The Latvia Option

by dday

I’ve been hearing the California crisis, and the Governor’s response, referred to as a kind of shock doctrine, used to transform the state’s social safety net and radically alter the lives of the poor and downtrodden. And that’s entirely true. But not necessarily through the budget cuts, which have met fierce opposition from Democrats and the nascent activist progressive movement. No, the real shock doctrine is happening behind the curtain, with a proposal engineered with bipartisan support, that will really permanently turn the state into an experiment in Chicago Boys free-market fundamentalism, not unlike the conservative “paradises” created in developing nations, all of which are crashing, by the way.

Last year, the Governor and legislative leaders put together the Parsky Commission, a classic blue-ribbon panel led by Gerald Parsky, a right-wing investment fund manager and professional hack who has consistently been put to use by Republicans in Sacramento and Washington to carry out their radical plans. He was George Bush’s California campaign chair in 2000 and 2004. The idea behind this one started from a decent premise – California has a taxation problem, and needs a study group to look into how to reform it so that it’s better equipped to handle boom-and-bust economic cycles. Supposedly, all ideas – including Prop. 13 – would be “on the table” from this commission, which would seek a more stable solution.

Of course, the fix was in from the start. Because this panel respected the 2/3 requirement for raising taxes, it sought revenue-neutral solutions, tinkering and shifting the tax burdens rather than reforming them. So predictably, the end result is a proposal that broadens the tax base while shifting the burden downward onto the lower and middle classes while relieving the wealthy. The Governor’s Chief of Staff tipped her hand about this previously when she said that the problem with California’s tax structure is that it’s too progressive.

Some of the Commission’s proposals, like broadening the sales tax to include services in addition to goods while lowering the rate overall, make a bit of sense. But the rest of it is pure right-wing fantasy:

At the 14-member commission’s penultimate meeting in Los Angeles June 16, its members appeared to narrow its potential recommendations, due July 31, to two proposals.

Both would lower the top income tax levels and, in one case, eliminate the state’s corporate tax and the portion of the sales tax pocketed by the state.

Under one proposal, what the commission refers to as Tax Package 1B, all Californians would pay a 6 percent income tax rate. The state’s wealthiest residents currently pay 9.3 percent with lower percentages as earnings fall.

The effect of the proposal would be to increase the taxes on Californians earning less than $100,000 to broaden the tax base.

The state’s 8.8 percent corporations tax would be eliminated, as would the 5 percent of the sales tax the state retains […]

A new “business net receipts” tax makes up for much of the lost revenue from the sales and corporation tax eliminations.

“Business net receipts” taxes are essentially a value-added tax. And one estimate predicts that it would take in $28 billion dollars annually. But everything must be revenue neutral, so in a time of crisis, the Parsky Commission would go to a FLAT TAX and eliminate the corporate tax rate, as well as possibly cutting the capital gains tax. It’s impossible to see this as anything but a giant wealth transfer from the poor to the rich. Simply impossible.

Useful idiots like the folks at Calbuzz prefer not to actually take sides on an issue when just splitting the difference between left and right automatically provides the best practice every time. Their somewhat illuminating article about all of this betrays a bias toward that wise “sensible centrism” that ends up orienting toward crazed right-wing solutions every time.

The political play is to produce a tax reform bill so clean it can be introduced in both houses with assurances no one will be allowed to bog it down with amendments. Democrats will be able to avoid drastic program cuts and Republicans can claim they’ve cut taxes. The bill breezes through both houses on an up-or-down vote and bada bing it gets signed by Arnold and everybody goes to dinner. No muss, no fuss, no partisan fingerprints […]

Getting a consensus recommendation from the commission, which includes conservatives like former Reagan economic adviser Michael Boskin and liberals like Santa Cruz County Treasurer Fred Keeley is by no means guaranteed. Even if commissioners do agree, their proposal will be fly-specked by lefty groups who will dislike elements that are not progressive, and industry groups, who will push for business-friendly changes.

As a political matter, forcing an up-or-down vote on a package in the Legislature would address what-about-me objections from all quarters, in the same way as the prohibition on amendments to congressional legislation produced by the military base closure commission in the 1990s finally solved that intractable problem. (Or like a Pete Wilson-Willie Brown deal from days of yore in Sacramento.)

After all, the impending bankruptcy of state government should be sufficient to show players at every point of the political spectrum not only that sweeping change is needed, but also that everyone will have to compromise to keep California from sinking into the 9th Circle of Hell.

This is “the midpoint between two points always works best” pop politics masquerading as serious thought, and what else would you expect from a duo who can spin a whole article out of a picture of two politicians smiling. Somehow, “lefty groups” arguing against the literally insane idea of a flat tax has the same moral and intellectual equivalency of business groups trying to wiggle out of a way to pay their taxes. A flat tax would very clearly shift the burden of taxation to the middle class, and practically every taxpayer would actually see their tax burden increase except the few at the top. But because we’re in crisis, and everyone will have to “sacrifice,” surely we should ram through a right-wing fantasy, turning California into Latvia, Estonia and Lithuania, all of whom have flat tax systems. How’s that working out for them?

Over the last decade, Eastern European countries became darlings of the far right by instituting free-market economic policies designed to break convincingly from their Communist past. The so-called Baltic Tigers—Latvia, Lithuania, and Estonia—garnered worldwide plaudits for a number of free-market reforms, led by the imposition of a flat-rate income tax, especially from the American right. “The flat tax is making a comeback,” trumpeted the conservative National Review. The three nations are “leading a global tax reform revolution,” said the right-leaning Heritage Foundation […]

Too bad for them that it hasn’t worked out. Latvia, which has a flat tax of 25 percent, and Lithuania and Estonia, which have 21 percent tax rates, are all in deep economic trouble. They all have huge government budget deficits, a sign that they took in too little in tax revenue to cover their costs, primarily state expenditures to provide a generous welfare state. Conservatives might argue that they didn’t slash welfare benefits enough, but there is no dispute that the flat tax didn’t provide the expected revenue.

This is the future that would be put into place – with a no-amendment, up-or-down vote – under the Parsky Commission. Somehow, the elected legislature of the people cannot be trusted with tax law, but an unelected, unaccountable blue-ribbon commission should be empowered to create this radical change in law with no public input. That’s the wise and sensible solution. Because we can’t have all this messy “democracy” mucking up the need to protect the rich and transfer wealth downward more radically than any proposal ever seen in America. California Budget Bites has more.

It’s important to note that this all stems from the revenue-neutral demand embedded in the proposal. Otherwise, it could never pass because it would need a 2/3 vote. So somehow, a flat tax, elimination of corporate income taxes and slashing of capital gains taxes get thrown into the mix, something that nobody outside the fringe far right would ever endorse. The 2/3 rule, AGAIN, prevents a real solution.

If you wonder why I oppose a so-called “bailout” for California, it’s because in addition to everything else, that attacks the wrong problem. We need a major restoration of democracy in the state, and instead we get “solutions” that don’t reflect the desire of the citizenry. That’s why only a local grassroots movement to finally remove the structural barriers, not a one-time cash infusion, will work.

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