Tuesday, June 30, 2009
Posted by: Gary Tuma
What's worse for the Pennsylvania Economy - a tax increase or spending cuts?
Don't believe the rhetoric about an increase in the Personal Income Tax costing Pennsylvania jobs. It won't happen. Major corporations that are subject to the Corporate Net Income Tax are not affected. Subchapter S Corporations, Partnerships and Limited Liability Corporations pay the PIT rate, but only about 27 percent of employees in Pennsylvania work for those kinds of companies.
If an S-Corporation, partnership or LLC makes $100,000 a year in profit, they would pay an extra $9.80 per week in PIT under Governor Ed Rendell's tax increase proposal. No company making $100,000 in profit is going to lay off an employee over $9.80 a week. But most of those companies won't have a tax liability even that large. Three quarters of them would pay about $2.45 a week in additional taxes.
On the other hand, the track record from the last recession in the early 2000s shows that spending cuts are worse for employment than tax increases. The Center for Budget and Policy Priorities analyzed the data and found that states that enacted tax increases saw growth in personal income, employment and median wages that matched national averages during the subsequent three years. States that enacted some of the largest tax increases experienced above-average growth, while states that did not raise taxes, or cut them, during the recession saw slower growth.
Why? States spend their tax dollars immediately on vital services, help for the needy, and salaries of public employees. The money goes straight back into the economy and has a stimulating effect.
Studies by some conservative "think tanks" purporting to show that tax increases lead to job loss base their findings wholly on the ridiculous premise that tax money is pulled out of the economy, when in fact, the opposite is true.
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