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A Taxing Problem

by Mytheos Holt, published

In the aftermath of the release of Gov. Schwarzenegger's proposed budget, he has found himself blocked by an unlikely source.

The Los Angeles Times reports that Schwarzenegger's plan has received most of its opposition from California's Republicans, rather than by Democrats, who are now using the Republican opposition to the budget as an excuse to remain ambivalent. Most of the opposition comes from assembly minority leader Mike Villines, who has stated point-blank that, "Republicans cannot support the governor's proposal to impose $14 billion in higher taxes on Californians."

Any enemy of overweening government would concede that Villines has a point. Given that tax cuts have proven to be such a winning issue for Republicans and Schwarzenegger has until recently proven to be such a losing governor where principled leadership is concerned, it's no surprise that Villines wants to cut him loose.

When the backlash against Schwarzenegger's badly marketed, Scrooge-esque leadership inevitably happens, Villines is poising himself and his fellow Republicans to protest that Schwarzenegger wasn't one of them, and didn't speak for their party. The real route to economic recovery is always through tax cuts, this hypothetical Republican apologia would run.

Politically, this is smart. Economically, it is dubious. While the cause of cutting taxes is almost always philosophically and morally justified because it clips the wings of government before tyranny can take flight, it is difficult to argue that it is always economically justified.

The infamous Laffer Curve, which demonstrates how tax revenue can increase when tax rates are decreased has been proven historically correct, but even a simple look at the curve will prove that the optimal tax rate is never zero. This suggests that even according to this supposed bulwark of supply-side economics, there is such a thing as having tax rates that are too low. Naturally, there is room for disagreement over whether California's tax rates are too low, but it seems indisputable that regarding the variables the Laffer Curve is supposed to measure - namely, the effect of the tax rate on revenue - the tax rate is in the wrong place.

This does not necessarily argue for a tax increase, but it doesn't argue against it either. Villines belongs to a breed of Republicans whose favorite pastime is to starve the beast of government, and while this is a noble goal, if the beast is gnawing off its own leg, one has to realize that starving it any further is probably an exercise in futility.

Villines is taking a rather large gamble by sticking to his guns like this - he appears to either be betting that Schwarzenegger will come up with a more reasonable compromise by February, or following in the footsteps of Newt Gingrich by whistling happily as he careens down the road to a government shutdown.

If such a shutdown were to occur, it is not clear whether Villines could lay the blame at Schwarzenegger's feet. The governor is above all else a political survivor, and would be sure to throw this belligerent assembly leader under the bus. The danger in this is that if Schwarzenegger were to leave Villines with the blame for a government shutdown, it would forever taint the cause of tax cuts with extremism, thus knocking out yet another principled cause against the state. Discretion is the better part of valor, and Villines ought to be more cautious before declaring Schwarzenegger's plan to be an attack on the better part of California's income.

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