess Cruz’s primary opponents will attack his VAT as enabling bigger government, especially given its “hidden” nature. But it does have some big economic merits, deficits aside.