Arthur Laffer has proposed a new tax code for California. California is a continuing disaster zone: high unemployment, exodus of high-income people (Laffer was one), massive deficits, and slow economic growth.
California is an anti-business state. But start-up businesses create jobs. In California, there are few new jobs.
The climate is nice; the business climate is not. The state is headed for bankruptcy.
He left California in 2006. I left in 1975. He left for a zero-income tax state. S did I.
He makes a good point: economies do not tax themselves into prosperity. He writes:
Taxes are indeed a big part of California’s economic problem. At 10.30 percent, the state’s top marginal personal income-tax rate is the fourth-highest in the country, and its top marginal corporate income-tax rate of 8.84 percent is 25 percent above the national average. Excessive taxation is an equal-opportunity tormentor, afflicting labor and capital, poor and rich, men and women, old and young.
Smart people leave this kind of environment.
California’s income-tax system is also the nation’s most progressive—and that’s not a good thing. Progressive tax systems magnify tax-revenue volatility, with lots of money pouring in during periods of growth and the till running dry during downturns. This volatility occurs because wealthy people, who pay more taxes in a progressive system, experience sharp income swings from boom to bust. Depending disproportionately on the wealthy for its own revenues, the state experiences the same swings. This dynamic has a bad effect on politicians, who go on spending sprees during booms and then raise taxes during busts, harming competitiveness.
The bad times hit in 2008. They have not departed.
He recommends a flat tax, with deductions only for charity, mortgage interest, and rent on a primary residence. Everyone pays 6%.
As John Wayne said in The Searchers, “That’ll be the day.”
Such a tax reform would spark a surge in economic activity in California, since the after-tax rate of return for doing business would rise, both from the decline in tax rates and from the elimination of myriad fees that harm productivity. The result would be more businesses moving into California, fewer moving out, and more economic activity emerging from the underground economy. The California economy would soar, generating higher tax revenues, which would reduce the state budget deficit. The revenue stream would also be far more stable from year to year.
Envy will nip this in the bud.
So, what is going to happen when all this is ignored? More debt, more promises, and higher interest rates on bonds. Then the state will default. It will be the biggest default in America in modern times.
As Herb Stein said, “When something can’t go on, it has a tendency to stop.” That includes payments to lenders who were silly enough to ignore the numbers.