Gov. Arnold Schwarzenegger has reminded a commission now studying an overhaul of the state’s tax system that no idea should be off the table. Still facing a $24 billion deficit, California must cut expenses or find some new money — or both — and must do it before the month is out.
The governor told the editorial board of the Sacramento Bee that he hoped the commission would not be afraid to propose something like “straight tax.” The Governor suggested a 15% rate.
There are two principal arguments for a flat tax—growth and fairness. Many economists are attracted to the idea because the current tax system, with its high rates and discriminatory taxation of saving and investment, reduces growth, destroys jobs, and lowers incomes. By dramatically lowering rates and ending the tax code’s bias against saving and investment, it would boost the economy’s performance when compared with the present tax code.
Shifting California to a flat tax system is not a new idea. Previously the Pacific Research Institute (PRI), a free-market think tank based in California, released the results of a study to determine a revenue-neutral flat income tax rate for California. The report found that a 3 percent flat income tax for all Californians would help smooth the revenue roller-coaster from economic booms and busts. Coupled with the elimination of current tax loopholes, PRI suggested that a 3% rate could result in an extra $10 billion flow into the state coffers. That’s virtually half the current deficit.
The flat tax does have its detractors who suggest that a it taxes the wealthy at the same rates as the poor. Of course for those who don’t find the flat tax agreeable, there is always the Fair Tax.