GOP Debate: Marco Rubio vs Ted Cruz Tax Plan

Which tax plan is better for middle class families: Ted Cruz’s flat tax and VAT or Marco Rubio’s more conventional tax relief package?

Let’s begin by defining “middle class family.” I and most people would define that as a median-income (half make less, half make more) family of four with two minor children.
The Census Bureau says that such a family makes about$72,000 per year.

For the sake of simplicity, let’s make this vanilla family even more vanilla. All of their income is wages. Their taxable wages are also their gross wages. They, like70% of tax filers, claim the standard deduction (so no mortgage interest deduction or charitable deduction).

Let’s evaluate this vanilla, plain Jane, very boring family under three scenarios: current tax law, the Rubio plan and the Cruz plan.

Current Tax Law
The family pays a 15.3% FICA (Social Security and Medicarepayroll) tax of $11,016. This is both “halves” of the tax (employer plus employee), as all stripes of economists say the whole tax is in fact borne by the worker at the end of the day.

On the income tax side, the family claims a standard deduction of $12,600 and four personal exemptions totaling$16,000. This results in federal taxable income of $43,400, and a federal tax before credits of $5,588. Reduce this latter number by two child tax credits totaling $2,000, and you have a federal tax after credits of $3,588.The total current tax liability for our family of four (FICA plusincome tax) is $14,604.

Rubio Tax Plan
For income taxes, the taxable income is $72,000. This results in a tax before credits of $10,800. A $4,000 personal tax credit, $2,000 in child tax credits, and $5,000 in new child tax credits are then applied. The result is a negative$200 income tax liability.
This is applied under the Rubio plan to the FICA liability, reducing it by $200.The total Rubio plan tax liability (FICA plus income tax) for our family of four is $10,816. This is a tax cut of nearly$4,000 from current law. It also bears mentioning that the Rubio plan completely eliminates the income tax for median income families of four with two kids, a powerful talking point.

Cruz Tax Plan
Based on the top of the page quote, you would think Cruz’s plan would win here by flying colors. After all, he has a low 10% flat tax. Even more, his plan eliminates FICA entirely, the largest component of tax liability under both current law and the Rubio plan.
You’d be wrong. Under his income tax, Cruz permits the first $36,000 of income for a family of four to be deducted. That results in taxable income of $36,000. The tax before credits is $3,600, and this is reduced by $2,000 in child tax credits. The tax after credits is $1,600.Then you have Ted Cruz’s VAT(and it most certainly is a VAT). Herein lies the rub.

In a subtraction method VAT (the Cruz “business transfer tax”), wages are not deductible as a business expense. That means that wages are actually taxed twice under the Cruz plan.
First, they are taxed as part of the VAT tax base. Then, they are taxed again when subjected to the personal income tax.

That second, VAT level tax on wages has to be accounted for in order to make an apples to apples comparison. Doing the math by applying Cruz’s 16% VAT to business income needed to pay a $72,000 wage, I end up with a second VAT tax on wages of $13,714. Just like FICA taxes are ultimately borne by workers, so is this second wage tax on the VAT level. If others have an alternate way of calculating the VAT’s wage taxation, let’s hear it. But it can’t simply be ignored, as Senator Cruz is doing in the excerpt above.
The total Cruz plan tax liability (VAT plus income tax) for our family of four is $15,314. This is a tax increase of over$700 relative to current law, and is nearly $4,500 more in taxes than the Rubio plan.

Conclusion
The Cruz plan is not the deal for middle class families that he claims it is. It results in higher taxes compared to current law, and it results in much higher taxes than this family would pay under the Rubio tax plan.

This is consistent with the tax Foundation's analysis of the Cruz plan. They find that after-tax income for the middle class is pretty much unchanged (gains of less than 2%), while the top decile sees gains of over 17% and the top 1% sees gains of nearly 30%.

Now, conservatives should not be engaging in class envy, and I don’t mean to. But the Cruz plan is simply not designed as a boon to America’s middle class families, as he claimed in the debate. The Rubio plan certainly is.



Source:  Forbes




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