We swapped our kitchen fluorescent tubes with a 2'x4' led panel and are super happy with it. To answer your question though I would find out how much light you had before and then adjust up or down depending on how happy you were with the previous setup.

final idea, use two sheets of 1/4" drywall to fill the gap all the way up so you'll just have super thick drywall there. This way you have a clean finish and you won't have to tear out the old drywall

Another alternative is to feather it up the wall but that gap is huge for that, there is a method where you define a plane you want using drywall screws and fill with mud until its flush. Though again, this seems like a ton of work and might end up looking quite odd given its a big gap. Finally, you could put furniture there or even add some built in shelving to cover the issue.

If it were me, given its a garage, I would install some 1/2" trim before putting the baseboards up so that the two are flush at the top. Finish with some caulk and at least it will be a good seal. Main concern with a garage is preventing mice and other critters from getting into the walls.

a flag will just pull the vinyl off. You need some good wood behind the vinyl to properly mount.