In Unpacked, Brookings experts provide analysis of Trump administration policies and news.
THE ISSUE: As President Trump and the House GOP propose tax and spending plans that include sharp cuts to income taxes, it’s important to explore what happened when Kansas Governor Sam Brownback implemented similar cuts in 2012. The Brownback plan aimed to boost the Kansas economy, but instead led to sluggish growth, lower than expected revenues, and brutal cuts to government programs. The Brownback tax cuts, one of the cleanest experiments for measuring the effects of tax cuts on economic growth in the U.S., were eventually reversed by a Republican-controlled legislature as a failure.
The experiment in Kansas has important implications for federal tax reform, the first being not to expect tax cuts to boost the economy much, if at all.
THE THINGS YOU NEED TO KNOW
- In 2012, Kansas Governor Sam Brownback sought to boost the economy by sharply cutting income taxes across the board.
- Under his plan, the tax rate on pass-through business income fell to 0. The idea was to boost investment, raise employment, and jump-start the economy.
- This type of supply-side trickle-down theory has been proposed by Ronald Reagan, George Bush, and many others.
- The program in Kansas served as a lab test for how supply side tax cuts may work at the federal level. In Kansas, however, these tax cuts proved unsuccessful.
- The Kansas economy did not grow faster than neighboring states, the country itself, or even Kansas’ own growth in previous years.
- The experiment with tax policy was such a failure that a Republican controlled legislature not only voted to raise taxes, but did so over the veto of the governor.
- Rather than Democrats overturning the tax measure, this was a case of Republicans in power looking at the effects of the tax cut on the economy and making the decision that it was, overall, a bad idea.
- The experiment in Kansas has important implications for federal tax reform, the first being not to expect tax cuts to boost the economy much, if at all.
- Second, a lowered business income tax can be manipulated. While Kansas cut the tax rate on pass-through income to 0 in hopes of promoting economic activity, the growth simply didn’t happen. In reality, many people in Kansas re-characterized income from labor into business-form in order to take advantage of the 0 percent tax rate.
- At the federal level, Republicans often express intent to reduce the corporate and business income tax rates. The lesson from Kansas is that, while this might induce some increase in economic activity, it certainly will induce a massive increase of tax sheltering.
- There are other, more general, takeaways from the tax cut experiment. When Kansas cut taxes, its bond rating went down, and it had to cut central services such as education and infrastructure. After seeing this, a majority of Kansans decided they would not prefer to keep the tax cuts.
- Therefore, another implication is that tax reform is not just about taxes, rather what taxes pay for. Taxes and spending are linked.
- The tax reform discussion should include what it is that citizens are getting from the taxes they pay.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.