The Republican plan to make extreme cuts in Kansas’s taxes played by all the rules of conservative trickle-down theory, and made all the promises. It would pay for itself through economic growth … except it didn’t. It would cause corporations to flock to the state … except they didn’t. It would turn Kansas into a shining example that proved the truth about conservative economics.
That much it did. It proved that conservative economics are a disaster—one that Trump wants to repeat on a national level.
When Brownback outlined his plan in 2012, he, too, said the tax cuts would pay for themselves. “He too said the tax cuts would benefit everybody, [that] they would be be ‘a shot of adrenaline to the heart’ of the Kansan economy,” said Goossen.
Instead, Goossen claims, the money has gone to a small group of wealthy Kansans while the state’s budget has been left with a roughly $1bn shortfall.
Not only does Trump’s plan operate on the same Laffer-Curve, Supply Side, Trickle-Down theory that has failed to work since the time when George H. W. Bush dubbed it “voodoo economics,” Trump has recreated the worst feature of Brownback’s catastrophe—a system designed to allow the wealthy to avoid income tax by masquerading as “small businesses.
The Republican tax rewrite unveiled this month aims to jump-start economic growth in part by establishing a 25 percent tax rate on small businesses and other firms that operate as pass-through entities, a cut from the top rate of 39.6 percent that such business owners pay now.
But the abandoned experiment in Kansas points to how a carve-out intended to help raise growth and create jobs instead created an incentive for residents, particularly high earners, to avoid paying state income taxes by changing how they got paid.
There are enough loopholes and dodges already wedded to the rules about how businesses pay taxes, that individuals have often found it advantageous to find a way to tack LLC after their names. But the plan Brownback implemented in Kansas, and the one that Trump is pushing for America, specifically benefit those who pretend that their personal business is … business.
In Kansas, it didn’t take long for the wealthy to realize that the smallest amount of paperwork was all that was required, giving the wealthy an instant tax cut that went well beyond what was advertised when promoting the plan to middle- and working-class voters.
Between 2012 and 2015, the total number of Kansans claiming pass-through income grew 20 percent, to about 393,000 from about 330,000. A team of researchers from the University of South Carolina and other institutions who studied the impact of the tax change found the top 2 percent of Kansas earners reaped the largest gains from shifting income to pass-throughs.
The Trump version of the plan offers the same lopsided benefits to the top two percent—and even more to the top 0.1 percent—as the Kansas plan. In fact, the potential savings for people in Trump’s tax bracket are massive.
Participation at the federal level could be far more dramatic — with tax benefits dwarfing those enjoyed in Kansas. The top income tax rate in Kansas before the 2012 law was 6.4 percent. This year, it will be 5.2 percent, growing to 5.7 percent in 2018. The top federal rate is 39.6 percent, offering a significantly bigger incentive for tax avoidance if pass-throughs are taxed at 25 percent. Already, 70 percent of pass-through income flows to the top 1 percent of American income earners, Owen Zidar, an economist at the University of Chicago Booth School of Business, has found.
Trump has been making noises about how his tax cuts don’t benefit the rich. But not only do the rich get a discount in their personal rate, and a complete elimination of the estate tax, and a break on many of their investments, they also get an option that lets them act as if they are a business, resulting a rate lower than that of people making much less.