By Tim Redmond
The governor’s tax-reform commission released its report today, and it probably won’t amount to much, because nobody seems to like it.
But the report shows how badly skewed the whole notion of “tax reform” has been warped in this state. The central premise of the report is that the top income tax rate — the rate that the very rich pay — should be reduced, and the overall income tax structure flattened. The argument: Since the income of the richest Californians changes with the economy, flattening out the tax structure will give us more budget stability.
But that’s an utter crock. As Lenny Goldberg, the director of the California Tax Reform Association, notes:
1. The top personal income tax rate should not be lowered, since figures presented to the Commission demonstrate clearly that the volatility problem is a function of the distribution of income, not a steeply progressive tax. In fact, the tax is relatively flat, assessing the same marginal rate on the upper-middle class (90k +) as the very rich, with a very quick ride through the brackets. If anything, the bracket structure should reflect the federal structure, which has increasing brackets and rates at $137,000, $208,000, and $372,000.
As Phil Spilberg’s presentation on March 16 pointed out, the top 1% take an extraordinary share of income (25%), nearly doubling since the early 1990’s. Their tax burden moves consistently with their share of income, so their disproportionate share of taxes is a function of their disproportionate share of income. That fact alone is what leads to volatility, but lowering their tax burden only exacerbates the mal-distribution of income. And any tax cuts share income with the federal government at a marginal rate of 35%, likely to become 39.6%, so are effectively a capital outflow.
In other words, the reason that tax receipts drop off so much during recessions is that the very rich have too much of the state’s total income. If anything, the tax rate is too flat now.
I’m somewhat intrigued by the new business tax proposals, which amount to what the Europeans call a “value added tax.” You take the total sales of a business, subtract its total costs, and tax the net proceeds, which are supposed to represent the value added during production. It’s a little trickier when you apply that to services, but I don’t think any sane person watching the state’s tax system disagrees with the concept that services ought to be taxed.
But overall, the tax reform commission has offered a very limited perspective — which is too bad, because California’s tax system is a mess and badly needs a comprehensive overhaul.