Arthur B. Laffer is chairman of Laffer Associates and author of the new book “Eureka! How to Fix California.” Laffer is a former member of President Ronald Reagan's Economic Policy Advisory Board.

Viewpoints: Brown should go back to idea of a flat tax to help economy

Published: Sunday, Jul. 15, 2012 - 12:00 am | Page 5E
Last Modified: Sunday, Jul. 15, 2012 - 10:27 am

Gov. Jerry Brown just signed bills finalizing California's budget and closing the Golden State's $16 billion budget deficit.

But the governor's budget is contingent on voters approving a proposed $8.5 billion tax hike at the ballot box this November. If they don't, some $6 billion in spending cuts will go into effect.

This approach is exactly the wrong one. No one would know that better than the Jerry Brown of 20 years ago. Instead, the governor should have resurrected an idea that he and I first worked on during his 1992 presidential run – a pro-growth flat tax. Such a move would instantly breathe new life into California's economy – and even deliver enough revenue to balance the state budget.

California's problem isn't that its taxes are too low – it's that the state's economy is moribund. State GDP grew a tepid 1.8 percent in 2010, while the country's economy as a whole swelled 3 percent. Nearly three years after the recession has officially ended, the state's unemployment rate is just south of 11 percent. Today, almost one of every six Americans looking for work resides in the Golden State.

Yet instead of looking for ways to spur growth, the governor has proposed a hike in the sales tax to 7.5 percent, an income tax increase on everyone making more than $250,000, and a new 13.3 percent tax rate for those earning $1 million or more.

If raising taxes were the solution, California would be swimming in budget surpluses instead of drowning in deficits.

California's corporate income tax rate tops out at 8.84 percent, well above the national average. Its existing top marginal tax rate is among the nation's highest, as are taxes in just about every other category.

The tax code already relies too heavily on the wealthy, with the top 0.3 percent of Californians paying more than 31 percent of the state's personal income taxes.

As a result, California's tax revenues yo-yo drastically from year to year.

Despite the conventional wisdom, the rich tend to lose more of their incomes during economic slumps. According to the IRS, the wealthiest 1 percent saw their incomes drop 34 percent between 2007 and 2009. By contrast, income for all workers declined 11 percent.

In California, the richest 1 percent paid $25.7 billion in state income taxes in 2007. Two years later, they remitted less than half that figure, according to the state's Franchise Tax Board.

Worse, sky-high tax rates are driving wealthy Californians out of the state. And they're taking their tax payments, their businesses and the jobs they create with them.

Between 1992 and 2008, the Golden State lost a net total of 869,000 tax filers. Add up all the taxes they would have paid had they stayed put, and California lost roughly $500 billion.

More of the same will not cure the state's fiscal woes.

The governor should know this better than anyone else. He did two decades ago, when, as a presidential candidate, he proposed a flat tax to fix the stagnating national economy.

Back then, he called the flat tax a "silver-bullet solution for the economy." Despite the low rate he proposed – a flat 13 percent – he noted that "federal revenues would be at least as much as they are today and probably much higher if this revamping of the tax code unleashes the business expansion we expect."

And guess what – my friend Jerry's conclusion is still right today.

To get started, California's Byzantine tax code must be scrapped in favor of a simple, fair, revenue-neutral flat tax. A rate of about 6 percent would bring in at least as much revenue as the current system – with none of its growth-destroying distortions.

Such a system would broaden the tax base – and thereby reduce the volatility that plagues the state's finances at present. It would encourage Californians to stay put – and even attract tax refugees back into the state.

A flat tax wouldn't just benefit the wealthy. Under the new system, regressive taxes like those on payroll, gas and sales – which disproportionately burden low-income folks – would disappear.

Twenty years ago, Gov. Brown banged the drum for a pro-growth tax policy. California's economy won't bounce back until the governor dusts off his old flat-tax proposal once again.

© Copyright The Sacramento Bee. All rights reserved.

Read more articles by Arthur B. Laffer



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