Friday, October 28, 2011

Opposition to the Kansas Income Tax

There is an old Saturday Night Live mock commercial I have been thinking about lately. The commercial was for "First Interstate Change Bank" as I recall, and it featured employees and customers extolling the virtues of the bank who's sole function was to make change. If you need four quarters and you had a dollar bill, they can do that. If you need a crisp new twenty to give a grandchild as a birthday present and only have a couple of wrinkled tens, they can do that. The commercial featured Phil Hartman explaining the bank's business philosophy. "People ask me how we make money doing this and I tell them 'Volume'".

This week a new Kansas political group called Kansas For No Income Tax (headed by a former Kansas Republican party executive director, Ashley McMillan) was created to oppose the Kansas Income Tax. This seems in line with the push nationally to radically change the taxing mechanisms in this country (e.g. Herman Cain's 9-9-9 plan; Rick Perry's support for a flat tax, etc.). Of course if you eliminate the income tax you have to find a way to replace the income it generated because the need for government services will not disappear. This mostly likely means a switch to a sales tax based system. But that is not what the news report said when announcing the new group. Rather, the report stated the loss in income could be made up for by economic growth and closing loopholes.

Phil Hartman would explain this new tax strategy as "volume". But, no matter how many loopholes you close, no matter how much the tax base grows, you cannot bring in any income tax revenue if you have zero income tax. Zero times any amount is still zero. There is an argument to be made that a flat tax with no loopholes could replace the revenue of the current progressive tax system. That argument may or may not be persuasive but at least it is a valid argument. Conversely the idea that you can close loopholes and gain revenue after you eliminate the income tax is incredibly misleading, false, wrong, stupid you name it. Once the tax rate is set to zero there are no loopholes because there is no tax. End of discussion.

I also have grave concerns about the idea that cutting income taxes will produce jobs. First, wages are deductible for businesses presently. I fail to understand how lower tax rates on businesses will spur job growth - if the tax rate is such a concern the business could hire more employees and increase its deductions. I suspect it is not the tax rate that is keeping hiring down. Second, when you really study why businesses start up or expand you discover taxes are a very minor consideration. Does anyone remember the big push for enterprise zones in the late 1980s and early 1990s? It was the same idea - if you cut or eliminate taxes in impoverished areas you will release a latent entrepreneurial spirit which will produce business and jobs and lift the area out of poverty. Only they didn't work. The hurdles to business are very high.  Taxes are way down on the list and cutting or eliminating those taxes had basically zero effect on business growth. Making capital more available at a lower cost, perhaps by expanding the Small Business Administration, would have a much greater impact.

I hope to discuss the pros and cons a sales tax or property tax based system as these proposals move forward. For now I just wanted to make the seemingly obvious point that closing income tax loopholes will not make up for revenue lost if you completely eliminate the income tax. I just wish that point had not been lost on the new advocacy group focused on influencing Kansas's tax policy going forward.

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