We the People

By Ron Meyer

Published in the Santa Barbara News-Press

California’s chief budget analyst, Mac Taylor, shocked Sacramento legislators last Wednesday when he announced some daunting numbers: California will run a $6.3 billion deficit this year and a $14.6 billion deficit next year. Key players at the state capital are already considering raising taxes.

If California raises taxes, they will continue to chase away the state’s main revenue sources: businesses and the rich.

California’s total per capita taxes are the fourth worst in the country; state and local taxes are the sixth worst; individual tax rates are the fourth worst; sales tax rates are the worst; top individual rates are the fourth worst; and the business rates are the third worst. Who would want to live or own a business here?

Well, California is the most beautiful state in the union. When Oprah Winfrey quit her show last week, she said, “[w]hy would anybody stay [in Chicago]? It’s freezing here and I own a mansion in Montecito.”

There’s no doubt it is gorgeous here, but not even Oprah chooses to pay the taxes. Hollywood tabloids have been reporting that she has wanted to live full-time in Montecito for years, but had been advised to stay in Chicago because of California’s exorbitant tax rates.

Oprah is not alone. Many companies, both large and small, do everything they can to avoid paying California taxes. For some this means hiring savvy lawyers, but for most it means relocating. Some companies can’t afford either and just go out of business.

What many in Sacramento don’t realize is that if they raise taxes, the government will actually get less revenue. Many people support raising taxes on businesses and the rich because they can afford to pay more. Well, the fact is they usually don’t end up paying more at all. They evade the taxes, become less productive, or leave.

Raising taxes not only chases away rich people and businesses, but increased rates could further destabilize our already fragile economy. Small business and middle-class Americans are already struggling enough just to keep above water, and the last thing these folks need is one more expense.

A couple weeks ago I had the opportunity to travel an hour west of Santa Barbara to see Ronald Reagan’s Rancho del Cielo. This is where President Reagan signed the Economic Recovery Tax Act of 1981. Looking into this act and its effects on tax revenue got me thinking: We can boost California’s revenue and the state’s economy if we cut taxes.

People will immediately identify this recommendation with supply-side economics, but don’t get me wrong. Not all taxes are supply-side. Sales taxes and some income taxes are historically revenue-neutral or slightly revenue-negative, meaning that if you decrease the rates, the revenue either stays the same or goes down.

Cuts in business and top individual tax rates are revenue-positive. Whether it was Ronald Reagan’s or JFK’s national tax cuts, or Mayor Rudy Giuliani’s tax cuts for New York City, in almost every case where high business and top individual rates have been cut, the revenue from these taxes has gone up.

To understand why this happens, we should examine the logic behind both tax cuts. First off — as we learned from Oprah — businesses and rich people are less likely to move or avoid taxes when rates are low.

When corporate taxes are lowered, businesses have more money to invest in future ventures — like hiring new employees or buying new machinery — creating more taxable wealth.

Personal tax cuts are often criticized because they usually don’t generate a lot of consumer spending. When we cut taxes for rich people, they usually invest the money in banks, stocks or real estate. These investments go on to make these folks richer (equalling more tax revenue), and they also provide the needed liquidity an economy needs.

When people invest or save money in banks and stocks, it provides small businesses and entrepreneurs access to more capital. More capital means more employees, more machinery, and more land. All three help the economy and bring in additional taxes.

If Sacramento legislators want more money, they need to be counter-intuitive and lower tax rates. Lower tax rates — especially top individual and business rates — would be the stimulus California needs to turn around these droopy unemployment numbers.

It really shouldn’t be difficult politically; most people and business owners certainly won’t complain. Plus, it will keep Oprah in Montecito.

Ron Meyer Jr. is a student at Principia College in St. Louis. He is interning at the News-Press this winter.