Flat Income Tax: Impact on California

Executive Summary

This report details research about flat income taxation for the Governor of California, Mr. James Cash. The research encompasses the advantages and disadvantages of flat income taxation, and how such a system would impact the economy of California. The report ends with possible responses to critics and how a flat income tax could help revive the California economy.

A flat income tax for California offers the state many advantages over its current system:

• Flat tax would decrease complexity, therefore reducing administrative expenses and increase tax compliance

• Flat taxes create a risk-averse environment, reducing the volatility of the current progressive system.

• California, under a flat tax, could better retain wealthy taxpayers instead of driving them into more attractive tax environments.

• Also, California would attract wealthy taxpayers from other states who currently tax at a highly-progressive rate.

• Attracting wealthy taxpayers would increase venture capital involvement and small business development. This would increase employment and the overall tax base of the state; resulting in higher tax revenues.

Flat taxes can also present possibly disadvantages for California:

• Our nation as a whole favors progressive tax because it presents the greatest degree of social inequality. This is the main argument presented against flat taxation.

• Some researchers believe flat taxation is too simple for our complex and capitalist society.

• Many researchers believe flat taxation does not respond well to economic growth.

Responses to critics on the possible disadvantages of flat taxation include:

• California currently uses the lowest bracket low-earners while using the second highest top bracket. This has caused the state to rely on the top 1 percent of taxpayers to fund 50 percent of tax revenues. By doing so, California cannot accurately forecast revenues and budgets.

• States that do not impose income tax or already...