Fixing our broken tax code is a foundational step to building a healthy economy, creating more jobs and ensuring more take home pay for hardworking Americans.
To that end, Congressional Republicans are working to reform our tax code – which today includes more than 70,000 pages of laws and regulations – to make it fairer and simpler. We recently released our tax reform framework, which will be an outline for Congress in the months ahead and can be viewed here.
As a member of the House representing Kansas, and as a member of the House Ways and Means Committee, I am often asked to explain the differences between Kansas’ tax reform and Washington’s tax reform. Before I begin to dispel the myths, I would ask that you please read the eight page framework – eight pages that lay out our vision for tax reform.
Let me say this again: we are not zeroing out the pass-through rate as Kansas did. Instead, American businesses, both small and large, will be paying a tax rate firmly in line with our other global competitors, rather than one of the highest of any first-world country.
As for the myths, folks like to hastily equate our tax reform effort in Washington to the 2012 Kansas tax cut package. I’ve seen several headlines with variations of equation - which is either lazy analysis, or analysis based on assumptions that lack substance. The only real similarity is that they are both called “tax reform.”
It’s no secret that Kansas made a few mistakes with its tax reform plan. First of all, they zeroed out the tax rate for pass-through businesses, which is the tax status used for most small businesses, and failed to erect any guardrails to discourage tax avoidance. This created a loophole that allowed some existing businesses and wealthy individuals to avoid paying income taxes altogether by simply reclassifying as a pass-through and thus create a new “business” without adding any employees.
As for our federal tax framework, Congress wants to lower rates for ALL taxpayers: individual, corporate, and pass-through. As the top corporate rate drops from 35 percent to 20 percent, the pass-through rate drops similarly from 39.6 percent to 25 percent. Kansas went to a zero rate, not 25 percent.
Let me say this again: we are not zeroing out the pass-through rate as Kansas did. Instead, American businesses, both small and large, will be paying a tax rate firmly in line with our other global competitors, rather than one of the highest of any first-world country. Further, the pass-through rate and the corporate rate will remain relatively similar to each other, meaning there is little incentive for businesses to reclassify for tax avoidance purposes. Business owners can instead just focus on creating jobs.
Also, much has been made of individuals in Kansas who set up pass-through businesses in order to avoid paying tax on their personal wage income. Congress is well aware of this loophole and has worked hard at crafting safeguards to ensure that the federal pass-through rate is not exploited in similar ways. That is why we specifically included this statement in our eight page framework that committees will “adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
Finally, in addition to lowering rates, the federal tax reform plan calls for broadening the base. This is shorthand for closing tax loopholes. When tax loopholes are closed, more business and personal income is subject to taxation, so we are able to raise the similar revenue at lower tax rates. This allows us to cut tax rate for individuals and businesses without blowing a hole in the budget, since revenue neutral reform is our goal.
As a CPA, I am fully aware of how confusing and complex taxes can be. Unfortunately, that’s why Americans waste so much time and money filing their taxes and exactly why we are working to make our tax code fairer and simpler – so that you can do your taxes on a postcard.
In the coming weeks, as Congress continues to reform our broken tax code, I encourage everyone to read our framework – in its entirety – to better understand our policies and agenda. Simply stating that Washington’s tax reform is the exact same thing as Kansas’ tax reform is incorrect. We learned from Kansas' missteps and took steps to correct them - because you, the taxpayer, deserve better.