Source: The Street
Can you imagine a future where Ted Cruz becomes the Leader of the Free World? Cruz Control would certainly spur major economic changes, and having the junior U.S. Senator from Texas as our next Commander-in-Chief is actually not outside the realm of possibility.
“Donald Trump’s presence in this race has turned all the conventional wisdom upside down,” said Joel Sawyer, Republican digital consultant at Campaign Grid, a digital political advertising firm in Washington, D.C. “Any of the middle- to top-tier candidates have a shot, and I would put Cruz on that list.”
Many Americans will form a more concrete opinion of Cruz when they get a run-down of his economic outlook during the third Republican presidential debate on Wednesday (which TheStreet will be covering live). And while a Cruz presidency remains unlikely, it’s worth imagining what the U.S. markets and economy would look like were that to become reality.
Cruz has a few concrete initiatives that could alter this country’s economic landscape. Among his most significant proposals are eradicating the Export-Import Bank, switching to a flat tax, balancing the budget and euthanizing Obamacare. Those policy bullet points may be his biggest asset, emphasizing his serious experience and specific game plan.
“His strategy is he wants to be the candidate that Trump and Carson voters come home to,” Sawyer said. “He’s counting on that anti-establishment bloc to come home to a more traditional candidate in the end. Even though he counts himself as an outsider, which to some extent he is, he is a sitting U.S. senator with a voting record.”
Of course, ideas are more valuable when realizable, and a glance at the feasibility of his proposals is in order. It’s time to take a deeper look at Cruz’s plans.
End the Export-Import Bank
Cruz wants to end the practice of using taxpayer dollars to subsidize what he calls “corporate fat cats” by ending the Export-Import Bank, which provides financing to overseas customers buying expensive products from American manufacturers such as GE and Boeing.
This is a stand against what Americans see as corporate privilege, according to Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University and an expert on the Ex-Im Bank. She calls the corporate favoritism provided by Ex-Im “a very unhealthy marriage — with unfair privileges, given to a few at the expense of the majority.”
This anti-corporate cheerleading has become in vogue since the Great Recession, when banks and entitled large corporations were seen as gaining advantages to the detriment of the common American tax payer. Cruz’s decision to highlight this initiative is sending a clear message.
“It is picking a position on the broader issue of cronyism,” de Rugy said. “I do think it’s important. In a sense, the need to come out against cronyism was made very pressing.”
(It’s worth noting that Cruz’s wife, Heidi, has had a successful career at Goldman Sachs, a corporation that has received governmental favors in the past. And historically, Cruz has received $69,350 in campaign donations from Goldman.)
The advantages to putting the kibosh on Ex-Im are clear and elevate Cruz’s favor to a wide swath of the electorate. But even though Cruz’s initiative is, at first blush, a crowd pleaser, it’s not universally approved. Corporations who benefit from Ex-Im float the possibility of economic havoc were it to be eliminated.
Others suggest ending Ex-Im could put U.S. corporations at a significant disadvantage, according to Robert Ferrari, who teaches economics at Rowan University.
“As long as we are operating in a global environment, to end the Ex-Im bank while other countries have their methods of supporting their trade would be a significant negative to U.S. exporters,” he said, saying it would reduce U.S. exporters’ revenue, profits and U.S. taxes paid.
However, Ferrari said that if the U.S. could get all of our trading partners to agree to offer no support to their exporters, eradicating Ex-Im might work.
Flat Tax
The IRS is broken, and the current tax system is convoluted, according to Cruz. He has said he wants doing taxes to “become so simple that they could be filled out on a postcard.”
A simplified tax code is something that Republicans of all stripes have been advocating for years, but Cruz takes this to the extreme.
In 2014 Cruz wrote an op-ed in USA Today calling to abolish the IRS and impose a national flat tax that, as opposed to our current system of progressive taxation, would tax all income levels at the same rate.
Policy wonks argue over the potential economic fallout, but flat tax supporters suggest that the increased spending resulting from abolishing a complicated tax code with its attendant incentives would give government revenues, in the case of a 17% flat tax, a 1.8 percentage-point shot in the arm.
In a plan like the one Cruz suggests, the poor and middle class would pay more in taxes, but the rich would pay less and have more money to invest back into the economy. A flat tax system would also remove incentives toward consumption by eliminating the various deductions that offset costs, and instead encourage savings. Advocates also argue that the possibility of reaching a higher tax bracket would no longer disincentivize people from earning more and crossing a tax bracket threshold, thus contributing to long-term economic growth.
According to a seminal study by the National Center for Policy Analysis, the flat tax would boost the production core of the economy in every area by getting rid of corporate tax avoidance schemes, except for subsidized agriculture since tax subsidies would be lost there. In the case of a 17% flat tax, there’s also the suggestion that the housing sector would see a 1.5% uptick.
Flat tax opponents, however, argue that such a policy would increase the national deficit because of lost tax revenue in the higher brackets and also would cause outsized economic burdens on the poor while favoring the rich who can shoulder the same tax rates more easily.
Despite Cruz’s best intentions, a Cruz Presidency would likely not feature a bona fide flat tax. That’s because a pure flat tax proposal is not entirely feasible, according to Henry J. Aaron, a senior fellow at The Brookings Institution.
“A flat tax would not be simple and it would not be flat, unless it massively distributed tax burdens from the rich to people of modest means,” Aaron said. That is to say, a true flat tax imposes the same tax rate on all income levels, but a marginal flat tax — something that’s perhaps more practical — would allow for deductions and only begin to impose the marginal rate on income above the maximum deduction.
Rowan University’s Ferrari also recognizes the need for a more realistic iteration of the plan, considering that more than 40% of the American population doesn’t currently pay any money in income taxes.
“I am a fan of the flat tax — however, a graduated flat tax,” he said, describing a system where all income up to a certain threshold, say $15,000 is taxed at at low rate (10%, for instance), and all income above that is taxed at a higher rate (20%, for example). “It would be difficult to have someone currently exempt from federal income tax to now have to pay the tax.”
And eliminating the IRS altogether?
“We should abolish the IRS and end its abuse of power and violation of Americans’ constitutional rights,” wrote Cruz in USA Today.
“Anything he proposes is going to take a degree of compromise and buy-in,” Sawyer says. “You need pretty airtight case to the opposition party…maybe you can get half a loaf. Eliminating any federal agency is a pretty tall order in today’s environment in D.C.”
Balance the Budget
Cruz has railed tirelessly against the national debt; in fact, he supports passing a Constitutional amendment for Congress to pass a balanced budget to whittle away at deficits and debts.
But balancing the budget doesn’t get rid of the debt, of course.
“Passing a requirement to balance the budget is bad policy, as it would force the government to raise taxes or cut spending when the economy slips into recession, a sure way to turn a mild recession into a roaring depression,” Aaron said.
To boot, Cruz has not specified exactly how he would implement his initiative. Though a balanced budget may be a valiant goal, a practical outline for cost-cutting must be offered, with strict attention to how to get entitlement growth under control for programs like Medicare and Social Security.
“If one is serious about ending deficits, the key is to specify which taxes should be increased or which spending should be cut,” Aaron said. “Cruz has not done that.”
Cruz believes in a balanced budget so vehemently that he would be willing to hold the country hostage, in a fiscal sense — as a Senator, he’s promoted the idea of requiring a supermajority to raise the debt ceiling, and has insisted upon not raising the debt ceiling until Congress reaches a deal to balance the budget.
And again, there’s the issue of practicality.
“The debt should be balanced over a business cycle,” Ferrari said. “Deficits would be O.K. during economic downturns. The problem is how to get Congress to live with this.”
Repeal Obamacare
Cruz has fought against Obamacare and wants to do away with it entirely.
In 2013, he famously read Dr. Seuss in the Senate during a filibuster to protest the Affordable Care Act.
His main argument against Obamacare is the cost burden it places on individual consumers and small businesses.
“From a cost-driver standpoint, [Obamacare] makes things more expensive,” Sawyer said. “But people do like the pre-existing condition coverage and leaving the kids on the insurance. People just don’t like having to pay for it. Welcome to America, right?”
The health care initiative has actually had quite a bit of success that Cruz refuses to acknowledge. Though Cruz had feared Obamacare would result in reduced hiring — to avoid the additional overhead of health insurance or for small businesses to stay below the 50-person employee count at which providing health insurance is required — employment has actually increased in every month throughout the life of Obamacare.
“The growth of health care spending since enactment has been lower than in preceding years,” Aaron added. “Obamacare has reduced the proportion of people without insurance to historic lows. It is impossible to take seriously someone doesn’t like Obamacare until they describe in some detail what they will do to maintain the achievements of Obamacare. Cruz has not done that.”
Repealing Obamacare would add $137 billion to the federal budget deficit over the next ten years as a result of spending cuts and tax increases that would be eliminated, and such a drastic move would also increase the number of uninsured Americans by 24 million, according to the Congressional Budget Office.
Coming up with a concrete replacement to Obamacare is the big challenge.
“Voters are far more willing to engage in the idea of getting rid of Obamacare rather than what comes next,” Sawyer said.
Cruz actually does have the semblance of an alternative, a bill he proposed in March called the Health Care Choice Act. Cruz wants to allow Americans to buy health insurance across state lines and hopes to repeal Title I of Obamacare, which includes the mandate to purchase insurance, as well as the insurance marketplaces and the subsidies to help consumers afford coverage.
Of course, Cruz’s desire to snuff out Obamacare contradicts his balanced budget initiatives.
“Simple repeal would, according to the Congressional Budget Office, raise the budget deficit over the next decade and more in the decade following that, a distinctly odd position for someone who claims to want to balance the budget, particularly as Cruz offers no way to pay for the budget hole that repeal would create,” Aaron said.
Bottom Line
Cruz is in a fine position heading into Wednesday’s debate, but to reach the next level, he’ll have to present his economic initiatives in a reasoned and convincing manner to the American public.
To give himself a shot, it’s important for Cruz stay true to his beliefs without going so far as to alienate the electorate.
“You’ve got to walk a fine line in terms of someone who voters believe will stick to their principles and stick to their guns without being so far outside the mainstream that average conservatives will count you out in the long run,” Campaign Grid’s Sawyer said.