Image source: Ted Cruz.

Election season is officially in full swing, and during the coming months, we're going to start seeing the front-running candidates lay out the details of their most-important reforms. These will include how they'll handle Social Security's and Medicare's potential reserve shortfall, and how they'll reform the tax system for the better. Even if you're not a fan of politics, understanding how these candidates feel about certain issues is important, because if they're elected into the oval office, it could very directly impact your bottom line.

While many candidates have yet to lay out their cards, Republican front-runner Ted Cruz outlined his plan to completely reform the current tax code back in October. We'll get into a more-detailed analysis below, but the quick gist of Cruz's plan is that it would eliminate the IRS, create a single flat tax across all income classes, and create a single business flat tax. Cruz's plan is about simplicity, with the belief that putting more money into the pockets of consumers will spur jobs growth, as well as encourage investment.

Let's take a brief look at the nuts and bolts of Cruz's tax proposal as it relates to you and corporations.

Cruz's income tax plan: How might it affect you?
The heart and soul of Cruz's income tax reforms is that he'd eliminate the seven progressive tax brackets we have now, which range between 10% on the low-end and 39.6% on the high-end, and replace them with a single 10% flat tax on all personal income. This means your wages, dividends, capital gains, and so on, would be taxed at 10%.

Cruz's plan would allow for:

  • A standard deduction of $10,000, up from the $6,300 standard deduction a taxpayer could claim during the 2015 tax season.
  • Personal exemptions would be $4,000, as they are now.
  • A family of four would therefore owe nothing in taxes on their first $36,000 in household income.

Furthermore, Cruz would look to keep the Child Care Tax Credit, charitable contribution deduction, and mortgage interest deduction in place, as well as boost the Earned Income Tax Credit for low-income Americans by 20%.

Image source: Pixabay.

From a personal savings perspective, Cruz advocates for the creation of a Universal Savings Account, or USA. Americans would be allowed to contribute up to $25,000 annually to a USA -- which would be deductible from their taxable incomes -- and the money in a USA would grow tax deferred. Per Cruz's proposal, money in a USA could be used for any purpose.

What would be gone? The IRS, for one. It would be abolished under Cruz's tax reform. Additionally there would be no more itemized deductions beyond those mentioned above, the net investment income tax and Medicare surtax would be eliminated, and most interestingly, the payroll tax would be eliminated. The payroll tax is the shared amount that you and your employer pay into the Social Security program with each paycheck.

In addition to these income tax changes, the other critical component of Cruz's proposal is to eliminate the corporate income tax, and replace it with a business flat tax of 16%. The business flat tax will be based on revenue minus some exclusions, which include equipment and other business investments. Further, Cruz proposes a temporary corporate tax holiday at a rate of 10% for profits being held in overseas markets. 

The estimated financial impact of Cruz's proposal
If Ted Cruz were elected president, and he managed to get his proposal through Congress in its entirety, what sort of impact might it have on the U.S. economy and consumers? For that we'll turn to research from the Tax Foundation. As a reminder, these figures from the Tax Foundation are nothing more than estimates based on their own models, so the actual results if this plan were implemented could vary.

According to the Tax Foundation, Cruz's plan would result in a cumulative $3.6 trillion revenue reduction over the next 10 years. However, based on the perceived economic positives of 4.86 million created jobs, 12.2% wage growth, and a 43.9% increase in capital investment, the net impact over the next decade would be a negative reduction in tax revenue of $768 billion. Ultimately, the Tax Foundation sees U.S. GDP rising by 13.9% over the long term based on Cruz's proposal.

Income DecileStatic After-Tax Income AnalysisDynamic After-Tax Income Analysis
0%-10% 4.3% 15.3%
10%-20% 2.4% 14.8%
20%-30% 1.5% 14.2%
30%-40% 1.3% 14.5%
40%-50% 1.2% 15.5%
50%-60% 1.5% 16%
60%-70% 2% 16.4%
70%-80% 2.8% 16.8%
80%-90% 4.5% 18.4%
90%-99% 17.4% 27.1%
99%-100% 29.6% 34.2%

Chart by author. Data source: Tax Foundation. 

On an individual basis, consumers would see their taxes cut by an average of 9.2%. When accounting for economic growth, average taxpayers would see their incomes rise by an average of 21.3% roughly a decade from now.

On a static basis -- meaning not inclusive of projected economic growth --workers in the 0% to 90% after-tax income decile would see their incomes rise by 1.2% to 4.5%. However, those in the 90% to 99% decile, and 99% to 100% decile, would see their static after-tax incomes rise by 17.4% and 29.6%, respectively, under Cruz's plan.

Benefits and concerns
The clear benefit of Cruz's plan is that it would appear to put more money in the pockets of all Americans. A flat tax would almost assuredly mean lower taxes for the vast majority of Americans -- even with the elimination of many personal deductions -- and the 20% boost to the Earned Income Tax Credit provides a boost to hard-working, lower-income American taxpayers.

Image source: Pixabay.

The elimination of the corporate income tax also appears to open up a path for capital investments. Among developed countries, the corporate tax rate in the U.S. is the highest. Eliminating the corporate tax and introducing a flat business tax of 16% could spur foreign investment, encourage businesses to reinvest their extra profits into retaining talent via higher wages, and would likely result in job creation.

Lastly, the creation of the Universal Savings Account, along with putting extra after-tax income in the pockets of Americans, would probably encourage consumers to invest. Being able to put a substantial amount of money into a USA could reduce Americans' reliance on Social Security income in retirement.

But there are clear concerns with Cruz's proposals, as well.

Perhaps the biggest concern is the implementation of the business flat tax. Although the business flat tax certainly simplifies things in terms of regulation from the standpoint of the federal government, it also could make the very goods we buy much more expensive.

Image source: Flickr user ProgressOhio.

As described recently by Fortune, the business flat tax is very similar to a value-added tax, or VAT. VATs are applied at each step of the production process, meaning the goods that we buy, and that businesses buy, could grow substantially more expensive. That would most likely hurt lower- and middle-class Americans, and would be a big detriment to senior citizens, whose Social Security benefits probably aren't going to expand if Cruz becomes President.

The second issue appears to be the expansion of income inequality with a Cruz presidency. As noted by the Tax Foundation, the real gains in after-tax income are seen in the top 10% of income earners. Although some of this added income could result in increased consumption and job creation, the widening of the income gap between the rich and everyone else is not often viewed as a good thing. From longer life expectancies, due to well-to-do persons being able to afford medical care, to improved access to a college education, Cruz's tax plan may only perpetuate this dichotomy even further.

Finally, Cruz's tax plan doesn't exactly tackle the national deficit or the eventual Social Security shortfall. Currently, the U.S. is sporting more than $18 trillion in debt. While Cruz's tax plan figures to put more money in the pockets of taxpayers, it's expected to result in a static reduction in federal tax revenue of $3.6 trillion, or $768 billion in a dynamic sense, per the Tax Foundation. It's also unclear how Cruz's plan would support and reform Social Security with the elimination of the payroll tax.

How might you fare if Cruz's tax plan were implemented? Share your comments below.