Donald Trump’s Tax Plan Would Turn the Whole U.S. Into Kansas

It is hard to think of a more obvious recent public-policy failure than the tax cuts that Kansas Gov. Sam Brownback championed in 2012. The state has been mired in a perpetual budget crisis ever since the package passed, forcing its residents to swallow painful spending cuts in essential areas like education. Kansas' credit rating has been downgraded, as well. The financial wreckage has been so severe that Brownback's fellow Republicans are now staging a rebellion; in February, the GOP–run legislature voted to undo the cuts, and came close to overruling the governor's veto.

Somehow, the sharpest minds in the Trump administration have gazed upon the smoldering ashes of this misbegotten experiment and decided that they should imitate it. On Wednesday, Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn unveiled the skimpy outline of the White House's current tax plan. While the one-page document lacked much in the way of detail, it confirmed that the president wanted to cut the tax rate on so-called “pass-through” businesses to 15 percent—which would amount to a bigger, potentially more disastrous version of Brownback's ill-fated cuts.

“This would be Kansas on steroids,” Eric Toder, co-director of the Tax Policy Center, told me.

Pass-through entities are by far the most common type of business in the U.S., encompassing about 94 percent of firms as of 2011. Instead of paying corporate taxes, they simply distribute profits among their owners, who then have those profits taxed as normal income. Obviously, many small businesses are organized this way, but so are major law firms, hedge funds, real estate developers, and plenty of other extremely profitable enterprises. The Trump Organization? It's a pass-through.

This raises the obvious concern that the White House is simply planning a massive, backdoor tax cut for the rich.

"I’m not familiar with Kansas, and I thought the illegal kids problems were only affecting the border states.

How large is the illegal population in Kansas anyway?"

Oh My FRiend, Kansas is a major detestation for Illegals. Both City and Country.

To put it simply, very large.

My mother said that after the 80's amnesty she saw more illegals around.

She said the big change came shortly after I started Kindergarten in 1993. After only a couple of years she noticed there was a significant change in the student populations towards....Hispanic Origin.

Flash Forward 10 years later to High School, many Many Hispanic Students.

Now over 10 years out of High School for me, whenever I drive past the schools I have to do a double check to make sure I am not in San Diego.

However, now maybe that will start to change.

I was thinking about this the other day in relation to Trump's proposed tax cuts. While I believe that (if passed) they will spur an economic boom, let's just assume for the moment that the left is correct, and that tax cuts will destroy the federal budget.

The only reason that Republicans run in fear every time the left demands that they "pay for" tax cuts, or when the left spins scary stories of the horrors of a "government shutdown", is because the federal government has so wormed its way into every aspect of our daily lives. Imagine instead what would happen if we had a federal government constrained to its constitutional limits: So long as defense and a very few other legitimate functions were covered, no one would care one iota if the rest of the budget collapsed, for whatever reason.

The left has so expanded government, while making far too many people dependent upon it, that they can effectively hold the entire country hostage any time someone proposes cutting taxes. I hope that Trump will realize this at some point and begin to really dismantle the completely unnecessary components of the federal bureaucracy.

Here is the current bottom line on Tax Reform.

The process is driven by the disparity between the US Corporate rate of 35% and the world business tax rate ranging from 1 1/2% to 15% (the Hong Kong additional 1 1/2% expiring).

There are a wide range of other issues—personal rates are too high and discourage investment risk taking; we have this wide range of other deductions and credits that were intended to incentivize a particular kind of activities but have operated to one degree or another simply as tax shelters or havens.

But the key issue is the world rate and applicability to business income of the global industry establishment.

The inside story in DC is that the issues are too complex; the fiscal impact of reasonable modifications to present policies is too great to permit a bill in the current divided Congress. So the betting is that a broad reform bill can’t get done this year.

Backing down from that position, the conventional wisdom is that the pressure of the international tax environment is so great, something must be done immediately—lets just reduce the US Corporate rate to 20% or maybe 15%.

That isn’t going to happen. Doing only that leaves the most productive, innovative, employment segment of domestic industry in pass through entities (S Corps and Sub Chapter K entities—LLC’s and partnerships) taxed up to 50% in competition with the multi national C Corporations taxed at the simple reduction of 15% or 20%. On its face that seems unreasonable.

Congress often does unreasonable things but this one faces at least one or two material obstacles. Largest: Orrin Hatch, Republican Chairman of the Senate Finance Committee says outright that Senate Finance will not report a bill out that does not rationalize the rate burden on pass through entities. The staff guys on Finance say that position reflects a consensus on the Committee.

Trump (or rather Roy Cohn) are essentially on the same position as Hatch although they haven’t said so quite as directly.

But the Administration proposal yesterday addresses the issue—sort of: We will tax trade or business income earned at the pass through entity level at 15%. Regrettably, that proposal, as least as far as we can tell early Thursday morning, is a little lacking in important detail.

How would this work? The 15% at the entity level is the only income tax—the 85% of net income remaining is now PTI (”Previously Taxed Income”) distributed tax free? It isn’t exactly brain surgery to see where this is going to lead.

And that has been the primary problem with tax reform to date and so far, I haven’t seen any obviously acceptable proposed legislative solution.

Very doubtful that the “simple rate reduction” is going to happen either. So that’s the bottom line at present—significant pressure to act; most practical action obstructed by difficult to resolve issues. As my most direct DC source puts it on a daily basis, anyone who tells you how this is going to come out doesn’t understand the problem. Stay tuned. The situation looks much like prevailing conditions in the fall of 1986. When we reached October, we did in fact get a broad bill reflecting the most significant overall of federal tax law since 1954—effective two and a half months later on January 1.

Trump’s proposal yesterday also highlighted one other issue that has been a common topic and should be in view of the legal business community. World tax policy should be founded on “territorial taxation”—income should be taxed more or less on some kind of rough justice basis where the factors that produce it are located. A solution regularly advanced by our tax partner—the states allocate income for tax basis purposes on a factor formula, do something like that internationally. It appears that view is becoming a common international tax policy foundation and it is a reasonable idea for which it looks like the time is coming.

All that said however, assume that at some point (this year; next year; or whenever), you get to a legislative position where business tax rates level out internationally on the basis of a reasonable allocation of income, that leaves everyone on a level playing field.

Not very likely that results in a material boost to the US economy from tax policy. Maybe the US gains some benefit from reducing what is presently a significantly excessive tax burden to a reasonable level but that isn’t going to operate as a significant boost to the US economy unless other factors unrelated to the tax system are also rationalized.

THe problem was not the tax rate reductions, it was the refusal to cut spending, and the imposition of federal mandates that required these expenditures.

Bingo! Also, who do the politicians think pay for the highest corporate tax rate in the World? You don't think that corporations don't pass as much of that tax bite as possible onto the consumer?

Now, it's time to get out the picks and shovels and start beating on the politicians to cut spending. And don't give me this "I'll have to cut police, fire, and education spending". Bullcrap! Start with cutting your own benefits, like making your retirement SS benefits like the rest of us, pay for your own health insurance, and quit spending on "reelect me" projects. Free cell phones for deadbeats? Really? How does that help me?

Oh...and quit picking on the rich for "not paying their fair share". Really? The top 10% pay for 72% of all tax receipts. Like it or not, they drive this economic engine to all of our benefit. We glorify the poor. Why? How many of you were hired by a poor person.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.