Pursuing tax simplicity at the state and federal level
By John Lee
Earlier this year, President Trump called for a 15 percent corporate and small business federal tax rate. By the end of the summer, the White House plans to release its final tax reform plan, which is expected to include significant relief for small businesses in the form of a simpler filing process.
This is welcome news for America’s 29 million small businesses, which create millions of jobs in Missouri and nationwide. The National Federation of Independent Business (NFIB) has found that 85 percent of small business owners believe “the tax code is too complex and should be overhauled.” Even more (90 percent) have given up trying to comply with the tax and instead pay tax professionals to prepare their filings. This is money that could otherwise be invested in business expansion and job creation, but instead finds its way to H&R Block and other tax experts.
Most small business owners report that tax preferences are inconsistent and continuous changes to the tax code make it difficult to plan ahead and save money on compliance. The burden of compliance hits the smallest enterprises hardest, as they naturally have fewer resources than the largest corporations.
Fortunately, Missouri is already on the right path. At the beginning of 2018, individuals and small businesses in the state will see their rates drop significantly, which State Treasurer Eric Schmitt calls one of the largest tax cuts in state history. While most Missourians will have their state income tax reduced from six percent to 5.9 percent, small businesses that file through the individual income tax structure will see their rates drop to 5.5 percent at the same time. In Smith’s words: “This will mean more job opportunities and more take-home pay for Missourians, which will in turn help to grow our economy.”
He’s right. Now the onus is on Congress to follow Missouri’s lead and work with President Trump to reduce the federal tax burden.
One substantive but often-ignored reform is a transition to the linear and gradual (LG) tax rate system. Existing tax systems typically have multiple tax brackets, tax schedules, tax tables, withholding tables, and computations, which are complicated and time-consuming. There are typically two general systems: Tax rate schedules with lengthy tax withholding tables (for tax estimations) and tax tables (for tax returns) with up to 35 pages. The two systems only add tax complexity, time, and cost. Most state tax systems, including Missouri’s, are in similar situations.
Among other changes, the LG system would match, combine, and simplify the existing two federal and state tax systems into a consolidated system that is less than a page long. This consolidation could save a state anywhere from $100 million to $600 million annually, while the federal government might see billions of dollars in savings. Missouri currently has 10 tax brackets, which can be reduced to two with compatible results. Many employees with standard deductions and non-complex tax situations may also have the option to not file tax returns with tax withholding reports without or with minor modification, which can reduce time and costs. About 80 percent of Kansas tax returns use standard deductions now.
The LG system saves the government time to check more related tax returns, reducing tax fraud crimes, and collecting more taxes by comparing the differences.
Meanwhile, small business owners would have fewer pages to sort through and save valuable resources on tax filing. Running a business comes with many opportunity costs. Less time spent on taxes means more time spent running the business and creating jobs—and more money left over for business investment, wages paid, and covering other costs.
As an expert on the state and federal tax systems, I understand the importance of simplification. The filing process can be confusing, let alone a small business owner juggling employees, customers, and countless financial statements.
As President Trump and Congress tackle tax reform, Missourians should wish them luck and look forward to the time a simpler tax system with practical codes will save them.
John Lee is the founder of Tax Simple Center in Kansas City.