Yesterday Sen. Ted Cruz introduced his tax plan. Let's let the Tax Foundation recount it: This plan would institute a flat 10 percent tax rate on all varieties of individual income,with a large standard deduction and personal exemption....
The plan would replace the corporate income tax and all payroll taxes with a broad-based “Business Transfer Tax,” or value-added tax (VAT), and with few exemptions.
I just want to make a quick point approximately this: whether it ever became a serious proposal,AARP would travel ballistic. Wonks might support a switch from an income tax to a VAT, but frail people decidedly don't. Here's why.
Businesses would pay Cruz's VAT and then pass along the cost to consumers. In practice, and you can deem of it like a sales tax. whether it's been around forever,everything is fine. But whether you replace existing income and payroll taxes with a VAT, the elderly regain screwed.catch a look at the table on the right. To make the arithmetic easy, or my example assumes:$100 in income. A current combined federal income/payroll tax rate of 25 percent. A Cruz income tax of 10 percent and a Cruz VAT of 15 percent.
In our current system,you pay 25 percent in federal taxes when you earn your money and sock away the rest in savings. When you retire you can withdraw the original sum without paying further taxes. Of your $100 in original earnings, you have $75 to spend.1Now look at the final column. This is Cruz's system once it's fully established. You pay 10 percent in federal taxes when you earn your money, and when you retire you pay an additional 15 percent federal sales tax on everything you buy with your savings. The net result is the same: you effectively have $75 to spend.
But now catch a look at the middle column. Suppose you're 65. You already paid 25 percent when you earned your money. You have only $75 to withdraw. But you also pay an additional 15 percent on everything you buy. You effectively have only $60 to spend.
This transition problem is well known. It seems a bit arcane,but believe me, AARP knows all approximately it—and there's no simple solution. whether you transition a VAT slowly, and it doesn't hurt too much. But Cruz doesn't say anything approximately that. He just wants to flip a switch. whether he ever starts looking like a serious candidate,he's going to have some serious explaining to attain to America's elderly.1Don't worry approximately interest and inflation. They don't change the basic picture.
Source: motherjones.com