Mention Kansas and people’s minds turn to Dorothy, Toto and the yellow brick road.
That view almost always turns on the technicolour version of The Wizard of Oz. Not the black, white, dusty and generally unforgiving opening (and closing) shots of Kansas.
Beyond that, however, it would be difficult for anyone outside of the US (and even outside of the mid-west) to name anything of note about the Sunflower State.
But for the past five years Kansas has also been the centre of an important tax change.
And the proponents of that change have been left with a lot of egg all over their faces.
In 2010, the good people of Kansas elected Republican Sam Brownback as the state’s governor.
His aim was to slash taxes on companies. When I say slash, I actually mean effectively get rid of it.
So in 2012 he took the state’s business tax rate down to zero.
Slashing the state’s business tax to nothing would have a major impact on the budget. But Brownback argued that the increase in economic activity precipitated by the tax nirvana that Kansas would become meant it would be self-funding.
Five years on, the Kansas Budget is a mess. Schools, for instance, had their funding cut so deeply it led to court action while infrastructure repairs such as those for the state’s highways had to be stopped.
As revenues into the budget fell, the state was forced to raise its sales tax. Sales tax, like the GST, is regressive in that lower income earners spend a far greater proportion of their weekly pay cheque than higher income earners.
“Kansas is a beautiful natural experiment of tax reform. An example of what happens in the real world.”
While Brownback has argued the state has taken a hit due to outside factors such as falling commodity prices, none of these problems seem to have affected surrounding states that did not engage in his tax reform.
He claimed his tax cuts would generate 25,000 private sector jobs. Instead, Kansas is ranked 48th of America’s 50 states for job creation.
But the changes did create one important growth area — tax avoidance.
The tax change in Kansas affected so-called “pass-through” entities. In an Australian context, think of the small business, the doctor’s surgery, the accountancy firm, where profits go to the owners.
In a development that you could have seen coming from Balga, a large number of people decided that rather than pay the state income tax (which itself was cut to 3.9 per cent) they reorganised their tax affairs so their “salary” was the tax-free income of the business. Over five years the number doing this grew by 20 per cent.
So problematic has the issue become that the State legislature, controlled by Republicans, over-rode a Brownback veto to increase taxes to help fill the budget hole.
Kansas is a beautiful natural experiment of tax reform. An example of what happens in the real world. Now US President Donald Trump is proposing tax reform with the headlines around the corporate and personal income tax rates.
While much is being made in this country that the Trump plan will leave Australia a “company tax island” with its 30 per cent corporate rate, not much is being said about what the proposals will mean to the US Budget.
At this stage, the best guess is that there’s a $US1.5 trillion shortfall between the tax cuts and the tax increases that are being proposed to help cover its cost.
In recent days there’s been a pushback even among Republicans who have worked out the Trump plan will actually leave up to 30 per cent of the population paying more tax. And that 30 per cent is among middle to lower income-earning Americans, not those at the top.
The richest 0.1 per cent of Americans, based on the current proposal, will share in more than 25 per cent of the gains from the tax reform or the equivalent of $US278,350 each.
That’s just on the budget side of things.
Inside the proposals are plans that would deliver huge benefits to pass-through businesses (like those in Kansas) while exemptions have been made for the real estate industry. Like the one Trump operated in before he became president.
Mr Trump’s heirs would be the biggest winners. America’s existing estate tax would effectively be abolished, delivering huge windfalls to the sons and daughters of America’s richest families.
Critics are fairly declaring the proposals the return of a new Gilded Age to the US. The obvious political issues around the Trump tax plan mean it shouldn’t be taken at face value.
And, as the real world experiment in Kansas shows, any macro-economic modelling of them should also be taken with several grains of salt.
But that hasn’t stopped the Turnbull Government re-engaging on its single biggest tax or economic policy, the plan to cut the nation’s company tax rate to 25 per cent.
Treasury last week released a reheated version of the modelling it did last year on the company tax rate and the “importance” of it to the Australian economy.
It cites, as usual, the shift by a range of nations to lower their corporate tax rates (but fails to mention if they have delivered the promised economic benefits while also not blowing out their budgets).
Some people were enamoured with the claim that fully reducing Australia’s corporate rate, that will cost the Federal Budget about $65 billion, would be offset with a revenue boost worth $30 billion.
Now even my rudimentary mathematics shows that still means a $35 billion hit to the Budget.
And, going back to the original modelling that underpins the Treasury work, you quickly discover it assumed the cost of the company tax cut had to be offset with either very deep spending cuts or an increase in personal income tax.
Neither of those options have been proposed.
The same Treasury paper states that it looks at the likely impact of the US tax cuts on both America and the rest of the world.
But there’s no mention of how such a big hole in the US Budget will be funded or whether it will encourage the sort of tax management so evident in the Kansas example.
In other words, the theory is great. Just don’t ask about the real world. Or the difference between Kansas and Oz.
