Dr. Laffer’s Rx for California’s Economy

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Economist Arthur Laffer thinks the way to fix California’s broken economy is to rip out the current tax structure and replace it with a new model for the 21st century. At the request of the Pacific Research Institute, Laffer has written up his proposed solutions in a book, Eureka! How to Fix California.

Laffer’s remedy is to do away with practically all state and local taxes and replace them with a 5.8% flat tax on personal unadjusted gross income with a couple of deductions and a business net sales or value added tax. Laffer contends such a tax system will be more efficient, eliminate unneeded paperwork, encourage growth and produce the same amount of revenue that all California’s current taxes produce. (He makes an exception for sin taxes, which he argues are in place to modify behavior rather than to raise revenue.)

Laffer says California’s highly progressive tax code is “driving California progressively broke.”

Laffer, a former economic advisor to President Reagan, known widely as a father of supply-side economics, spent last week in California, the state he formerly called home before a move to Tennessee partially motivated by the state’s high tax rates.

In discussing Governor Jerry Brown, Laffer reveals a warm feeling for the man who he worked with in designing a flat tax for Brown’s 1992 presidential run. Laffer praised Brown for past accomplishments when Brown was governor thirty years ago giving him credit for implementing Proposition 13, advocating other tax reductions and supporting a spending limit.

Laffer said he held out hope that Brown would do the right thing in constructing a tax program. “Jerry is always pulled by the interests of the left but that didn’t stop him in 1979 and 1980 to get through a spending limit, eliminate estate taxes and advocate other reforms.”

However, Laffer warned that if Brown proceeds and is successful with his income tax increase initiative it would be a “catastrophe for the state.” Laffer said, “You don’t tax the last three workers and expect the economy to rebound.” If the tax passes, Laffer said, “California will be the worst state in the nation by far from an economic and tax burden standpoint.”

I asked if his plan for fixing California did not move forward what he thought of the much discussed approach of lowering income taxes and creating a new tax on services in California. Laffer said  he would go for it. “It won’t solve the problem completely but it would be an improvement.”

He said he assumed such a plan would be revenue neutral. “We don’t need more taxes in California. It would hurt growth.”

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