Human Events Blog

California slides off the Laffer Curve

As everyone capable of rational thought predicted, California Governor Jerry Brown is coming out in favor of gigantic tax increases in California – already one of the most highly taxed, and insolvent, states in the union.  A ballot initiative this November would give California a whopping 13.3 percent top marginal rate for state income taxes, stealing the confiscatory taxation crown from New York, which currently charges a bit under 13 percent. 

That’s more than double the average 6 percent top rate for state taxes.  The targeted Evil Rich of California carry close to half of the state’s income tax burden already.  If they desire escape from Brown’s clutches, they need move no further than Nevada, which has no state income tax at all, and offers comforting amenities including its own whack-job liberal politician, Senate Majority Leader Harry Reid – who doesn’t think the massive federal government needs a budget at all.

The new California tax rate is a great example of the special interest politics that have ruined California.  Brown was originally going to jack the rate up to a mere 12.3 percent, but the unions demanded more, and threatened to run their own ballot initiative for a higher rate.  Brown caved and signed on to the union demand, in order to avoid diluting the political support he’ll need to ram these higher taxes down the throat of his dying state.

The pretense that these increased taxes will be used to clean up California’s horrendous budget deficits is the thinnest pretense of fiscal responsibility in history, because Brown’s next budget will match the projected revenue from his tax hike with higher spending, dollar for dollar.  Tax-and-spend liberals usually try to keep the “spend” part a little better hidden when they’re posturing as deficit hawks, at least until the necessary votes from gullible citizens have been cast.

And, of course, Brown’s projected revenue increases are a leftist fantasy.  No tax increase ever brings in the revenue it promises, and this effect becomes more pronounced at higher levels of taxation, because the incentives to avoid the higher tax rate increase.  California’s beloved Hollywood is notoriously good at such avoidance, despite the tendency of liberal movie stars to loudly advocate higher taxes for everyone else.

An exasperated Wall Street Journal editorial reminds California voters that a very pertinent example of the Laffer Curve – higher revenues through lower tax rates – lies in the recent past:

Even Mr. Brown, in one of his saner moments earlier this year, said that relying on millionaires to pay the bills causes “more volatility” in revenue collections, which has meant “a more or less constant state” of deficits. He was right. Capital gains collections collapsed to $734 million in 2009-10 from $1.6 billion in the boom years. So why would Mr. Brown make that problem worse?

One of the last states to have a tax rate as high as California is proposing was Delaware in the 1970s. Its rate hit 19.8%. Then-Governor Pete du Pont cut the rate to 10.3% in 1979 and later to 5.95%, and after five years the state’s revenues had nearly doubled and its credit rating went from the worst to one of the best.

But Big Government is insane by definition, not just when people like Jerry Brown are at the helm.  The demands of ideology supersede logic and morality.  Square pegs of reality are hammered into round holes of dogma, and the less comfortable the fit, the more frenzied the pounding becomes.

The absolute priority of Big Government is spending.  Tax rates are viewed as an instrument of control, more than as a funding mechanism.  Every Big Government liberal, from Jerry Brown to Barack Obama, will spend as much money as he can, as fast as he can.  Deficits don’t matter until the fiscal burden becomes absolutely unsustainable… at which point the only tool in their toolbox is tax increases, no matter how universally history judges them inadequate to the task of achieving fiscal balance.  The same inflated projections of increased revenue, based on absurd static analysis models that disregard the increasing tendency of citizens to avoid mounting tax burdens, are always offered.  Tax cuts, which would reduce avoidance behavior and increase the government’s revenue stream through economic growth, are dismissed with the hollow laughter of the hopeless lunatic, as are spending cuts.

An individual who conducted his life this way would be consigned to a psychiatric ward for observation, but Big Government doesn’t have to worry about that, as long as voters are crazy enough to put tax-and-spend leftists in office.  The problem isn’t so much the absurdist fantasies spun by the Browns and Obamas of the world, but the citizens who believe them, no matter how insistently the alarm bells of history jangle in their ears.


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