 Good morning Hank, it's Tuesday. Thanks for your excellent video about Hillary Clinton and Bernie Sanders' tax plans. Today I'm gonna discuss the tax plans put forth by Donald Trump and Ted Cruz. I would talk about John Kasich's tax plan, but he hasn't put out a detailed one yet, so I can't. Okay, but first a brief overview of the federal budget for which these taxes pay. About a third of the U.S.'s $3.8 trillion federal budget goes to social security and unemployment, mostly to social security, which provides income for elderly and disabled people. 27% goes to health care spending. This is mostly Medicare, our publicly funded health insurance program for the elderly. 16% goes to the military, 6% to service the national debt, 4% to veterans benefits, and after that the pieces of the pie start to get pretty small. So Hank, as you pointed out last week, taxes aren't any fun. They're also very, very complicated, and I want to emphasize that I am neither a tax policy expert nor an economist, although in 1994 I did win the bronze medal in economics at the Alabama State Academic Decathlon. So for one brief shining moment, I was the third best economist among all 17-year-old C students in the state of Alabama, but I recognize that's not expertise. I have, however, read a lot of experts. Okay, so both Donald Trump and Ted Cruz have proposed tax reforms that will dramatically simplify the American tax code. In fact, Cruz has promised to make taxation so straightforward that we won't even need an internal revenue service anymore, so let's start there with his plan. So right now in the U.S., we have seven tax brackets. So like, if you're married and filing jointly and you made a million dollars last year, first off, congratulations. But as for your taxes, the first 18,450 of your million dollars are taxed at 10%. The next 56,449 dollars are taxed at 15%, etc., with everything over 465-ish thousand dollars taxed at the top U.S. marginal tax rate of 39.6%. Except not actually because of deductions. Like, if you have a mortgage, you can deduct the interest you pay, money you give to charity can be deducted as well. Your student loan interest might be deductible, some retirement savings, some childcare costs, lots of other stuff. But let's imagine an extremely unlikely scenario where you're making a million dollars a year but don't claim any of these deductions. You can still claim the so-called standard deduction. This is a tax deduction available to everyone if you're married and filing jointly. It's currently $12,600 per year. So your first $12,600 of income wouldn't be taxed regardless. In the end, with a million dollars of income taking only the standard deduction, you'd pay around $343,427 in tax, an effective tax rate of like 34.3%. The same family earning $250,000 a year would pay $53,755, an effective tax rate of 21.5%. And if your family had the median U.S. household income of around $52,000, you'd pay just under $5,000 in federal income taxes, an effective tax rate of about 9.6%. Ted Cruz's plan is to collapse these seven tax brackets into a single 10% tax rate for all income. This is sometimes called a flat tax. Crucially, Cruz would also increase the standard deduction to $20,000 a year for married couples filing jointly. So the median U.S. household income would end up paying $3,200 a year in federal taxes instead of $5,000, a reduction of $1,800 or 34%. The family making a million dollars a year would pay $98,000 a year in taxes, a reduction of $245,000 per year or 72%. So everyone would pay less tax, but the wealthiest Americans would see by far the biggest cuts, both in percentage and absolute dollars. Cruz would also eliminate most of the aforementioned tax deductions, except for mortgage interest and charitable giving. He would also eliminate all federal gift and estate taxes and repeal all corporate and payroll taxes in favor of a 16% kind of VAT, which is where it gets really interesting. Insofar as this stuff can be interesting. By the way, Europeans were like, oh my God, he finally said a word, I recognize VAT. Kinda. In most European countries there's a broad tax on consumption called the VAT or value added tax. Cruz's VAT is a little different. Basically, it taxes businesses' revenues minus their capital investments and the money they pay to other companies. I'm gonna oversimplify here a little bit, but imagine I wanted to start a company selling t-shirts that celebrated my love of pizza that were available for $20 right now at DFTVA.com. Now imagine that I had to pay a company $10 to manufacture each t-shirt. I would only pay VAT on the $10 difference. The other company would pay VAT on the $10 that I paid them, and then they would get to subtract any non-wage cost they incurred making the shirt, etc. Also, if I wanted to buy my own machine to make t-shirts, I could subtract the cost of that machine from my revenue before paying the VAT. The money left over is either profit that goes to owners or wages that go to employees. So basically it's a tax on both wages and corporate profits, and it would aim to do a better job than our current system does of actually like taxing economic activity, which would be good because as you might have heard with the current system, there's a fair bit of tax avoidance going on. Lots of economists, although certainly not all of them, like the idea of this kind of VAT. But Cruz's specific plan would dramatically reduce the amount of federal revenue. Like the Nonpartisan Tax Policy Center calculates that Cruz's plan would reduce federal revenue by $8.6 trillion over the next 10 years. Now, Cruz says that by eliminating the IRS and a few other federal agencies, the government can save $500 billion over the next decade, but that's less than 10% of the shortfall. Like if you ceased all military spending in the United States, you'd still be $2 trillion short. But Cruz doesn't want to eliminate military spending, instead he wants to increase it dramatically. Now, some economists argue the shortfall will partly be made up by increased economic growth, but even the most optimistic independent modeling I could find still showed a dramatic increase in the budget deficit under a Cruz tax plan barring huge cuts to either Medicare or Social Security or some combination of the two. Okay, so then there's Donald Trump's plan. Trump would also increase the standard deduction, but buy more so that any couple making $50,000 a year or less would pay no federal income tax. And he would collapse the seven tax brackets into four, with the top rate being 25% on income over $432,000 per year. Trump's plan is similar to Cruz's in that he would also eliminate gift into state taxes and most deductions, but he would cut corporate tax rates rather than replace them with a VAT, which would probably lead to a lot of people identifying as corporations instead of human beings for complicated reasons explained here if you want to pause the video. Now, the other facet of Trump's tax plan that he talks a lot about on the campaign trail is that currently hedge fund managers and some other people who work in finance can be paid in what's called carried interest, which allows them to pay a lower tax rate, and Trump's plan would end this. But because income tax rates will be so low, under the Trump plan almost all hedge fund managers will pay less tax than they do now. While campaigning, Trump has also repeatedly said that his tax plan will quote, cost me a fortune, which is just not true. Like under the Trump plan, if you make a million dollars a year, you'll pay about $200,000 a year in taxes, which is much higher than under the Cruz plan, but much, much lower than the current rates. But altogether, Trump's proposed tax plan would actually cost the federal government more revenue than Cruz's plan, somewhere between $10 and $12 trillion over the next decade. That's about like 25% of the total federal budget. He has said that his tax policy will be revenue neutral, but in response to that, the right-leaning Center for Federal Tax Policy wrote an op-ed entitled, Donald Trump's tax plan will not be revenue neutral under any circumstances. The tax policy center, meanwhile, estimates that eliminating the United States military altogether would cover just about half of the revenue gap created by Trump's tax plan. So in summary, Ted Cruz's tax plan involves a radical simplification of the tax code. A flat 10% income tax would lead to lower taxes for all Americans, but the wealthy would benefit the most. And Cruz's strategy for revamping the corporate tax code has support among a lot of economists, but the low rates would lead to dramatically higher budget deficits. Trump's tax plan would probably lead to even bigger deficits. As with Cruz's tax plan, everyone would pay lower taxes, but the rich get the majority of the benefit, although Trump's tax plan does not benefit the rich as much as Cruz's does. But more importantly, neither of these plans is at all feasible unless we completely reimagine the role that government plays in American lives, especially the lives of the elderly, the disabled, and military veterans. Budget cuts to services benefiting those people are extremely politically unpopular, so much so that both candidates have promised to find a way to preserve those programs. But to speak frankly, neither of these candidates has offered a serious explanation for how they would do that. You simply cannot cut government receipts by 20% while preserving the programs that together make up more than 80% of the budget. Hank, I'll see you on Friday.