The Tax Day Flood

It’s tax filing deadline day—an extension from the usual April 15^th. We’re having a flood here in Houston, from storms all night long. Several hours during the night we got 2-3 inches of rain per hour. In our neighborhood we got 15.6 inches overnight, double what we got during Tropical Storm Allison. The nearby bayou went over its banks; it’s a 500-year flood level. Our neighborhood, relatively new, is built up several feet about street level, so we’re safe. But a number of neighbors and people we know from church have some flooding. And the main street we have to take to get out of the neighborhood has flooded.

Houston's Tax Day Flood
photo from Houston Chronicle reader, here

This afternoon we’re having a bit of a reprieve between storms that are predicted throughout the week. That should give the water a chance to flow into the reservoirs down the road. We’re the bayou city for a reason; bayous (i.e., drainage ditches) are in and around every neighborhood. Because heavy rains happen here. So we’ve planned for them. And, when whatever we do is not enough and flooding happens, we dig in and help each other out.

There ought to be some metaphor in here about taxes. One might be that we’ve been suffering something of an economic catastrophe since around late 2008—that’s eight years. At last there are signs of the bad stuff letting up in the not-too-distant future.

I’m looking at the possibility that we could get lower taxes, simpler taxes, higher growth—all the things that happen when the government gets out of the way. These things might just happen, if we get the Ted Cruz tax plan.

It’s a simple plan. He put out an ad this past week, explaining it in one minute:

You can read the summary on his website. 

On Friday Ted Cruz appeared on CNBC’s Squawkbox, where he talked about his tax plan with Joe Scarborough and team. It was a good opportunity to hear what the outcome for the economy will be of this simple plan. So I’m sharing a few portions of it.

Joe Scarborough starts the conversation asking about economic growth.

Ted Cruz: Growth is foundational. My number one priority is growth. Every other problem we’ve got, whether it’s unemployment, the debt, the deficit. Whether it is strengthening and preserving social security and Medicare, or whether it is rebuilding our military and keeping us safe—you’ve got to have growth to make it work. And we have been trapped in stagnation for the seven years. And if we don’t turn that around, nothing else gets fixed….

Historically, since WWII, our country has grown an average of 3% per year. And yet from 2008 to today it’s averaged only 1.2% a year. If we stay at… this level of growth, these problems are not solvable….

My economic agenda is focused very directly on growth, because if you get back to historic levels, 3, 4, 5% growth, suddenly the federal government numbers turn around dramatically….

Joe S is concerned about what looks like a global problem and asks about that. Ted Cruz responds with examples from history, from Coolidge, to JFK, to Reagan, where the right policies turned things around.

TC: Taxation reform and regulatory reform are the two most potent levers that the government has. In the 1960s, John F. Kennedy did the same thing. In the 1980s Ronald Reagan did the same thing. We have three periods in the past century, the 20s, the 60s, and the 80s, and in every one when we passed tax reform and regulatory reform, when we reduce the burdens of government on small businesses—and small businesses are critical; they’re the job creators; they’re the innovators; they’re the catalysts—the result has been record-shattering growth. We just need to do what works.

At 13 minutes in, Ted Cruz gets to describe the actual tax plan.

TC: My tax plan is simple. It is a simple flat tax. For a typical family of four, for the first $36,000 you earn, you pay nothing. Zero income tax. Zero payroll tax. Nothing. Above $36,000, each marginal dollar you pay a simple flat tax of 10%.… Everyone pays the exact same….

Another difference, by the way, no longer do you have any differential rates between ordinary income and dividends or cap gains…. Everything’s 10%, which means people actually allocate capital based on where it’s efficient, rather than on what the tax laws say, because the tax laws are neutral to everything.

And then, on the business side, we abolish the corporate income tax. As you know we have the most punitive corporate income tax of any developed country in the world. We abolish the Obamacare taxes. We abolish the payroll taxes, which are the single biggest tax most working Americans pay. And we abolish the death tax, which is a tremendously unfair and punitive tax on farmers, on ranchers, on small businesses. And we replace all of those with a simple 16% business flat tax.

And the effect is an incredible catalyst for job creation and wages going up, and bringing jobs back to America. That’s my priority: high-priced jobs coming back to America, wages going up for everyone.

When government people score a plan, they give a number on what it will cost. But they assume the tax cut will do nothing but reduce government revenue. That is called static scoring. Ted Cruz gets to talk about that, and offers a more likely dynamic scoring scenario.        

                                                                                                                             

TC: I suspected you might say that, so I actually printed out a comparison of tax plans that was done by the Tax Foundation. The Tax Foundation is a nonprofit…. It is nonpartisan, and it scores everybody’s plan. If you look at it the way they score it, in terms of the cost—Now, the static cost is $3.6 trillion; that’s a lot of money. But scoring it static is assuming that cutting taxes has no impact on the economy—that doesn’t make any sense. I mean, that is an Alice-in-Wonderland scoring.

If you score it with dynamic scoring, which is, you take into effect what is going to happen when you cut taxes, then the total cost of this plan is $768 billion. It’s less than a trillion. If you contrast that, for example, to Donald Trump’s plan, Donald’s plan costs over $10 trillion. So mine is less than a trillion…. And the difference is, even though Donald’s is more than ten times as expensive as mine is, my tax plan produces more economic growth. 4.9 million new jobs, coming from this capital investment, increases 44%.

One of the big reasons is that any business, when you invest in capital, it’s immediately deductible. No longer do you have complicated depreciation tables. None of that matters. If you make a capital expenditure, you immediately expense it. That is a powerful catalyst for growth.

And then, the most exciting thing about it is just the impact on after-tax wages, take-home pay. Every income group, from the very poorest to the very richest sees a double-digit in after-tax pay. The average family in America under the Cruz simple flat tax will take home $7600 dollars more. Seven thousand six hundred dollars. That’s real money that makes a difference for someone struggling to make ends meet

Around 34 minutes into the conversation, Joe Scarborough brings in economist Art Laffer. Laffer, best known for the Laffer Curve, advised Reagan back in the day, and has helped Cruz in developing his plan. He is asked whether he can verify this “dynamic scoring.”

Art Laffer: Of course dynamic scoring’s the right way to do it, Joe…. I did watch the other segment. I thought Ted did a great job of explaining exactly how it works and what the dynamics of it would be—except that I think he underestimated the dynamics that will occur.

If you look at his tax plan, it makes Reagan’s tax plan look weak, in the 1980s. I would expect to see a greater growth rate, not only because Obama is worse than Jimmy Carter, but because this tax plan is even better than Reagan’s. It’s would take the top rate down to 16% on businesses and 10% on individuals. And I think you’ll get growth rates higher than Reagan’s, which were enormous, Joe. You’ve got 6, 7, 8% real growth annualized on a quarterly basis in the years ‘83, ‘84. And in a number of the quarters you’ll get more than that. Our economy is relatively much worse off than it was even under Jimmy Carter.

There’s some discussion about the excuses, relating to the Fed, about why this recession is supposedly different from all others, and then Ted Cruz is brought back in.

TC: I agree with Art that the numbers that were estimated, if anything they’re underselling the GDP impact. My object is a minimum of 5% GDP growth. And I would note JFK, when he campaigned, he campaigned promising 5% GDP growth, and he ended up producing 5% GDP growth. 

AL: And the tax revenues were much higher too. He went into surplus because of economic growth.

TC: That is exactly right. And the wealthy ended up paying more. When you cut the tax rates, the wealthy paid a higher percentage of taxes.

Art, tell us, what would the impact be on the economy? What would the impact be on working men and women, if we had four years or eight years of 5% GDP growth, instead of the stagnant 1 and 2% we’ve got right now?

AL: Well, the impact would be huge. I mean, the biggest driver of tax revenues, Ted, is GDP growth.

But what very few people have talked about on your plan, and, if I may, is the revenue impact on cities, counties, local districts, and state budgets would be enormous as well. And no one’s even looking at that.

The impact on income redistribution would be also huge. I mean, John F. Kennedy put it so beautifully—you referred to Kennedy, and he was my hero—John F. Kennedy said the best form of welfare is still a good high paying job. And creating those jobs will reduce inequality dramatically. And that will lead to more prosperity everywhere.

So you’re going to have much higher revenue impact. I think you’re going to get even higher growth rates than 5%. And you’re going to reduce inequality. What’s not to love in this plan?

Indeed. What’s not to love?

But would those good outcomes really happen? I think they would. I remember the Reagan years, which is helpful. But I think hearing from business people is helpful. I came across a five-minute video by businessman/speaker Ryan Moran, in which he talks about the so-called “fair share” he has to pay. He holds up a check for $170,000 he’s paying in taxes. This is not his tax bill; he paid the estimated tax in December. This is just the overage, by which he was off. He explains a bit about what he’s paying. And then he talks about what he could do with that money.

Now what could a businessperson do with $170,000? You know what I would like to do? Hire more people. I’d love to hire three highly paid people at $55,000, or five people at $35,000. But I can’t. ‘Cause it’s going to the government…. I’d love to put it back into a business, or back into people….

So the government can’t just create things out of thin air. It has to take—it has to take— from what would be productive: hiring people, investing into more products and services, creating better experiences for customers, putting into a college fund for my ten-month-old daughter. Any of that would be a better use.

But, no. People got to pay their “fair share.”

It’s not just speculation. People really do make better use of their money than government does.

I like that a 10% flat tax is pretty similar to what God does, with tithing. Let’s limit what government takes from us, and limit what government does with the tax money it gets—to the powers enumerated in the Constitution. 

Let the government-caused catastrophes end. And then watch us thrive.