Flatten California!

Tax hikes, especially during trying economic times like these, make no sense. Economies don’t tax themselves into prosperity. What California needs is a radical tax overhaul—to be precise, a single, low-rate flat tax. Such a reform would spur a renewal of economic activity and investment while continuing to raise the revenues that the state needs. …

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. …

California should follow George’s instructions by scrapping all its state and local taxes and fees (except for sin taxes, which exist to modify behavior rather than to raise revenue) and replacing them with a flat tax of about 6 percent on two distinct bases. One tax base would be personal unadjusted gross income from all sources, with only a few deductions: charitable contributions; interest payments, including on home mortgages; and rent on one’s primary residence, to remove the current system’s preference for homeowners. A single tax rate would apply across the board, from the first dollar earned to the last. The other tax base would be businesses’ net sales, or “value added”—that is, the difference between sales and production costs, which equals the state’s gross domestic product when aggregated across California. The low 6 percent rate would reduce the incentive to avoid earning taxable income in California, and the very broad base would reduce the number of places where people could hide their income to avoid taxation.