Thursday, 14 April 2016

CapX: In Defence of Ted Cruz

CapX: In Defence of Ted Cruz

by Sam Bowman

"Shifting the burden of taxation away from investment income should incentivize investment and, according to the Tax Foundation’s dynamic model, lead to a 13.9 percent higher GDP over the long term and 12.2 percent higher wages. Cutting out practically all deductions and exemptions from the system would remove harmful distortions, too.

Jonathan Chait has objected that this would be regressive, but I’m not so sure. In the UK, VAT is actually a mildly progressive tax, looking at total lifetime consumption. This is partially because of the many exemptions we have for things like food and clothes, but not entirely. All income is eventually spent on consumption, so even if we cut taxes on investment income now, once people consume that income they will be caught by the consumption tax.

But even if we look at a single year, the regressivity point can be addressed by lump-sum cash transfers to poorer people. And, sure enough, Cruz’s plan includes a massive expansion of the Earned Income Tax Credit, a simple wage subsidy to low earners.

Though tax credits like this are controversial among British free marketeers, they have bi-partisan support in the US, and wonks on both sides of the Atlantic have praised the EITC as an effective way of boosting employment and the wages of the low-paid. Indeed here in Britain both the Institute of Economic Affairs and my own think tank, the Adam Smith Institute, argued against cutting similar tax credits last year."

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