Why I Love the Cruz Tax Plan

Note: The following is an email I wrote to a liberal college classmate who asked my why I liked the Cruz tax plan. He did some research himself, and cited this New York Times article, which I refer to in my response.

Dear Xxxx,

The first thing you should know is that we're on the same side, in the sense that we want the same basic things. No one wants to see people suffer, although my guess is you would make the social safety net a bit bigger than I would. (Mine is smaller not out of meanness, but because I worry about how moral hazards can keep people poor.) Where we differ is that I don't see the government as an effective solution to just about anything. It's inefficient, and has its own agenda. It's poorly incentivized, and rarely accountable. If anything, it tends to only worsen problems it tries to solve. There are other, better, ways, none of which involve coercion, as government solutions must. You fear any Republican will dismantle the New Deal and Great Society, but you should want them dismantled because they have been failures at the very things they set out to do. And yet, we still have the TVA, the FCA, etc. (The FDIC can stay, that one's good.) Think of the good those trillions of dollars could have done had they been better allocated.

On to taxes. I love Cruz's plan for many reasons. It massively shifts incentives towards work, savings and investment. These things increase economic growth and nothing is better at solving societal problems, particularly poverty, than economic growth. It eliminates the estate tax. I'm sure you like that one, but it collects relatively little money, breaks up family businesses, and causes the wealthy to jump through ridiculous legal hoops to minimize its impact - a huge waste of time and resources, where society is concerned.

I used to live in Hong Kong, where they have a 15% flat tax. It is wondrous. I literally spent 5 minutes on my taxes. Places like Singapore and Russia (the irony!) are also having great success with flat taxes. (It works because it's simple. And because of the lower nominal rates, compliance goes through the roof.) Last year, I had almost no taxable income (such is the startup life!), and yet my tax return was 113 pages. What a phenomenal waste of time and money! A flat tax will save millions of hours and billions of dollars in preparation work. And imagine the psychic benefit to our nation of not having an IRS. Cruz is proposing a 10% rate, but I suspect that is a starting point for negotiation. Most countries that have a flat tax are in the 12-15% range.

The 10% tax on repatriating foreign cash for corporations will bring trillions of dollars back home, a win for everyone as that money gets reinvested in America. It's doing no one any good right now, and the only reason it doesn't come home is that we have one of the highest corporate tax rates in the world. Capital flows to where it is well treated, and it always will.

One of my favorite things, and one where you might agree, is that eliminating traditional corporate income taxes will eliminate our country's biggest source of corruption, which is the tax code itself. This is something Cruz always points out. There's a reason the tax code is 75,000 pages long - companies hire expensive lobbyists who get legislators to carve out special exemptions in the code, all in exchange for campaign contributions. And this is all legal! Most call it crony capitalism, but I don't like that term because there's nothing capitalistic about it. Rigging the game is precisely the opposite of free enterprise. It strikes me that this is where economic conservatives, like me, and Occupy types might have common ground. The only way to get rid of this plague on our society is to scrap our current code. It can't possibly be repaired.

Cruz's plan is radical, indeed, as the Times points out, if one's starting point is our current code. It's not radical at all to the many countries that do something similar. The Times author seems to be singularly focused on the corporate VAT part of the plan. I will admit, that I have always been leery of the VAT, but only because it represented a second tax regime. The last thing we need is a VAT and an IRS. To me, that doubles the potential for political chicanery. But, Cruz's plan eliminates the IRS entirely, so the VAT becomes palatable. I like the VAT, because like any cost you impose on a business, it tends to be spread around to a lot of parties - shareholders, management, employees, and consumers. This is true because it's unlikely that businesses will be able to pass through 100% of the costs. They rarely can, as the market won't bear it. But yes, it tends to be a consumption tax.

But, in trying to think why a liberal might like the VAT, I would say it's because it taxes the very activities by the 1% that they might find objectionable - the yachts, the fast cars, and the like. The more you spend, the more you're taxed. On the other hand, if you don't spend, the money is invested into the economy where it creates growth and jobs. It's numbers on a brokerage statement to you, but a job to someone else. Culturally, the VAT will incentive the rich not to act like assholes. I like that part too.

Where I will disagree vehemently with most liberals is this: the tax code is not there to carry out anyone's views of social justice. It is there to raise money for the operation of the government. Social engineering is a dangerous and ultimately corrupt game. But, really, if you want to rich to pay more, you should cheer lower rates. This is the part the drives me nuts about liberal logic. Did you know that after Reagan cut rates (from 70 to 28!), and after Bush II did the same, the rich paid both a higher percentage of tax receipts as well as more absolute dollars that everyone else? This happened because growth accelerated, they worked harder, and they shifted assets away from tax shelters. There was also likely far less cheating, although that's harder to document. Hurrah, right? Isn't having the rich pay more what the left wants?

Nope. The left only seems to focus on what rate people pay, not the amount of dollars they pay. This is because they are focused on their perception of social justice, not the actual results.

Sorry for how long winded this was, but as you can tell, I'm fairly passionate on the subject. Not because I want to save money on my taxes next year, but because I feel strongly there is a moral imperative to do something like what Cruz is suggesting.

And, the person who authored Cruz's plan is none other than (another college classmate). He and I have been talking about this stuff for years. You know both of us, so I assume/hope you know that we are not animated greed on this subject. Nor are other conservatives I know, for the record.

Cheers,

Scott