Our View: Debate over higher taxes misses point

Gov. Jerry Brown's proposed 2012-13 budget drew criticism immediately. Those militating for and against, we believe, miss the most important point.

The state's independent Legislative Analyst Mac Taylor said Brown's revenue estimates again were too rosy by perhaps $4 billion or more. Even if voters approve the governor's proposed additional $6.9 billion in higher sales taxes on everyone and higher income taxes on the wealthy, Taylor said it may not be enough to avoid further cuts in school funding.

Republicans curiously came at the issue differently, claiming tax revenue is running higher than the governor estimated, therefore, additional taxes are unneeded. Without Brown's tax increases, California's $84.9 billion in revenue is projected to reach $108 billion by 2015-16.

Higher taxes, one might conclude, are either inadequate or unnecessary.

We should stand back from the furor over tax revenue uncertainties, and consider what we know to be true. Taxation is the power to destroy, Supreme Court Chief Justice John Marshall famously said almost 200 years ago. As such, it should be used as little as possible.

Consider Brown's proposed fix, which would further burden California's most wealthy with a surcharge on top of what already is nearly the nation's highest income tax rate. That should lead to more of what high rates already have produced. The top 1 percent of state personal income-tax payers now supply 40 percent of all state income taxes collected. Increasing their taxes will only add to the volatility of such a lopsided reliance.

There is evidence the existing high rate on the wealthy also is driving them out of the state or into tax shelters for protection. The legislative analyst said the current added income levy on millionaires generated $734 million in 2009-10 compared with $1.6 billion in previous years. The higher the burden, the less the return to the government. And that comes on top of the damage to the economy as businesses flee to find more friendly tax environs.

Joseph Vranich, an Orange County businessman who advises companies on avoiding high taxes and regulations, said the cost savings now are up to 40 percent for employers who leave California. An average of 5.4 larger companies (100 or more employees) leave per week, versus 3.9 in 2010 and 1 per week in 2009, Vranich said.

Taxes also distort economic transactions.

Sales taxes increase what consumers pay above what sellers receive. Income taxes require employers to pay more than employees receive. In both cases, money is paid for no return value. Loopholes exacerbate the problem. People favor industries that are taxed less, wrote Dwight R. Lee at TheFreemanOnline.org. "[W]hen much of the cost of a house is deducted from taxable income but not the cost of clothing, people will sacrifice clothing to buy a larger house, even though they value the clothing more than the additional housing space."

Likewise, when one industry is taxed less than another, people will invest based on lower taxes even though investment would create more value in the higher-taxed industry.

To perpetuate this distortion, government adds deception. Instead of taking from people what they already have, government takes "from people what they would have had, but never get," Lee noted. If income taxes were not withheld but were paid once a year, in a lump sum on the eve of elections, not even Brown would be talking about increasing tax rates. Everyone would be talking about reducing them.

In our view, it is misguided to debate whether California needs higher taxes or can operate on the high taxes it already sucks out of the economy. To propose anything other than reducing taxes is to advance economic destruction and distortion.