Senior Citizens Are Going to Hate Ted Cruz’s Tax Plan

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Yesterday Sen. Ted Cruz introduced his tax plan. Let’s let the Tax Foundation describe 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), with few exemptions.

I just want to make a quick point about this: if it ever became a serious proposal, AARP would go ballistic. Wonks might support a switch from an income tax to a VAT, but old people decidedly don’t. Here’s why.

Businesses would pay Cruz’s VAT and then pass along the cost to consumers. In practice, you can think of it like a sales tax. If it’s been around forever, everything is fine. But if you replace existing income and payroll taxes with a VAT, the elderly get screwed.

Take a look at the table on the right. To make the arithmetic easy, 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.1

Now look at the last 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 extra 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 take 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 extra 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 about it—and there’s no simple solution. If you transition a VAT slowly, it doesn’t hurt too much. But Cruz doesn’t say anything about that. He just wants to flip a switch. If he ever starts looking like a serious candidate, he’s going to have some serious explaining to do to America’s elderly.

1Don’t worry about interest and inflation. They don’t change the basic picture.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate