Ted Cruz’s tax plan, envisioning tax returns that fit on postcards, would whack businesses twice over, Marco Rubio says.
We wondered about that.
In the Jan. 14, 2016, Fox Business Network Republican presidential debate in North Charleston, S.C., Sen. Rubio of Florida said that under the plan advocated by Sen. Cruz of Texas, businesses basically "will have to pay a tax, both on the money they make, but they also have to pay taxes on the money that they pay their employees."
A moment later, Rubio said Cruz’s plan "does not eliminate the corporate (income) tax or the payroll tax. Businesses will now have to pay 16 percent on the money they make. They will also have to pay 16 percent on the money they pay their employees."
Cruz disputed that characterization, saying in part that "a critical piece that Marco seems to be missing is that this 16 percent business flat tax enables us to eliminate the corporate income tax. It goes away."
Cruz’s plan replaces the corporate income tax, the payroll tax and others with a flat tax. Does it also make businesses pay 16 percent on profits and payroll, as Rubio said?
Cruz’s plan outlined
After emailing Rubio’s campaign about how he reached his 16 percent conclusions, we turned to Cruz’s tax plan as outlined by his campaign. "Under the Simple Flat Tax," Cruz says on a campaign webpage, "the current seven rates of personal income tax will collapse into a single low rate of 10 percent. For a family of four, the first $36,000 will be tax-free. The Child Tax Credit will remain in place," Cruz proposes, and the plan revamps the earned-income tax credit while preserving deductions for charitable contributions and mortgage interest payments.
Here’s the flat-tax postcard as envisioned by Cruz:
SOURCE: Web page, "The Simple Tax Plan," Ted Cruz presidential campaign (viewed Jan. 20, 2016)
Next up: the 16 percent element.
On Cruz’s website, we spotted no direct indication the 16 percent would apply to payroll spending. "For businesses," Cruz says there, "the corporate income tax will be eliminated. It will be replaced by a simple Business Flat Tax at a single 16 percent rate. The current payroll tax system will be abolished, while maintaining full funding for Social Security and Medicare." Cruz further says the business flat tax "will be based on revenues minus expenses such as equipment, computers, and other business investments."
In general, Cruz says, his proposed tax overhaul will deliver a tremendous economic boost, according to the "well-respected Tax Foundation," a Washington, D.C., nonprofit that describes itself as a leading independent tax policy research organization.
We fetched the foundation’s October 2015 analysis of Cruz’s plan which, the foundation said, would "replace the corporate income tax and all payroll taxes with a 16 percent ‘Business Transfer Tax,’ or subtraction method value-added tax. In addition, his plan would repeal a number of complex features of the current tax code."
Farther along, the analysis spelled out a payroll aspect. Specifically, the foundation said, Cruz’s plan:
"Enacts a broad-based, 16 percent ‘Business Transfer Tax’ or value-added tax. This tax is levied on all business profits, less capital investment. This would include the payroll of business, government, and nonprofit institutions, as well as net imports. The tax would exempt from taxation the purchase of health insurance. A business transfer tax is also often known as a subtraction-method value-added tax. While its base is identical in economic terms to that of the credit-invoice VAT seen in many OECD countries, it is calculated from corporate accounts, not on individual transactions.
The foundation also said: "Under current law, some taxes on labor are explicitly levied on nominal wages, reducing take-home pay, while others are implicitly passed on to workers through lower nominal wages. The business transfer tax would also fall substantially on payrolls, but it would do so entirely through implicit reductions in nominal wages rather than explicit reductions in take-home pay."
That’s a bit gobbledy-gooky for us. A foundation official, Kyle Pomerleau, told us by phone and email that what Rubio said largely holds up, though it would be wrong to conclude businesses under Cruz’s plan would pay 16 percent on the same money twice.
That is, Pomerleau elaborated, Cruz’s plan eliminates the existing payroll tax, which is 15.3 percent of wages (half of that paid by employers, the other half by employees), but the plan counts payroll expenditures as part of net business profits, which are taxed at 16 percent.
"Even though his plan gets rid of the payroll tax," Pomerleau emailed, "his new Business Flat Tax will end up taxing that payroll by disallowing its deduction at the business level."
Another authority, Joe Rosenberg of the Urban-Brookings Tax Policy Center, told us by phone that Rubio was accurate about Cruz’s plan presuming he meant what most people define as "profit" by his phrase "what you make."
Rosenberg walked us through how he sees Cruz’s plan working: Say a business buys something for 50 cents at wholesale and has to pay its employees 50 cents, accumulating $1 in costs. Then the business sells the something for $1.10, drawing a 10-cent profit. Under the Cruz plan, Rosenberg said, the business pays the flat tax solely on the 60-cent difference between the $1.10 in sales and the 50 cents spent on the wholesale purchase.
And, Rosenberg noted, there’s another way to pin what Cruz’s plan subjects to the 16 percent tax -- by isolating what the business "makes," the 10 cents, and then adding the 50 cents in employee payroll.
"It’s very fair to interpret what Sen. Rubio said as correct," Rosenberg said, though it’s also worth mention (again) that Cruz’s plan eliminates existing payroll and income taxes. Broadly, Rosenberg didn’t agree that Cruz’s plan whipsaws businesses, saying: "It’s a change in the way they’re taxed. It’s not taxing something twice."
We didn’t hear back from Rubio’s camp about his claim nor did Cruz aides engage.
Footnote: A Jan. 14, 2016, foundation post by economist Alan Cole says Cruz and Rubio aren’t proposing entirely distinct tax approaches. "In fact," Cole wrote, "if you put together two taxes from Rubio’s plan (and fiddle with the rates), you can actually synthetically construct the business flat tax from Cruz’s plan!"
Rubio said that under Cruz’s tax plan, "businesses will now have to pay 16 percent on the money they make. They will also have to pay 16 percent on the money they pay their employees."
Under Cruz’s plan, that rate applies both to net income and payroll expenditures though the way this description was phrased by Rubio merits clarification. That is, the 16 percent would not be applied to what a business makes and separately applied again to money paid to employees. Also unsaid: The proposed tax would replace taxes including payroll and income taxes.
We rate this claim Mostly True.
MOSTLY TRUE – The statement is accurate but needs clarification or additional information.
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Transcript, Fox Business Network Republican presidential debate, North Charleston, S.C., The Washington Post, Jan. 14, 2016
Web page, "The Simple Tax Plan," Ted Cruz presidential campaign (viewed Jan. 20, 2016)
Report, "Details and Analysis of Senator Ted Cruz’s Tax Plan," the Tax Foundation, Oct. 29, 2015
Telephone interview and emails, Kyle Pomerleau, director of federal projects, the Tax Foundation, Jan. 20, 2016
Telephone interview, Joe Rosenberg, senior research associate, Urban-Brookings Tax Policy Center, Jan. 20, 2016
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