Combine Tax Cuts with Tax Simplicity

  

By John Lee

 

Missouri recently marked Governor Parson’s (R-MO) first 100 days in office.

He’s accomplished plenty in that time, including a signed balanced state budget and swift action on drought relief efforts. Moreover, Parson has traveled to all 34 Senate Districts in Missouri, showing a commitment to every Missourian in the state, not just those in our largest cities or most densely populated locales.

But Parson’ signature accomplishment is clear: He signed into law Missouri’s largest single-year income tax cut ever. Signed over the summer, the Parson tax cut will drop the individual rate to 5.4 percent next year, and gradually reduce the tax burden to 5.1 percent: “We need to continue to make the Missouri tax code simple and fair. This is only the beginning of our plan to keep more money in the pockets of Missourians and Missouri small businesses. I look forward to working with the legislature long term to identify ways to continue to offer broad-based tax relief.” 

More importantly, Parson sees the income tax cut as only the “first step in an ongoing process,” recognizing that tax rates remain too high and too burdensome for too many Missourians. If we continue to slash rates and hike deductions, then business owners and employees alike will have more money in their pockets—more money to spend, save, and invest. 

The Tax Cuts and Jobs Act—passed and signed last year—is living proof that tax cuts spur private investment. To date, more than 720 U.S. employers have publicly announced pay raises, 401(k) match increases, benefit expansions, bonuses, and other employee perks—because of their reduced tax burden. 

In Missouri, we’re seeing it firsthand. Kansas City-based Hostess Brands distributed $500 in 401(k) contributions. Rogersville’s Mid-AM Metal Forming gave out bonuses to 140 employees. State Fair Floral in Sedalia, meanwhile, expanded business operations and renovated its existing facilities.

The economic benefit of tax cuts is undeniable here. Suddenly concerned with budget deficits, Democrats claim that tax relief is inadvisable because it strips the state budget of valuable resources. But we’re just not seeing it in Missouri. As of late June, our state’s budget surplus stands at $350 million.

Not only are we not in the red, but we’re well in the black. Missouri budget director Dan Haug put it this way: “I’m starting my third year as budget director, and I think this is the first year we haven’t had to immediately do spending restrictions.”

Tax cuts work, but there is more to tax reform than lower rates. Governor Parson and Missouri lawmakers—not to mention legislators in Washington, D.C.—-must not lose sight of tax simplification. Most Americans (90 percent) believe the tax code is too complex, meaning that they find it difficult to file their taxes smoothly.

The complexity should come as no surprise. Existing tax systems typically have multiple tax brackets, tax schedules, tax tables, withholding tables, and computations. There are generally two systems: Tax rate schedules with lengthy tax withholding tables (for tax estimations) and tax tables (for tax returns) with up to 35 pages.

Confused yet? You’re not alone. 

But not all is lost. The way to address tax complexity is a transition to the often-ignored linear and gradual (LG) tax rate system. Among other reforms, the LG system would match, combine, and simplify the existing two systems with tax withholding tables (for tax estimations) and tax tables/computations (for tax returns) consolidating up to 35 pages into one system that’s less than 1/3 page long, with up to 99% reduction.

Missouri tax brackets (10 or 5), tax schedules, tax tables and withholding tables can be simplified with just 2 brackets and a 98% reduction. This consolidation would save a state like Missouri about $200 million annually, while the federal government could see $10 billion/year in savings.

With tax reform, lawmakers usually struggle to select tax bracket numbers, taxable income ranges, and tax rates. With the LG tax system, which provides the most reasonable and simple tax rates, these factors are fixed and only tax rate ranges are adjusted. Tax rate formulas are decided by tax rate and fixed taxable income ranges. Then “complex” political factors are converted into simple technical issues, which will help lawmakers to make tax reform simple and practical. 

Don’t get me wrong: We need tax cuts and budget balance. Less money in the hands of Uncle Sam means more money for you and me.

But we also need tax simplicity. It would save us money, time, and plenty of headaches come Tax Day.

 

John Lee is the founder of Tax Simple Center in Kansas City.