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Flat Income Tax: Impact On California

2370 words - 10 pages

Executive Summary
This report details research about flat income taxation for the Governor of California, Mr. James Cash. The research encompasses the advantages and disadvantages of flat income taxation, and how such a system would impact the economy of California. The report ends with possible responses to critics and how a flat income tax could help revive the California economy.

A flat income tax for California offers the state many advantages over its current system:
• Flat tax would decrease complexity, therefore reducing administrative expenses and increase tax compliance
• Flat taxes create a risk-averse environment, reducing the volatility of the current progressive system. ...view middle of the document...

• States that do not impose income tax or already use flat tax take away wealthy California taxpayers, reducing its tax base. California is also at a disadvantage to attract wealthy Americans to move to the state.
• Implementing flat tax would attract venture capitalists and small business owners, therefore increasing tax revenues and employment.
• Flat taxes prove to be more risk-averse than progressive rates. This would help California more accurately plan budgets, resulting in fewer deficits.
Table of Contents

Executive Summary 1
Introduction 2
Advantages of Flat Taxation 2-4
Disadvantages of Flat Taxation 4
Response to Critics 5
Conclusion 5-6
Works Cited 7

Flat Income Tax: Research of Advantages and Disadvantages for the State of California
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Since the economic meltdown, flat income taxation has become a hot topic on both federal and state levels. Many people express ranging views on the issue. Advocates for flat tax say the system creates risk-averse economies and simplifies our current progressive system. Advocates for progressive taxes feel flat income tax is too simple for our complicated society and it present social inequality for poor and middle class taxpayers.
Seven states currently utilize flat income taxation and seven others impose zero state income tax. On the federal level, flat tax advocates think our high corporate rates drive business out of the country, therefore depleting the tax base and reducing revenues. Economists arguing in favor of flat state income taxes share this view; however, they believe states imposing high income tax put themselves at a competitive disadvantage against other states. To understand the impact flat income tax has on an economy, many researchers study the impact such policies have had in eastern nations.
Russia, a nation often researched by economists, switched to flat income taxation in 2001. That year, Russia imposed a 13 percent flat personal income tax. Russia experienced income tax revenues rise from 2.4 to 2.9 percent of GDP in the following year, representing a 21 percent rise relative to the nations GDP (Schiau, 345). In addition to rising revenues, the International Monetary Fund (IMF) conducted a study revealing part the rise in revenue was due to increased tax compliance. Certain qualitative factors make these studies hard to apply to the United States; however, California currently ranks seventh in world GDP ranks and Russia ranks twelfth. By the numbers, this study makes for a good quantitative comparison.
Like any public policy, tax reforms evoke debate. Flat income taxation presents many advantages over its progressive counterpart. Flat taxes, however, also introduce various disadvantages when compared to progressive systems. This report will explain the various advantages and disadvantages associated with each system; as well as apply...

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