Increasing Personal Income Tax Will Increase Volatility (Draft)

The Wall Street Journal ran an article today on the widespread state budget deficits and how this problem will not only persist but worsen in coming years. According to the article:

“[State] revenues appear to have grown more sensitive to the business cycle in the past decade, in part because capital-gains taxes have become a bigger component of tax bases.�

Research by Leslie McGranahan and Richard Mattoon of the Federal Reserve Bank of Chicago have found that capital gains taxes are fives times as volatile as wage income and mostly concentrated among high-income families.

If you can follow this logic, Governor Rendell and certain members of the state General Assembly want to increase income taxes to raise revenue to cover the budget shortfall that was caused by a reliance on income taxes. Yet again, the legislature is confusing the cause for the solution.