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Ted Cruz’s Iowa Win Not A Victory For A VAT

February 5, 2016

Sen. Ted Cruz finally did what the GOP establishment couldn’t: He stopped Donald Trump’s momentum. After fending off criticism from party elites who can’t stand his tactics in Washington, and vicious attacks from Trump about his place of birth and integrity, Cruz defeated the billionaire businessman in the Iowa caucuses Monday. There are many reasons for the Texas senator’s come-from-behind victory, but the appeal of his tax program probably wasn’t one of them.

Cruz has perhaps the most bizarre tax program of any of the major candidates in the GOP race. In fact, his tax plan has more akin to proposals from fringe candidates such as Dr. Ben Carson and Sen. Rand Paul than with more establishment challengers like Jeb Bush and Sen. Marco Rubio. Cruz is essentially pushing for a value added tax. He calls it a business flat tax, but experts would say it’s asubtraction method VAT. VATs are traditionally unpopular in the United States because conservatives view them as money machines to fund expanded government, while liberals worry about the tax’s extreme regressivity. 

The strange thing about Cruz’s VAT is that it is intended as a replacement not only for the corporate tax, but also for payroll taxes. He would keep a very reduced income tax in the form of a 10 percent flat rate. Most tax expenditures would be repealed, except for the truly popular ones for things like mortgage interest and charitable contributions. The EITC and child credits would also remain.


Cruz’s plan would be very expensive to enact. Even the Tax Foundation admits it would lose $3.6 trillion in revenue over 10 years. However, both Cruz and the Tax Foundation argue that the proposal would jump-start the economy, with dynamic effects making the true cost only about $768 billion. Most other analyses of the plan aren’t quite so optimistic about the growth effects.

Cruz may have a radical tax program, but it hasn’t been a big piece of his campaign. In fact, he almost never talks about it, except in vague terms about being a plan for economic growth. That means it probably didn’t help him much in Iowa, and it certainly wasn’t a major part of his strategy in combating the latest wave of establishment and Trump attacks. Instead, Cruz has focused on being a true conservative, running against the GOP party leaders in a much more overt way than even Trump. The senator’s entire campaign is predicated on his promise to never compromise with Democrats and to govern in Washington the same way he talks on the campaign trail. It is almost certainly this appeal to the most conservative wing of GOP caucus goers that allowed Cruz to overperform his poll results and become the latest outsider or evangelical to win Iowa (think Pat Buchanan, Mike Huckabee, and Rick Santorum). 

Taxes also probably didn’t play much of a role in Trump’s disappointing showing or Rubio’s surprisingly strong third place finish. Trump’s bubble probably burst because polls were overstating his support in a caucus all along, while Rubio’s surge was almost certainly because of voters leaving other establishment candidates in an effort to push forward a truly electable Republican.

New Hampshire is traditionally a state where taxes matter more than in Iowa. But don’t look for Cruz to push his plan there either. If the Texas senator pulls off another win (not likely) or Trump again falls flat (very likely), tax policy will be at the bottom of the list of reasons why.