What’s the matter with Kansas? Economist Scott Sumner looks at the controversy over the recent Kansas tax reforms:
The past two years Kansas reduced its state income tax rates. As a result, the top rate of income tax faced by Kansas residents (combined state and federal) rose from 41.45% in 2012 to 48.3% in 2013 and then fell a tad to 48.2% in 2014 (if they don’t itemize.) That’s a pretty tiny drop in the top marginal tax rate in 2014, and a much bigger rise in 2013.
I can’t imagine any serious economist predicting that the Kansas rate cut would boost Kansas GDP by 25% or more. Why did I pick that figure? Because the Kansas state income tax top rate fell from 6.45% in 2012 to 4.8% in 2014, which is roughly a 25% rate cut. In order for that rate cut to boost Kansas tax revenues, you’d have to see Kansas GDP rise by more than 25%. That’s obviously absurd.
The Sumner post is there to refute a straw-man argument made by tax fans:
“Why am I even discussing such crazy ideas? Because Paul Krugman seems to want to convince his readers that lots of supply-siders believe such nonsense…”
Actually, supply-siders do not claim that tax cuts pay for themselves, except in very unusual cases. Kansas is not one of those cases. The Laffer curve effect is typically applied to cases of extremely high marginal tax rates.
I have long pushed for a combination of rate cuts for Iowa, combined with comprehensive elimination of deductions and cronyist tax credits. That would keep the state budget from getting clobbered, while making the tax system much easier and cheaper to run and to comply with. Kansas couldn’t let go of the loopholes, and in fact added new ones. Joseph Henchman of the Tax Foundation discusses the Kansas tax changes in Governing.com (my emphasis):
Good tax reform broadens the tax base and lowers rates. That’s what Gov. Brownback wanted to do. But the legislature took out the “broaden-the-base” part. They just passed a tax cut, which can be justifiable if you want to reduce the size of government or expect other revenue sources to go up. But they didn’t cut spending and they don’t expect revenue to grow, so it’s just a hole. With the exemption for pass-through entities, if you’re a wage earner, you’re taxed at the top rate, which is currently 4.9 percent in Kansas. If you’re a partnership, an LLC or any form of recognized business entity with limited liability that’s not a corporation, your income is taxed at zero percent. That’s an incentive to game the tax system without doing anything productive for the economy. They think things like the pass-through exemption will encourage small business, and to be fair, it might. But they are doing it in a way that violates the tax principle of neutrality.
So what would happen if my Quick and Dirty Iowa Tax Reform Plan were enacted in Iowa? My plan would eliminate corporation taxation and allow S corporation owners to elect to be taxed on distributions, rather than on pass-through income. Properly structured, it wouldn’t hurt Iowa’s tax revenue, as the rate cuts would be offset by fewer deductions and elimination of tax credit giveaways. I like to think that without a corporation tax and without a culture of begging for tax credits, Iowa would over time do well, considering that its regulatory and labor environment is already business-friendly. But I don’t expect miracles, and I would not want the rate cuts to be so deep as to depend on a short-term economic boom to keep the state solvent.
Richard Borean, House to Consider Bonus Depreciation (Tax Policy Blog). “It turns out that adding permanent bonus expensing to the Camp Plan would boost GDP, wages, job creation, and federal revenue.”
Bonus depreciation is one of the many perpetually-expiring provisions that get renewed every year or two, after enough lobbyists make their offerings to the congressional fundraising idols. The congresscritters love enacting proposals temporarily because that way they don’t appear to cost as much as officially-permanent provisions, and because it makes the lobbyists come and visit them regularly to get yet another extender bill passed.
Ways and Means Committee Chairman Camp is calling out this game by trying to get some of these provisions extended permanently, officially. He notes that they really are permanent, and that pretending that they are temporary isn’t fooling anybody. His opposition in the Senate wants to keep pretending the provisions are temporary, and that the honest step of treating them as permanent is “budget busting.”
None of this helps businesses pricing investment decisions for 2014. Anyone buying equipment has to guess at the deduction schedule in order to forecast cash flows from the purchase. Unfortunately, nothing is likely to happen until after the November elections, when a temporary retroactive extension is likely to pass — but might not.
Trish McIntire discusses The New Voluntary Tax Preparer Program. “I’m interested in seeing the numbers of the Filing Season Program come January 2015. Honestly, I don’t think they are going to be as high as the IRS hopes.”
Roberton Williams, IRS Help Line Is Out Of Service (TaxVox) “I needed to double-check an issue concerning withdrawals from my nonagenarian father’s IRA. IRS Publication 590 wasn’t clear so I decided to call the IRS. The experience was illuminating. Not helpful mind you, but illuminating.”
William Perez, What’s Form W-9? “Independent contractors and other people who work for themselves will often need to give a Form W-9 to their clients. Clients will then use the information on Form W-9 to prepare Form 1099-MISC to report income paid to the independent contractor.”
Jim Maule continues his Tax Myths series with “I’m Getting a Refund and Not Paying Tax.” He notes “Whether a person has a tax liability cannot be determined simply from the existence of a refund.”
Kay Bell assigns 5 easy tax tasks to take care of in July.
Brian Mahany, Are FBAR Penalties Unconstitutional? In Many Cases Yes. “It’s one thing to assess a 50% or 75% penalty but when penalties exceed the total tax owed by a multiple of 50 times like in the Warner case, we believe the penalties are clearly unconstitutional.”
Martin Sullivan, Will States Get a Multibillion-Dollar Windfall From Corporate Tax Reform? (Tax Analysts Blog). Only if there is actually corporate tax reform.
Stephen Olsen, Summary Opinions for 6/27/14. (Procedurally Taxing) Don’t let the date fool you, this roundup of tax procedure news was posted yesterday.
Peter Reilly, City Taxes Trip Up Investment Advisor Restructuring. Beware New York City.
Jack Townsend, Convicted Politician Did Not Lay a Proper Foundation For Proferred Indirect Testimony of Lack of Intent. “How does a defendant unwilling to testify as to his intent — thus invoking his Fifth Amendment privilege — introduce indirect evidence of his lack of intent to blunt the Government’s indirect proof of his intent?”
TaxProf, The IRS Scandal, Day 425
Robert D. Flach brings the Tuesday Buzz. I like this:
Item #10 on the new IRS-issued Taxpayer Bill of Rights is “The Right to a Fair and Just Tax system”.
In order to assure this right to taxpayers the Tax Code would need to be totally rewritten and all current members of Congress would have to be replaced by competent and intelligent legislators who actually give a damn about the American public.
It’s right as far as it goes, but some members of the executive branch would also need to go, starting with the Commissioner.
Tags: bonus depreciation, Brian Mahany, Expiring provisions, Jack Townsend, Joseph Henchman, Kay Bell, Martin Sullivan, maule, Peter Reilly, Quick and Dirty Tax Reform Plan, Richard Borean, Robert D Flach, Stephen Olsen, TaxProf, Trish McIntire, William Perez