What's the Story
Over time, personal income taxes have made up a greater percentage of total tax revenues. This has two problems: 1) Personal income is highly volatile, thus leading to highly volatile personal income tax revenues, and thus highly (and increasingly) volatile tax revenue in general. This revenue volatility, in turn, can lead to higher bond yields (since higher revenue volatility leads to higher risk of unexpected deficits, for which investors should rationally demand compensation in the form of higher bond yields). These higher bond yields, in turn, can "crowd out" useful private investment, thus reducing potential living standards of California's citizens. Also, the more money that goes towards interest payments, the less money is dedicated to more productive things. This revenue volatility also effects the expenditure side in a different way: optimal government expenditure decisions in a world of high government revenue volatility are likely different from optimal spending decisions in a low volatility world--likely, higher revenue volatility leads to increased short-term thinking for expenditures. This lack of long-range planning by politicians could reduce the efficiency with which government spending is allocated. 2) Personal income taxes represent a tax on labor, and a forced shift from private sector savings to public sector savings, both of which can reduce the potential living standards of California's residents. (Having a tax on personal income possibly reduces labor supply, since you keep less of what you earn. Lower labor supply reduces potetial living standards, holding all else equal). (Since revenue is shifted from private sector to public sector, depending on the relative efficiency with which these funds are used by government relative to the privatesector, these savings could be allocated less efficiently than they otherwise might be, thus reducing potential living standards further).
What's At Stake
Reduced living standards (less money in everyone's pockets; higher unemployment rates; more constant negative news in the press about sudden unexpected deficits; etc....)
What You Can Do
What You Can Do
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