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David Nicklaus Why Trump’s Tax Cut Looks Like Kansas Writ Large

The following article by David Nicklaus of the St. Louis Post-Dispatch was posted on the National Memo website May 2, 2017:

President Donald Trump seems to want to turn the country into Kansas.

The tax plan Trump outlined last week has echoes of the Sunflower State’s big 2012 tax cut, which precipitated a budget crisis that persists to this day. In large part, that’s because more people than expected took advantage of the state’s generous exemption for pass-through income.

Pass-through income, for those of you who aren’t tax nerds, is business income that’s reported on a personal return. It comes from partnerships, limited-liability corporations and other closely held businesses, including Trump’s own family real estate operation.

Trump isn’t being quite as generous as Kansas, which decided not to tax pass-through sums at all, but he does want to lower the tax on such income to 15 percent. Pass-through income currently is taxed just like wages, at rates that escalate to 39.6 percent.

The result is easy to predict: A lot of people would start LLCs and other entities, turning their paychecks into lower-taxed pass-through payments. “Whenever there are different rates for different sorts of income, individuals can find ways to game the system,” says Scott Greenberg, an analyst at the Tax Foundation.

Congress could try to write rules to limit such conversions but it would have a hard time keeping up with clever tax lawyers. “It would probably leave federal revenue pretty substantially lower,” Greenberg said.

When candidate Trump floated the idea of a lower pass-through rate last fall, the Tax Foundation estimated that it would cost the government $1.7 trillion over 10 years.

The pass-through tax cut is even harder to justify on equity grounds. It would let law-firm partners pay a lower tax rate than their first-year associates, and Trump pay a lower rate than some of his hotel staffers.

The pass-through cut is just one piece of the president’s single-page tax outline, but it’s a telling piece. Like Kansas Gov. Sam Brownback, Trump is arguing that unshackling job creators will boost the economy enough to pay for much of his tax cuts.

The problem, in both Topeka and Washington, is that the growth projections are unrealistic.

The Tax Policy Center analyzed Trump’s campaign tax plan, which contained many of the ideas that are in the new version, last October and found that it would raise the national debt by $7 trillion in a decade.

It would boost the economy for a few years, the center found, but by 2024 the stimulus would be gone and the swollen deficit would be pushing up interest rates. That would hold down private investment, making the economy weaker than it would have been without the tax cuts.

So, at best, the tax cuts represent a temporary sugar rush for the economy. The budget-busting effect of cutting the corporate tax rate to 15 percent from 35 percent is especially huge: It reduces tax revenue $3.5 trillion over 10 years.

Trump’s plan is far from specific, and he may eliminate some loopholes to help pay for that cut. But Joseph Rosenberg, a senior research associate at the Tax Policy Center, says abolishing tax breaks “isn’t easy in any sense, and there certainly aren’t enough of them to pay for a reduction all the way to 15 percent.”

Trump seems more intent on delivering a massive tax cut for the wealthy than on crafting a simpler, more efficient tax code that’s roughly revenue-neutral.

That’s too bad. If you want to know what happens when greed-based tax plans are sold with unrealistic projections, just look at Kansas.

View the post here.

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