CALIFORNIA TAX REFORM THE FLAT TAX
Again Kevin Paffrath and I are in agreement, if he were to accept the ATAC and Immigration reform, I have would no problem with him winning
Mr. Paffrath is not the first person in this race to propose a flat tax. I proposed it first nearly 20 years ago when running in a special election for state senator. It was too radical and idea then but the time has a way of bringing people around. In fact as recently as in 2015, proposed it. So with the maturity of time, the idea may be finally ripe for enactment. I differ a bit on the percentage of the tax but that is merely mechanics that can worked out in the initiative after with consultation with the various State Bar’s taxing committees.
I am a tax attorney I have a both Diploma in Taxation and a Master of Law in Taxation from the University of San Diego School of Law as well as a Master of Science in Management from Pacific Christian College. My Master’s Tax Thesis was the publicly boring being “The Tax Consequences and Recommendations For A Subsidiary Dealing in Its Parent’s Stock.” However for tax attorneys attorneys the thesis was a work of art with every word in encased in golden wisdom. Acting together my fellow tax attorneys and myself we can competently design an exemplary flat tax bill for any Governor who wants to carry the initiative
From a business sense it really has never made business sense to have multiple tax brackets and thousands of tax exemptions and credits which while reducing taxes for special interests which causes everyone else to make up the difference. When you buy products you have pay a sales tax of around 10%. That sales tax rate is the same for everyone in that county and paid regardless of your income. Even though a poor person might have to pay no income tax he must pay sales taxes on purchases.. Sales taxes are local taxes bit they show my point
A sales tax is fair because it reaches everyone as it is applied as equally as possible No one argues that a sales tax should be graduated and no special interest contributes to candidates seeking an exemption or a credit for sales taxes on the final product that is sold to the consumer ie the ultimate tax payer.
California’s income-tax system is also the nation’s most progressive—and that’s not a good thing. Progressive tax systems magnify tax-revenue volatility, with lots of money pouring in during periods of growth and the till running dry during downturns. This volatility occurs because wealthy people, who pay more taxes in a progressive system, experience sharp income swings from boom to bust. Depending disproportionately on the wealthy for its own revenues, the state experiences the same swings. This dynamic has a bad effect on politicians, who go on spending sprees during booms and then raise taxes during busts, harming competitiveness.
Another effect of a highly progressive tax structure is that the most productive California residents and businesses—the primary employers of others—wind up taxed the most on the margin. State government figures have shown since in 2008, that 61.3 percent in 2008 of all personal income taxes were paid by persons with adjusted gross incomes of over $200,000. This group constituted just
4.1 percent of the population yet earned 34.5 percent of all income. It is this unequal taxation rate that is the basis of the flight of high earners from California
My proposal is for California to:
- Eliminate existing state and local taxes. Eliminate such existing taxes and fees (except for sin taxes, which exist to modify behavior rather than to raise revenue)
- Implement a Flat Tax. A Flat tax replacing of about 8 percent on two distinct bases: one for individuals and a value added tax base for businesses.
(a) The individual tax rate. The flat tax rate would be on the personal unadjusted gross income from all sources on the amount over $200,000
- Against the gross income will be allowed with only a few deductions: charitable contributions; interest payments, including on home mortgages; and rent on one’s primary residence which would remove the current system’s preference for homeowners. A single 6 % tax rate would apply across the board, from the first dollar earned to the last over the $200,000 earned.
(b) The Business Tax Rate. The business flat tax would be on businesses’ net sales, or “value added”—that is, the difference between sales and production costs, which equals the state’s gross domestic product when aggregated across California. The tax would be applied to the amount of net sales over $200,000.
(1) There would no annual S-Corp and LLC filing fees for businesses with net sales under $200,000.
The low 8 percent rate for both business and individuals would reduce the incentive to avoid earning taxable income in California, and the very broad base would reduce the number of places where people could hide their income to avoid taxation.
CALIFORNIA CURRENT TAX STRUCTURE
California essentially has three main comprehensive taxes: the California Personal Income Tax, the Corporate Franchise/Income Tax and the Sales and Use Tax.
The California Personal Income Tax Law largely conforms to the federal Internal Revenue Code. Even so, there are still has over 550 separate statutes within the California Revenue and Taxation Code that are not in conformity with federal law and known as adjustments on the California tax reform
California state tax rates are 1%, 2%, 4%, 6%, 8%, 9.3%, 10.3%, 11.3% and 12.3%. A 1% mental health services tax applies to income exceeding $1 million. California state tax brackets and income tax rates depend on taxable income and filing status.
California’s high marginal tax rates discourage, rather than encourage hard work, savings, investment, risk taking and even residing in the state.
California has no fewer than 4 other agencies that collect taxes, i.e., the State Board of Equalization (BOE), the Employment Development Department (EDD), the State Controller’s Office (SCO) and the Department of Motor Vehicles (DMV) and these agencies employ over 17,850 employees.
ADVANTAGES OF FLAT TAX
The California Personal Income Tax has become outdated, too complicated, unwieldy, highly progressive too expensive to administer, too intrusive, punitive and grossly unfair.
In 2008, California’s overall personal income tax burden as measured by tax liabilities per $100 of personal income is $3.07 which is far above the average of $2.40 for all states. Over 70% of the tax liabilities are paid by married couples filing jointly.
- Taxation will not be excessive. When a state has an excess in taxation, that means it overtaxed its citizens, It means that the state took more money from its citizens than it said it needed for the public services covered in the budget. The People did not approve this excessive taxation. This is no different than the situation where you enter an agreement to build a house for $200000 but are charged for the work $300000 and builder keeps the overcharge. That is what California presently does.
In 2020, California announced, that it ended up with $76 Billion Dollars in extra taxation. That means that California overtaxed the People by $76 Billion dollars. Divided by 20 million taxpayers than means on a per capita basis the state should return $38,000 per taxpayer. The fact that most people did not pay $38000 in taxes would show how unequal the tax system the current system is.
The over taxation is nothing more than confiscation of assets and ultimately over time it hurts the state. Overtaxing the People who actually overpaid the $76 billion which the state did not need or even ask for. shows the unfairness of the system. Is there any doubt as to why high earners leave the state, with their companies and jobs whenever they can?
The flat tax only deals with the excessive taxation. The state will still have a tax system which taxes income and profit at a rate sufficient to cover the state budget and have a reasonable reserve but not upwards of twice the actual state budget. The government is not a profit making entity. It exists to serve the people and to provide those essential services it is taxes. It does not exist to overtax the people for no reason and then engage in spending that the people did not approve or even know would happen. The flat tax simply stops the over taxation beyond the budget and by doing so spurs business growth in the state also which carries with it more employment.
- Underground Economy Revenue brought in the tax system. The Flat Tax will be a significant blow to the underground economy that now thrives in our great state and resulted in the loss
of $6.5 billion in tax revenue in 2004 according to the FTB’s own calculations. This is commonly referred to as the “Tax Gap”.
- Universal Taxpayer Base: Illegal aliens, drug dealers and tax cheats will finally pay the same tax to support California’s infrastructure (government, highways, bridges, hospitals, state parks, education, clean water, health care, etc.) as the rest of us.
- Nondiscrimination in application. The Flat Tax does not discriminate as it will apply to every person whether they are a citizen, resident alien, nonresident alien, illegal alien, visitor, small business or large corporation purchasing goods in California.
- Rich Flight Reduced. The Flat Tax will eliminate the ability of the rich to avoid paying their fair share of taxes by exploiting loopholes in the Personal Income Tax Law.
- Reduction of Government Employees. The Repeal of the Personal Income Tax and replacing it with the Flat Tax will allow for a substantial reduction in the number of FTB employees, saving millions of taxpayer dollars related to salaries, office space, furniture, computers, software, state-owned vehicles, equipment, supplies, pensions and benefits.
The Flat Tax will not require the hiring of any additional BOE tax auditors or BOE employees as the Sales and Use Tax is already collected by retailers or self-assessed by purchasers and remitted to the BOE on a monthly, quarterly or annual basis depending on the amounts collected. In other words, the tax collecting and audit infrastructure is already in place and works well. Thus, the Flat Tax will greatly simplify tax collection.
- Stabilization of the tax for stock sales. Presently for tax reasons alone, there could be wide market swings generated by the exercise of uncertain stock option and sales thus done solely for tax planning reasons0. The Flat Tax will eliminate such inherently volatile revenue swings that now occur almost every year solely for such sales made solely for tax reasons as the tax rate would remain the same whenever the sale is made.
- Reliable Tax Revenue Projection. The California Legislature will finally be able to more accurately predict the tax revenues each year. Thus, the annual California budget process will be greatly enhanced.
- Corporate Franchise Tax Reduction. Because the Flat Tax will actually increase the tax burden of corporations doing business in California, a corresponding corporate franchise/income tax rate reduction and a sales and use tax exemption for manufacturing equipment is also part of this initiative in an attempt to make the “Flat Tax” more revenue-neutral to the business community.
The Flat Tax will bring to an end state income tax withholding. Instead, we will all pay as we go.