“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.”
(Quoted from Mother Jones; click here for source article.)