Posted on 11/10/2015 10:10:35 AM PST by Jane Long
Senators Ted Cruz and Rand Paul are strong advocates of limited government. They are gifted spokesmen for free markets, and they are heroes for taking on the GOP establishment on issues such as overspending and civil liberties.
That is why their embrace of the value-added tax (VAT) in their presidential campaigns is so baffling. VATs are the revenue engine of big-government welfare states, not a proper funding source for the small federal government that both senators favor for America.
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 senators are right to want tax reform - but hiding the cost of government is not reform."
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.
I share Cruz and Paul’s passion for major tax reform, but we should not hide the huge cost of the government from the people. Federal spending currently costs 21 percent of the nation’s gross domestic product. So a simple flat tax on individuals at a 21 percent rate would more accurately convey the cost of government to the public.
By dropping individual tax rates to 10 and 14.5 percent with big exemptions, Cruz and Paul would be creating a mirage of cheap government. Those low "prices" for government would raise the demand for it - people would clamor for more subsidies from Washington. Like Cruz and Paul, I want cheap government, but the way to actually get it is to slash spending.
The VAT issue comes down to where we want to tax labor income, which is a huge base. Because Cruz and Paul shift much of the collection to businesses, more of the tax burden gets hidden from citizens and voters. For the Cruz plan, the Tax Foundation estimates that 71 percent of total taxes in coming years would come from the hidden business VAT, while just 22 percent would come from the individual income tax. By contrast, if the individual income tax is not reformed, it will raise about 50 percent of total federal revenues in coming years.
Furthermore, Cruz and Paul would abolish the 15 percent federal payroll tax. Currently, that levy is partly hidden from workers in the tax’s "employer half.""But the solution to that transparency problem is to change the administration of the tax so that the full amount is visible on workers' paystubs, which is where the burden already falls in reality.
If the government is going to take our money, it should mug us on the street in broad daylight, rather than sneak into our homes at night and burglarize us unnoticed. The VAT would encourage more burglary. Cruz and Paul want smaller government, but down the road, other politicians looking to shore up entitlement programs will say, "They could be financed with just a small tax increase on businesses." But each “small†increase in the VAT rate would transfer huge amounts of additional cash from the private economy to the government.
Cruz and Paul deserve credit for thinking big on tax reform, but they should remember the H. L. Mencken line, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.†If the common people want government spending, then the tax system ought to make them feel the full cost "good and hard."
VAT tax is something we do NOT want to EVER get started, here in the USA. It's what cemented Europe's status into socialism, imo.
It ALWAYS starts out small and innocent....but, like ANY other government program or tax....continues to GROW.
NO THANKS TO THE VAT TAX....TODAY or EVER!!
Ping to important info on VAT tax.
Wake up, folks....we do NOT want to get a VAT tax....of ANY kind, started here.
NO N O NO TO ANY VAT TAX!!!!!!!!!!!!!!!
Anyone who supports it has never been to Europe and seen how it cripples the economy.This is AMERICA,not Europe.
I’ll have none of VAT, thanks.
Absolutly NO VAT TAX!!!
‘When in Rome, do as the Romans do’ does that ring a bell for anyone? I don’t want to see American’s going anymore to ‘hell in a hand basket’ than She already is.....
Yes....my feelings, too, although the rest of Cruz’s tax plan looks good. That part is a perfect example of the slippery slope theory.
Agree...slippery slope, indeed.
Trump’s plan trumps all other plans. It lowers the tax rates, into tiers, to ultimately end up with a flat, or Fair tax, imo.
VAT tax it TERRIBLE!!! The ultimate transfer of wealth.
It’s the camel’s nose in the tent.
NOOOOOO to VAT taxes of ANY kind!!
I agree.
Thanks for the ping.
This is surprising for Cruz and I agree; it is a slippery slope.
You should check out the HST in Canada. It has been very successful. It took us from a huge deficit to balanced budgets.
The advantage of this type of tax is that it is built into the price of pretty much everything so it makes tax avoidance difficult. People who otherwise hide from the tax man still pay this tax in the price of everything they buy. People who buy expensive stuff like cars pay more tax for high end cars so the low end can be cheaper.
It sure is and has messed up the countries that use it, so why should we ?
First I’ve seen of it.
Link to supportive details, please?
If true, it comes down to Cruz still being the best of the bad.
Problem is our federal revenue is $3.75T with spending >$5T, with the necessary cuts being so deep & drastic we can’t solve the problem exclusively by spending cuts without widespread societal rioting and cities being burned down (which is an alternative...). I might grudgingly consent to a tax increase IF it is handled by someone smart, adept, & conservative enough for me to trust - like Cruz. I might grudgingly consent to a VAT if federal spending is slashed 20%.
Need more details.
The real answer to all this is we’re past a tipping point, and nothing will work.
‘Where is the Cruz fans?’
They’re busy supporting Carson.
Must be accountants and public employees lobbying them for this. Think of how many jobs this would create!
.......If the government is going to take our money, it should mug us on the street in broad daylight, rather than sneak into our homes at night and burglarize us unnoticed.
The VAT would encourage more burglary. Cruz and Paul want smaller government, but down the road, other politicians looking to shore up entitlement programs will say, “They could be financed with just a small tax increase on businesses.”
But each ‘small’ increase in the VAT rate would transfer huge amounts of additional cash from the private economy to the government.....
This is how it started, in Europe. A ‘miniscule’ amount....then....it’s just continued to grow and grow.
NO NEW VAT taxes!!!
“You should check out the HST in Canada.”
I did. Sucks to get a receipt with itemized lines “15% sales tax, 18% VAT”.
It’s rather proof that the pro-FairTax rhetoric “if people see the tax _right_there_ on every receipt, they’ll push back and get lower taxes legislated” is misguided. Canadians regularly put up with 32% tax on every purchase without serious complaint.
The issue with VAT is that other countries use it but in addition to other taxes, such as income tax and sales tax..
What Cruz proposes is using a Vat like tax, to replace income tax...
VAT is nothing more that a sales tax at the wholesale level, as I see it... It’s nothing to fear here in the US as a option, proposed by a conservative, but the proposed by a liberal, it would be another tax on top of what we already have.
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