Ted Cruz's Tax Plan is a VAT
![](https://crfb.org/sites/default/files/Ted-Cruzs-tax-policy-is-a-VAT.png)
A VAT is a consumption tax that — unlike a sales tax — levies the value that each business adds along the chain of production. In most developed countries, the VAT is a major source of revenue; and generally these countries rely on a credit-invoice method VAT. This type of VAT taxes consumption by imposing a tax on every business transaction.
To avoid effectively double-taxing consumption, a credit-invoice method also provides an offset, or “credit,” for taxes paid by businesses earlier in the production line. So for example, a table sold for $10 might be subject to a $1.60 tax assuming a 16 percent VAT, but if the furniture dealer had spent $5 to make the table, he could subtract the 80 cents of VAT already paid at previous parts of the process and only pay 80 cents of additional taxes.
![](https://crfb.org/sites/default/files/Cruz-VAT.png)
Table derived from Heritage Foundation
Senator Cruz’s plan does not function in this way, but instead looks a lot more like a corporate income tax with “full expensing” of equipment and no deductibility of wages. However, even though Senator Cruz’s plan might look like a tax on business, it is actually a consumption tax — and specifically it is a subtraction-method VAT.
A subtraction-method VAT assesses liability on the difference between sales and receipts for each business. Rather than give a credit for each penny of tax paid earlier in the chain of production, this method give a deduction for every dollar taxed. So in the case of the $10 table, rather than assessing a $1.60 tax on $10 and then providing an 80 cent credit, this method instead only asses a 80 cent tax on $5 in the first place. And so long as the tax is flat, the methods are equivalent.
Of course, there are advantages and disadvantages to each approach. The subtraction-method is probably simpler and easier to administer, particularly for the United States which currently has a corporate tax but no consumption-based tax system. On the other hand, the credit-invoice method may lead to less evasion since failure to pay taxes at one level simply increases taxes at the next level. The credit-invoice method also allows for different tax rates on different types of goods, though there are arguments this may be either better or worse than a flat tax on all products.
Yet fundamentally, the two types of VAT are equivalent; and Sen. Cruz’s Business Flat Tax has all the characteristics of a VAT. Perhaps not a “European-style VAT,” but a VAT nonetheless.
Ruling: Largely True