GOP Tax Reform Boosts Wages According to Boston University Researchers

TAX REFORM UPDATE!!

Researchers at Boston University Agree!

In a study published this morning analyzing the economic and revenue impacts of the Republican “Unified Framework” Tax Plan, researchers found:

  • The new Republican tax plan raises GDP by between 3 and 5 percent and real wages by between 4 and 7 percent.
  • This translates into roughly $3,500 annually, on average, per working American household.
  • The source of the increase in U.S. output and real wages is the UF plan’s reduction in the U.S. marginal effective corporate tax rate from 34.6 percent to 18.6 percent.
  • According to their model, the U.S. corporate income tax represents a hidden tax on U.S. workers.

Click here to go directly to the study

Corporate Tax Reform and Wages: Theory and Evidence

New analysis from the Council of Economic Advisers proves:

  • Reducing the statutory federal corporate tax rate from 35 to 20 percent would increase the average household income in the United States by, very conservatively, $4,000 annually.
  • The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000 à The most optimistic estimates from literature show wages could boost more than $9,000 for the average household.
    • A 15 percent corporate rate cut could increase average household incomes from $83,143 in 2016 to between $87,520 and $92,222.
    • Median household income — meaning earnings for more of a typical household — would rise from $59,039 to between $62,147 and $65,486.
  • Literature finds countries with low corporate tax rates have seen higher wage gains than countries with high corporate tax rates.

Click here to link to study in its entirety

A Fairer Tax Code Is a More Efficient Tax Code

Tax formThe last time we saw comprehensive tax reform in this country was also the last time UCLA won a Rose Bowl (1986), so we are talking about a long, long time. We know there have been several tax cuts, and tax increases, since then, but as for some legislative attempt to drive a change in the overall system of tax policy in this country, it has not happened in over 30 years. It would be easy to argue that partisan polarization is the cause of this legislative difficulty, but that would be inaccurate. Partisanship did not keep welfare reform or comprehensive trade agreements from being done in the 1990s. Partisanship did not keep significant national-security endeavors from passing in the 2000s. And President Obama’s reelection in 2012 coincided with the sunsetting of the George W. Bush tax cuts, creating one of the more bipartisan agreements in recent history, when Vice President Biden and Senate majority leader McConnell negotiated a permanent extension of the tax cuts that resulted in more favorable treatment for investment tax and estate tax and left the individual rates at the lower levels of the Bush plan, besides at the top rate. Bottom line: Partisans have done plenty of bipartisan work over the last 30 years; they just haven’t done it when it comes to reforming something that is broken.

The term tax reform is pivotal here. Tax cuts scream for people who pay too much in taxes wanting to pay less (fair enough). Tax reform implies something is structurally unfair, and therefore needing reformation. We do not need to reform that which is already good and right. Sure, we may turn a knob here and there on levels, but reform is more comprehensive, and more reactive. The catalyst to reforming something is admitting something needs to be reformed.

The catalyst for 2017/18 tax reform is a broken tax code, and that brokenness is most evident in two places: A brutally non-competitive business tax code that hasn’t come close to dealing with the global realities of the last 30 years; and a glut of tax brackets and deductions that are too confusing, too easy to manipulate, and too divorced from simplicity and fairness. Yes, the rates are too high, both individually and corporately, but beyond that, the system is not right. The efforts of the Trump administration, led by Treasury Secretary Steve Mnuchin, National Economic Council director Gary Cohn, and the GOP leadership of the House and Senate, seek to use a new tax-reform bill to attack the fundamentals of what is broken in the tax code (a non-competitive corporate code) and clean up around the edges as well (alternative minimum tax (AMT), pass-through entities, etc.).

The math of passing tax reform is difficult because of Senate rules on reconciliation. To attach it to a budget bill and thereby enable 51-vote passage, the impact the tax plan can have on overall revenue (and therefore deficits) is limited. “Dynamic scoring” — the reality of supply-side math that pro-growth tax cuts move us in the right direction on Laffer’s Curve — allows for some more liberal use of this parliamentary reconciliation reality. But at the end of the day, the White House is limited in how much it can reform the tax code without “pay-fors” — offsets and such that will enable the plan to be scored within budget-reconciliation math.

After the inevitable death of the ghastly “border adjustment tax” idea, the best “pay-for” available is eliminating the deductibility of state and local taxes against federal tax liability. Should that tax deduction be eliminated, the comprehensive business tax reform needed (a 20 percent rate vs. a 35 percent rate, a territorial system, repatriation of foreign profits, and the elimination of nearly all special-interest deductions) can become reality. And yet the path to tax reform is being blocked by those who would hold on to the abysmal deductibility of state tax — a blockage being promoted by Republicans and Democrats alike (who says they never do anything on a bipartisan basis?).

Who would want to hold onto the deductibility of state taxation? Well, legislators in high-tax states, for one, who fear little consequence from the residents of low-tax states who end up footing the bill for their fiscal recklessness. In fact, the sole source of opposition to eliminating this deduction has come from blue state California, blue state New Jersey, blue state New York, and blue state Connecticut. Unfortunately, the fact that these states are all blue does not mean this is leftist partisanship, because the opposition is coming from Republican legislators and thought leaders in these states as well. That opposition underscores the fundamental need for reform — reform in our policy, but reform in our thinking as well.

There is never going to be reform that does not upset some people, somewhere in the tax food chain. If there could be such a thing, by definition, there would be no need for tax reform! The objective of a national tax-revenue system should be to fund the legitimate functions of government, and do so in a manner fair to the national self-interest, devoid of governmental favoritism or bias. The purpose of a tax system is not to implement social agendas, punish certain behaviors, reward certain behaviors, etc. The federal tax code is a funding matter, and it ought to be done in the least threatening way to growth and competitiveness possible. A 0 percent tax code is not a possibility, as competitive as it may be, as government has responsibilities, liabilities, and legitimate functions that require funding. But where funding can be achieved without compromising American economic growth, that must be the aim.

The business-investment tax code in our country is a disaster, and this is hardly denied by the other side of the aisle. The rate is too high, and the incentives for businesses to keep moneys offshore are gigantic. Additionally, the loopholes, deductions, and various ways in which certain privileged or selected companies benefit (while others do not) is a direct violation of the intent of the tax system. Simplification is the goal, and an even playing field that does not pick winners and losers is the aim. While I would prefer to get rid of the R&D credit (crony capitalism for pharma) and the low-income-housing credit (crony capitalism for real-estate developers), the proposed tax reform goes a long way towards equalizing the business code and creating a competitive scenario for our U.S. companies with large multinational presence.

So what is the hang-up? The aforementioned state-tax deductibility issue is being presented as a hang-up by Left and Right alike. Ironically, the concern the Left has always had with Republican tax maneuvering is that it unfairly assists those on the higher end of the wage spectrum. Here, the Democrats are supposedly upset about the loss of a tax deduction that, by definition, is used only by those on the higher end of the wage spectrum (those who itemize). But let’s look at the issue from the vantage point of Republican voters in high-tax blue states. Could it mean a higher overall net tax liability? That is very unlikely, since those most affected by this would be of such an income context that they have almost certainly been subject to the AMT anyways, a tax atrocity that was already disallowing the state-tax deduction. But for those who were not previously in AMT but are fearful of losing the state-tax deduction, two things must be said. First, no one knows whatsoever how their net picture would turn out in the new tax law, because the income levels receiving the new tax rates (12 percent, 25 percent, 35 percent) have not been announced. Any attempt to model tax liability in the new system will be rank speculation.

Second, if a very small number of people end up paying more, not less, in the new system, it should have no bearing on what we believe about tax reform. I do not believe that will happen, and if it does, I think the net impact will be so small and affect so few, it will not even register. But even if it did, the fundamental question is whether or not residents of South Dakota and Texas should be footing the bill for a federal loss of revenue just because their states choose to run their affairs with a high degree of fiscal sensibility and wisdom. Tax reform is meant to reform what is broken, and the use of a state-tax deduction is discriminatory, unfair, and, worst of all, enabling. It enables high-tax states to make foolish decisions, to overly rely on highly cyclical income streams, to spend without regard to consequences, and to not factor in competitive realities across our cherished 50-state union.

The need of the hour is beneficiaries of the broken tax system to maintain advocacy for reform. The generation-long resistance to reform is a by-product of special interests and a mentality that replaces common-sense tax policy with gaming of the system. We can do better, and for those who know how badly this economy and our national fiscal situation need growth, we must.

David L. Bahnsen is a trustee at the National Review Institute, the managing partner of a bicoastal wealth management firm, and the author of forthcoming book, “Crisis of Responsibility.”

This article was originally published by the National Review

Trump’s Incentive-Packed Tax Plan

 

Tax reformMuch as he did in his command performance before the United Nations, when he took back control of U.S. foreign policy, President Donald Trump has seized and energized the tax cut issue. Almost daily, he is pounding away on the themes of faster economic growth and more take-home pay, arguing that his plan will make America’s economy great again.

“Under my administration,” Trump just told the National Association of Manufacturers, “the era of economic surrender is over.”

The Trump plan would slash large- and small-business tax rates, double the standard deduction for middle-income folks, make the whole tax code simpler by eliminating unnecessary deductions, repeal the death tax and end the alternative minimum tax.

As usual, Democrats say the president’s plan is a handout to the rich. But in a recent speech in Indianapolis, Trump asked: Why can’t this be a bipartisan tax cut bill?

The argument that the U.S. is doomed to 2 percent or less growth — “secular stagnation” no matter what we do in terms of tax policy — is nonsense. Across-the-board tax cuts produced 5 percent annual growth during the JFK period. And after tax cuts were fully implemented in 1983, real growth averaged 4.6 percent for the remainder of Reagan’s presidency.

OK, let’s take one example from the Trump tax plan. Corporations today are taxed at 35 percent. That means, for every extra dollar of profit, a company keeps 65 cents. But the president has agreed on a 20 percent corporate tax rate. So, for the extra dollar earned, the private company would keep 80 cents.

On the individual side, the sleeper tax detail is the doubling of the standard deduction. This is a huge positive for young millennials (who don’t own much) and folks with no mortgages or homes. It puts more cash in worker’s pockets, simplifies the code and means that near 80 percent of taxpayers won’t have any deductions.

Slimming income-tax rates from seven to three brackets and cutting income-tax rates in general add even more supply-side incentives to the Trump package.

More money for rich people? Well, the not-rich family of four will be a lot better off with a $24,000 standard deduction. And the center-right Tax Foundation calculates that the bottom 80 percent of households get a lower tax burden, while the top 20 percent get a higher burden.

Click Here To Read The Full Article

Will the Trump tax plan help California?

donald-trump-2As most people are now painfully aware, California’s progressive political majority has just hit middle-class taxpayers with billions of dollars in new taxes. As a direct result of these actions, the state will soon have the distinction of having the highest taxes in the nation in the following categories: Highest income tax rate; highest state sales tax rate; highest vehicle tax; and the highest gas tax (and that doesn’t even include the added costs of cap-and-trade regulation). For the wealthy, California can be a lovely place to live. For normal folks, life in the Golden State can be a struggle. According to a recent article in the Sacramento Bee, California lost more than 1 million people in net domestic outmigration between 2004 and 2013.

Other than leaving the state, perhaps the only relief available for California’s middle class is tax reform at the federal level. And while there’s a lot to love in the “Unified Framework for Fixing Our Broken Tax Code” embraced by both President Trump and the Congressional Republican leadership, there is also a very big caveat.

First, the good stuff. The plan calls for lowering the income tax rates for individuals and families. It would shrink the current seven tax brackets into three — 12 percent, 25 percent and 35 percent — with the potential for an additional top rate for the highest-income taxpayers.

Second, it would roughly double the standard deduction so that typical middle-class families will keep more of their paycheck. The plan also significantly increases the Child Tax Credit.

Third, while it eliminates some loopholes, it does preserve the cherished tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education and retirement security.

Fourth, it repeals the death tax and Alternative Minimum Tax which forces many Americans to calculate their taxes twice.

In addition to helping middle-class Californians, the reform package would also help the state’s small businesses by limiting the maximum tax rate for small and family-owned businesses to 25 percent — significantly lower than the top rate that these businesses pay today.

For larger businesses and corporations, the framework reduces the corporate tax rate to 20 percent — below the 22.5 percent average of the industrialized world. It also ends the perverse incentive to offshore jobs and keep foreign profits overseas.

Finally, in a commonsense proposal, the framework would allow “repatriation” of American dollars by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.

Now, here’s what will undoubtedly cause some Californians heartburn. The proposal calls for the elimination of the deduction for state and local taxes. Currently, Californians are able to deduct from their federal tax returns both property taxes paid to local governments and income taxes paid to the state. Because California is a high tax state, the loss of the deduction would be very significant. In fact, some estimates show that Californians, in total, currently deduct over $100 billion in taxes from their federal tax liability.

Losing this deduction will have less of an impact on working families and the middle class, particularly when balanced against the middle class tax relief under the framework. But as one moves up the economic ladder, California’s more wealthy taxpayers will take a bigger hit.

While some have suggested that the Republican Tax Reform Framework is revenge against high tax, mostly Democrat controlled, states, the reality is that there are legitimate policy reasons for reducing or eliminating the deduction. In essence, low tax states are currently subsidizing high tax states with funding the federal government.

Moreover, the loss of this deduction might spur high tax states like California to rethink their own tax policy and pursue lower taxes as part of tax reform efforts at the state level. In California, that is long overdue.

Finally, a bit of irony for high-tax California. Because property taxes are included as part of the federal deduction, if it were not for Proposition 13, Californians would be threatened with an even greater loss of deductibility. So as bad as getting rid of the deduction might be for some, it could be worse. And for that, we can thank Prop. 13 which, once again, rides to the rescue of California taxpayers.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

This article was originally published by the Orange County Register

How the Trump tax plan will make most people better off

TaxesWith Washington planning a broad overhaul, your tax bracket could be changing. But will that actually score you and your family a lower tax bill?

While the Republican-led tax reform plan is short on some details at this point, the head of a tax policy group called the plan “viable” in an interview with CNBC.

“I think it’s a real step in the right direction,” Scott Hodge, president of the non-partisan tax policy research Tax Foundation told CNBC’s On the Money recently. “Not only in just simplifying the tax system, but in creating a more dynamic tax system, one that is more conducive to economic growth.”

Founded in 1937, The Tax Foundation is an independent, non-partisan tax policy research organization.

The tax overhaul promises a simpler tax code. For individual taxpayers, the current seven income tax brackets would be reduced to just three: 35 percent, 25 percent and 12 percent.

However, another “bracket” is zero percent, which represents those who don’t pay any income tax at all. The standard deduction will double to $12,000 for single taxpayers and $24,000 for married couples filing jointly.

Hodge predicted those folks will come out ahead under the new plan. “At the bottom end, they’re going to make some big changes. They’re increasing the standard deduction, the ‘zero bracket’ if you will, so that a couple won’t pay any income taxes up to $24,000 a year. That’s great.”

But while establishing fewer income brackets, the plan is proposing the removal of nearly all itemized deductions, except those for mortgage interest and for charitable donation deductions.

“That’s the real balance here, is how far we can reduce tax rates to make up for some of the deductions that we’re going to lose,” Hodge said.

Another major provision of the GOP tax reform plan is the elimination of deductions for state and local taxes – a change that could hit middle and upper-income taxpayers. …

Visit CNBC for the rest of the story

President Trump’s weekly address: Four principles for tax reform

Transcript:

My fellow Americans,

The American Family has always been the heart of our great nation.  In homes across this country, families teach their children to work hard, to love each other, and to make the most of their talents in pursuit of their dreams.

Yet for too long, American families have been hurt by Washington’s policies that put the interests of other countries before the interests of our country.

That is why, in my Administration, we are pursuing tax cuts and reform that create jobs in America, for American workers – not foreign workers, but American workers.

Here are my four principles for tax reform:

First, we are going to make the tax code simple and fair so that families can spend more time with their children, and less time wading through pages of paperwork.  A staggering ninety-four percent of families use professional help to do their taxes – and that’s not fair, that’s not right.  That’s why under our plan, ninety-five percent of Americans will be able to file their tax return on a single page without keeping receipts, tracking paperwork, or filling out extra schedules.

Second, we are going to cut taxes for the middle class so that hardworking Americans can finally save more for their future.  We want to help families keep more of what they earn – and to be able to afford the costs of raising a family.  Our tax code should recognize that the most important investment we can make is in our children.

Third, we are going to restore America’s competitive edge by making our tax system more attractive for investment and job creation.  Our business tax rate is the highest in the world – pushing jobs to foreign countries.  That’s not what we want, that’s not what I’ve been talking about all these years – I’ve been talking about the exact opposite.  We need to bring down our tax rate so we can create jobs, wealth, and opportunity right here, in the United States of America, so we can bring our hobs back and bring our businesses back.  We want tax reform that puts America First.  We want tax reform that makes America great again.

Finally, we are going to bring back trillions of dollars in wealth parked overseas so that it can be invested in our country, where it belongs.

We have a once-in-a-generation opportunity to reform our tax code and pave the way to unprecedented prosperity.  By doing what we’re doing, we will see results like you’ve never seen before.  It will be the largest tax cut in our country’s history.  I am asking members in both parties to come together, to put aside partisan differences, and to pass historic tax reform and tax cuts for the great citizens of our nation.  That’s how we will all succeed and thrive together – as one team, one people, and one American Family.

Thank you, God bless you, and God bless America.

###

Now is the time for commonsense tax reform

TaxesThe world has changed dramatically in the last 30 years. The Internet allows anyone in the world to connect with the click of a button; we’ve achieved great medical advances, economic growth in California, and locally, the population of Stanislaus County has almost doubled.

But one thing that has stayed the same through all of it is the U.S. tax code. Passed in 1986, the behemoth 75,000 page and 2.4 million-words document remains much the same. While there have been some patchwork fixes over the years, the core problems remain.

But it doesn’t have to be that way. With Republicans controlling both Congress and the White House, the political and legislative environment is ripe for reform. House Republicans have released the most prominent tax reform plan to date. Supported by Speaker of the House Paul Ryan and Ways and Means Committee Chairman Kevin Brady, the “Better Way” tax reform plan is a good start toward modernizing the tax code.

After hearing promise after promise on the campaign trail, it is refreshing to see political leaders in Washington step up to the plate and present a plan that would reform the individual tax code, broaden the tax base and simplify the entire code. If implemented, the House Republicans’ plan would increase the size of the economy, boost wages, and result in more full-time jobs.

As Vice Chair of the Californian Republican Party and Supervisor in Stanislaus County, I constantly hear remarks from Californians about the outdated, overly complex tax code. And I feel the same frustrations myself. Whether it’s personal stories or complaints about the high combined state and federal tax rate, the message is the same – the current tax code is outdated and isn’t working for America. In order to modernize it, we need to make the system fair, simple and efficient.

Californians want a new tax code that is pro-growth and that allows them to provide for themselves and their families. There are thousands of small businesses in California who spend countless hours and valuable resources to comply with the tax code when they would rather spend that time and money growing their business and creating more jobs. This important demographic of our economy is being left behind while big business exploits and benefits from our tax system’s loopholes.

Californians want a system that is fair and simple. They don’t just want fewer headaches come April 15th; they want to be able to see and understand where their hard-earned money is going and that everyone- individuals and businesses- are paying their reasonable and fair amount.

Despite other issues dominating the news in Washington, now is the time for our federal elected officials to pass commonsense tax reform. Promises have been made, and we need those promises to be kept. Tax reform must be done so the economy can grow and more Californians can get back to work.

Kristin Olsen sits on the Stanislaus County Board of Supervisors and is a former member of the California Assembly.

Some Candidates’ Tax Plans Go in ‘Less Freedom’ Bracket

TaxesAmerica’s first income tax was temporary. Abraham Lincoln signed it into law in 1861 to help pay for the Civil War.

Although that tax and a later one in 1894 were challenged as unconstitutional, the issue was settled in 1913 with the 16th Amendment, which changed the Constitution specifically to allow income taxes.

The income tax in 1913 was nothing like the one we know today. It was a flat 1 percent on income over $3,000, topping out at 7 percent for earnings above $500,000. Of course, most Americans earned a lot less than $3,000 in 1913, when you could buy a pound of sirloin steak for 24 cents.

Today a pound of sirloin steak is enough to make you swear off red meat, and the income tax is enough to make you swear, just generally.

The U.S. government now lays claim to as much as 39.6 percent of the income of individuals in the highest of seven brackets, and our corporate tax rate is 35 percent, among the highest in the world. The tax code is ornamented with multitudes of rewards and punishments, the result of a century of political deal-making for the benefit of various constituencies and the promotion of assorted goals.

The federal income tax has become a massive weapon of control over the lives of the American people, exactly the opposite of what the framers of the Constitution intended. With outrageously high tax rates, the government can force people or businesses to “voluntarily” take actions that will reduce their taxes. This neatly sidesteps the constitutional limits on the federal government’s power and makes your life the plaything of elected politicians.

As the tax plans of the 2016 presidential candidates are released, watch for the motive of the proposed changes. Are they designed to increase your freedom or to increase the government’s management of your freedom?

Dr. Ben Carson has proposed a flat tax of 10 percent to 15 percent. Score that as an increase to freedom. With a flat tax, the government has no say in what you do with your money.

Donald Trump has proposed a top tax rate of 25 percent, which begins at $150,000 of personal income, and a tax rate of 15 percent for all business income. His business tax rate would apply to people who work freelance, own a small business or otherwise derive income from business activity instead of wages. Trump’s plan includes a tax rate of zero for income up to $25,000 for single filers and $50,000 for married couples filing jointly. Score the plan as an increase to freedom, with bonus points for recognizing how many people are now independent contractors instead of employees.

Bernie Sanders would increase the death tax from 40 percent on estates worth over $5 million to 65 percent on estates worth more than $3.5 million. Score that as a reduction in freedom. The money has already been taxed, and the choice of what to do with it after death rightfully belongs to the person who owns it.

Hillary Clinton would raise the tax rate on short- and medium-term capital gains from the current top rate of 23.8 percent to between 24 and 39.6 percent. She says “short-termism” is bad for the economy and hurts workers. Score that as a reduction in freedom, moving us further down the road of government interference in our personal and business decisions.

Tax-reform ideas are a window into a candidate’s philosophy of government. How much power should Washington have over our decisions? More? Less? All? None?

Once, these questions were debated in a constitutional convention. Today they’re tax proposals.

Cutting Taxes One Diaper at a Time

From the San Diego Union-Tribune:

 — Some prominent California legislators are trying to jump-start a “conversation” about raising (or extending) taxes, which is how Sacramento politicians often set the stage for potentially unpopular policies. Meanwhile, two San Diego-area legislators are pushing for something that doesn’t often get discussed in the Capitol: tax cuts.

The proposal is modest, but is interesting because the politicians co-sponsoring the legislation come from opposite ends of the political spectrum. Democratic Assemblywoman Lorena Gonzalez of San Diego, doesn’t often team up with Republican Sen. Joel Anderson of El Cajon, but find themselves simpatico when it comes to taxing diapers.

Last year, Gonzalez proposed an $80 monthly (per infant) diaper subsidy to families on welfare. She said poor parents could barely afford this necessary product — and a state subsidy would help people get jobs given that child-care centers usually require parents to provide diapers. The bill ultimately was killed given its $119 million price tag.

This year, she’s still focused on diapers, but is taking a different approach. …

Read the full story here

Taxing Services a Bad Move For CA

There is a clamor in Sacramento for “tax reform.” But for every political pundit, politician and bureaucrat in the room, there is a different definition of “tax reform.”

For fiscal conservatives, tax reform means tax cuts. The state of California takes too much of our money now and this heavy tax burden unquestionably hurts working families and hinders economic growth.

But for self-styled “progressives,” tax reform means even more tax hikes to feed an ever growing government and the demands of tax hungry special interests.

Because these two visions of “tax reform” are polar opposites, is it even possible to agree on anything related to changing California’s tax system?  Surprisingly, the answer is yes.

Both conservatives and liberals have at least acknowledged that California government is too reliant on revenue that fluctuates wildly.  In other words, there is some agreement that the mix of things that are taxed might be altered so that tax revenue is more predictable.

The desire to address revenue volatility is understandable.  Indeed, a commission was created by former Governor Schwarzenegger to address this very issue.  Unfortunately, the commissioners themselves could not agree on a solution.

Now, newly elected state Senator Robert Hertzberg has proposed that California start taxing services, not just sales of physical goods.  The reasoning behind Senate Bill 8 is that services make up a much larger slice of today’s economy than in the past and in order to have a “balanced” tax system, we should consider expanding the tax base to things like car repair, legal services, kids piano lessons and dry cleaning.

But taxing services is a bad idea for California.  First, such a levy would have a depressing effect on California’s service economy.  It is a simple fact of economics that when you tax something you get less of it.

Second, and somewhat related to the first, is the ability to avoid the tax by exporting the service.  For example, one can avoid California’s tax on accounting services simply by hiring an out of state accounting firm.  And speaking of avoiding the tax, unlike a sales tax where there is an inventory of physical goods that can be tracked, it is much more difficult to ensure compliance with a tax on services.  California already has a massive problem with tax avoidance due to the huge percentage of the economy that is “underground.”  A tax on services would drive even more economic activity into the shadows.

Some respected tax experts have not rejected out of hand the notion of extending a tax to services but only if done incrementally and in a manner that does not result in a net tax increase.  And here is where the Hertzberg proposal is especially flawed.  Rather than extend the tax to services and lowering the tax rate on both sales and services so the proposal is “revenue neutral,” SB 8 has no provision for lowering the rate.  So what is the tax hit on Californians?  It is estimated to be $10 billion annually.

Last week, a Wall Street Journal article noted how several states in America are now cutting taxes to stimulate economic growth and provide needed relief to their citizens. But the ruling class in California apparently wants to head in the opposite direction.

Taxpayer advocates should always be prepared to discuss legitimate tax reform. But, at this point, Senate Bill 8 doesn’t qualify.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Originally published by the HJTA