I know, you’re busy wrapping presents and such, but allow me to intrude for a brief second to make sure you saw this WSJ piece about the ongoing supply-side tax cut experiment in Kansas. This is important not just because it’s a microcosm of the Trump tax plan, designed, in fact, by some of the same dubious characters, but because of a particularly unfortunate aspect of the Kansas cuts that the trickle-downers are trying to bring to the nation: big carve-outs for pass-through income.
See the text box here for specifics of the tax changes, but back in 2012, Gov. Brownback was persuaded by some of the same folks now advising Trump to sharply cut state income taxes and to fully exempt pass-through income (income from a business that you pass-through to your personal income tax).
As the WSJ piece and much other analysis shows, not only did the growth that was supposed to offset the revenue losses fail to appear, but the Kansas economy appears to be doing notably worse than it was before the cuts. The budget’s in trouble and the state’s bond rating has been downgraded.
Needless to say, this reality has had almost no perceptible impact on the cuts’ architects. As soon as I and every other tax wonk heard about the pass-through exemption, we concluded that the incentive to restructure as a pass-through entity would be irresistible. The WSJ piece points out that the number of entities taking advantage of this new loophole turned out to be 70 percent above the state’s projections.
Steve Moore, a key trickler that pushed the plan in Kansas, didn’t see that coming:
“Sometimes it was legitimate, and sometimes it was a gaming of the tax system to pay the zero rate, so that loophole has to be closed,” he said. “Unless you have some rules about this, people really will shift income and they’ll find ways to legally avoid paying tax, and that was never the intention.”
Who’d a thunk it?
Moore is now a Trump adviser, and while pass-through income isn’t zeroed out in the Trump plan, it is taxed at very favorable 15 percent rate.
This isn’t complicated, folks. In fact, it’s my first rule of tax avoidance: if there’s a type of income that’s privileged under the code, any putz with a tax lawyer suddenly discovers—who knew?—that’s the very type of income he or she had all along.
The WSJ includes a figure showing how job growth in Kansas is trailing the nation, but a more convincing comparison is job growth in Kansas compared to surrounding states. Regional economic conditions pose a better control than national conditions.
The first figure shows year-over-year job growth in Kansas, its four surrounding states (CO, MO, OK, and NE), and the nation. Sure enough, around the time of the tax cuts, Kansas starts drifting below the pack in terms of employment growth.
More recently, the control states’ line falls a bit too. This is driven wholly by Oklahoma which, of all these states, is most dependent on oil extraction, and the crash in the price of oil quickly whacked the OK job market (Kansas is much less dependent on energy jobs). That’s a good reminder of the sort of thing that actually moves the job market, versus the fairy dust claims of the trickle-downers.
Here’s another way of showing the same thing. Suppose you tried to predict state job growth using just national job growth and a trend term. You’d get a decent fit, but to be clear, this is of course not a detailed, causal model, just a correlation exercise. So I ran such a model on Kansas, stopping the estimate in 2012. Then I forecast job growth after that based on actual, national data.
National job growth handily tracks that of KA up until around when the tax cuts hit the scene. After that, the prediction consistently surpasses the actual. It’s just another simple way of showing that something happened around then that hurt the state’s employment record, and we all know the prime suspect.
But if facts could kill the trickle-down tax cut myth, it would be long dead. I harbor no illusions: there is no other economic policy I can think of that is both so actively pursued yet so clearly wrong.
OK, I promise not to bother you again until after the holiday. I’m tempted to offer you seasonally adjusted greetings, but that would be no greetings at all! (Not sure if that’s a “dad” joke or a nerd joke–pretty sure it’s the intersection of both.)