What Trump can learn from Kansas’ failed tax cut experiment
The Brookings Institution
4411

Unless one understands how the system works, articles like this are manipulative. Government doesn’t impose “taxes” and doesn’t “cut taxes”. Government sets tax rates and offsets them with loopholes. How the taxpayer responds and what effect the new rates have on taxable income are what determines the effect on tax revenues. This is at the heart of it.

A change in tax rates and loopholes might increase or decrease or leave tax revenue unchanged. It depends on how the taxpayer responds to the new rates and what effect the loopholes have on taxable income and the economy. The consequences are complex and hard to predict.

Blanket statements in articles like this, such as “tax cuts won’t boost growth” and “will surely generate tax sheltering and revenue losses” and “will not produce much new business activity”, are deceitful. A specific change in tax rates and loopholes might do all of those things or none of them. It all depends on how the taxpayers and the economy responds.

The article might well be correct, that those new rate reductions in Kansas produced results the opposite of what was hoped for. There also are examples where rate increases caused revenue reductions and harmful consequences. For example, an experiment years ago with increasing the luxury tax on high end items caused a major reduction in tax revenue from that source, plus started putting American manufacturers of those items out of business, before it was quickly repealed.

President Kennedy and President Reagan both reduced tax rates and removed some loopholes, and the result was increased tax revenue and stronger economic growth. Many decades ago, the marginal tax rate was 90%, but there were so many loopholes that the rich easily avoided it. “Tax shelters” were a major business segment. When that rate and those loopholes were both reduced, tax revenues increased and the economy improved.

The main argument of this article, that tax rate reductions lower tax revenues and tax rate increases increase tax revenues, is a shallow argument and often wrong. The author hopes you accept his single example where that relationship did happen as proof that it must happen that way. It isn’t and it doesn’t. What will actually happen from any changes in tax law are hard to predict, and predictions are often wrong, but it usually is the case that lowering rates and eliminating loopholes at the same time does increase tax revenue and spurs economic growth.