Economy

Ted Cruz’s Tax Plan Hands The 1 Percent A Massive Break

CREDIT: AP Photo/Mark J. Terrill

Republican presidential candidate Sen. Ted Cruz (R-TX)

On Thursday evening, Republican presidential candidate Sen. Ted Cruz (R-TX) released a tax plan that calls for a flat tax of 10 percent that would end up with a benefit for the wealthiest 1 percent that dwarfs what everyone else would get.

Cruz’s plan wouldn’t tax the first $36,000 of income for a family of four, but anything made above and beyond that would be taxed at 10 percent. That means that the most a wealthy family could pay on its income or investment would be that same 10 percent, a big drop from the top income tax rate of 39.6 percent and capital gains tax rate of 23.8 percent.

The plan would also get rid of many deductions but would keep those for charitable giving and the mortgage interest deduction. The benefit of the mortgage deduction mostly flows to those who make more than $100,000 a year, while the charitable deduction is mostly used by the well off. He would also eliminate the estate tax, which only affects the wealthiest 0.2 percent.

Corporations also get a big windfall. While they would lose all of the loopholes they use to lower their on-paper tax rate of 35 percent to about 19 percent, they would still see it drop further to a 16 percent “Business Flat Tax.”

Cruz would also offer some relief for lower-income Americans by expanding the Child Tax Credit and Earned Income Tax Credit.

But the overwhelming benefit of Cruz’s tax cuts would flow to the richest Americans. While the Tax Foundation’s analysis finds it would cut taxes by 9 percent on average, increasing after-tax income for everyone by at least 14 percent if making some big assumptions about growth, the wealthy still make out with more. The Americans in the poorest 10 percent of the income ladder would get a 15.3 percent boost under these assumptions; the 1 percent gets double that, at 34.2 percent. Without its assumptions, the plan has an even more disparate impact, boosting the poorest Americans’ income by 4.3 percent but the richest 1 percent by 29.6 percent.

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CREDIT: Tax Foundation

Cruz says that an important requirement of his plan is that it “spur robust economic growth and job creation.” In an op-ed describing it, he asks readers to “imagine 4.9 million new jobs.” The Tax Foundation says that taking into account the assumption that lower taxes on investment would spur growth, his plan would increase the economy by 13.9 percent and 4.8 million new jobs.

But there’s reason to be skeptical of those kinds of assumptions. There is no evidence that high corporate tax rates hurt economic growth, and even corporations that pay higher effective rates create more jobs than those that lower their bills. The same holds true with lowering taxes on wealthy individuals. Post-war growth has generally been higher during times when the top marginal tax rate was higher and lower when rates were much lower; in the 1950s, the top rate was more than 90 percent but growth averaged more than 4 percent.

Another problem for Cruz’s plan is that it would reduce tax revenues by $3.6 trillion over a decade, which only drops to $768 billion with generous assumptions about growth.