Cruz proposes to transition to the new system by imposing a 10 percent tax on profit accumulated by foreign subsidiaries of U.S. companies through 2016. U.S. companies have deferred taxes on an estimated $2.1 trillion of such earnings. The 10 percent tax would be payable over a decade.
Republican Debate
Cruz’s business-tax plan stirred conflict during a Republican debate last month, when Florida Senator Marco Rubio said it would lead to higher prices for consumers and act as a hidden tax. Many conservatives say value-added taxes aren’t as transparent as other forms of taxation. At the time, Cruz disputed Rubio’s description of his plan.
“My proposal is not a VAT,” the Texas senator said during the Jan. 14 debate in North Charleston, South Carolina. “A VAT is imposed as a sales tax when you buy a good.” Yet the Tax Policy Center’s analysis, like others from across the political spectrum, concluded that Cruz’s business-tax plan is indeed a value-added tax.
“The base of this new tax would be the difference between a firm’s sales and its purchases from other businesses, which is equal to the value-added of the business,” according to the analysis.
Cruz’s plan would create a bigger deficit than Rubio’s plan or Jeb Bush’s, but a smaller revenue loss compared with Donald Trump’s plan, said the Tax Policy Center’s Burman. In South Carolina, which holds its Republican primary election Saturday, polls put Cruz in second place behind Trump. Cruz finished in fifth place in the New Hampshire primary earlier this month.
Social Security
Cruz also proposes to repeal individuals’ payroll taxes for Social Security and Medicare, including the 0.9 percent Medicare tax on high-income workers under the Affordable Care Act. Burman said it was unclear how Social Security would be funded.
For individuals, Cruz would collapse the current seven tax brackets into a single, 10 percent rate on income, capital gains and dividends -- about one-fourth the current top 39.6 percent rate. The plan would increase standard deductions but repeal most itemized deductions, except those for charitable donations, contributions to retirement savings accounts and a limited deduction for home mortgage interest. As a result, fewer taxpayers would itemize their deductions, which might hurt charitable contributions, the analysis found.
Cruz would also repeal the 12.4 percent payroll tax for Social Security and a 2.9 percent payroll tax for Medicare. He’d eliminate Medicare’s 3.8 percent net investment income tax on high-income taxpayers. The payroll tax cuts would reduce federal revenue by about $12.2 trillion over a decade, the analysis found, while the various changes to federal income taxes would cut about $11.9 trillion more. Scrapping the corporate income tax would cost about $3.5 trillion and creating the new value- added tax would raise $19.2 trillion over the decade, offsetting about 70 percent of the various tax cuts, the report said.