Can a Flat Income Tax Fix the State's Messed-Up Finances?
When Arnold Schwarzenegger convened his council of economic advisors for a couple of hours of chitchat early in the recall campaign, one individual I expected to see in the group was conspicuously missing.
Where, I wondered, was Arthur Laffer?
One would think that the economist was perfectly cast to serve on Schwarzenegger's Economic Recovery Council. He's a longtime California resident and observer. His name is synonymous with the supply-side economics of the Reagan era and with largely (if not exclusively) Republican tax policy.
Only later did I learn the likeliest explanation for his exclusion: Laffer has been on the outs with former Gov. Pete Wilson, the eminence grise of the Schwarzenegger campaign, for years. I learned this from Laffer himself when I visited him last week at his office in San Diego.
Our nominal subject was not his absence from the Schwarzenegger inner circle (in fact, he says he spent an hour consulting with Schwarzenegger and a "stone-faced" Pete Wilson the week before the economic summit), but rather a provocative proposal for a California flat tax that Laffer has been pressing, most recently in a Wall Street Journal op-ed article.
The proposal is essentially to abolish every state and local tax in California, replacing them with flat-rate income taxes on personal and corporate income. Only minimal deductions, such as for mortgage interest, would be allowed.
Laffer contends that these levies could meet California's state and local revenue needs with a rate of 5.85% to 6%. He says that by avoiding the volatile revenue swings resulting from the existing progressive tax, this would temper the cycles of overspending and painful cutbacks that afflict the California budget.
"The progressive tax magnifies revenues, so you get some years with lots of revenues and others with crushing deficits," he says. Laffer's contention is that this volatility invites the creation of lavish new programs in fat years that can be sustained only by tax increases in lean years.
Followers of Laffer's career will recognize a few familiar themes here. One is Laffer's hostility to progressive taxation. Progressive taxes, he says, provoke high-earning economic decision makers to make choices that are self-interested but detrimental to the community at large, such as moving businesses out of state. He further contends that progressive rates fail to redistribute income efficiently from rich to poor because the poorest of the poor have no earned income and thus can't exploit a tax exemption.
