POLITICO: Deconstructing Kansas

I spoke with Bernie Becker who writes POLITICO‘s Morning Tax tipsheet about the repeal of the infamous Kansas tax cuts and whether it will have an impact on the federal tax reform debate:

Here’s one explanation that was offered for why the two are an imperfect comparison — the design of the Kansas tax cuts, which totally erased taxes on pass-throughs, was so bad that it’s hard to even contemplate anything like it passing in D.C. “I don’t know how you could possibly replicate it at the federal level,” said Liam Donovan, the director of legislative and political affairs at Associated Builders and Contractors and a former top staffer at the National Republican Senatorial Committee. “It’s so egregious — we’re talking about pass-throughs paying zero. It’s almost cartoonish.”

You can read the rest here.

While it didn’t make the story, I laid out for Bernie why the comparison is being misapplied, and how the real lesson of Kansas is being ignored, echoing my tweetstorm from a few weeks back:

It’s not that pass-throughs are bad. It’s not even that steep tax cuts are bad. [But] if you make one business structure wildly preferential, people will seek it out. And if exempt it from tax altogether, katy bar the door.

So you want to invoke Kansas to argue cuts won’t pay for themselves? Fine. But don’t use it to demonize pass-thrus when that mangles the point.

If anything, Kansas experience underscores why it’s important to have equal (or at least similar) treatment regardless of business structure. Should that mean a 15% rate for all? Maybe, maybe not. But you certainly can’t have a 20pt chasm between Main Street and the Fortune 500.

Neither the Trump plan nor the House blueprint would exempt pass-throughs a la Kansas. Nor would either advantage them over C-corps. Only in the administration’s proposal would even be on equal footing.

Bottom line: using the example of Kansas to argue against pass-through parity is at best inapt, and at worst self-defeating. Rate disparities inevitably distort behavior, and a large gap between C-corp and pass-throughs would have a similar effect, just in the other direction.

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