Two leading Pennsylvania House Democrats are taking aim at the Commonwealth’s surviving corporate taxpayers. Reps. Mike Veon and David Levdansky say that legal provisions in the tax code—“loopholes” in their words—utilized by corporations have caused “a huge drain on state revenue,” and that individuals and smaller businesses are paying higher taxes as a result. To remedy this seeming inequity, they plan to close such “hidden byways in the tax code.”
Rarely has so much ignorance of recent history and basic economics been displayed in a single public policy proposal. If enacted, the House Democrats’ proposal to close tax “loopholes” will only serve to tighten the “noosehole” around the Commonwealth’s economic neck.
First of all, it is difficult to take these gentlemen’s supposed concerns about higher taxes for the Commonwealth’s “regular men and women” and small businesses seriously. Last December, both politicians voted for $1.1 billion in new taxes and fees on all Pennsylvanians, including a 10 percent personal income tax increase on individuals earning as little as $10,000 per year.
More important, however, is that economic history demonstrates that attempts by politicians to capture more government revenue through tax increases produce more of the very behavior they seek to reduce. Eliminating means by which a company can legally reduce its tax burden results in increased tax avoidance—or companies leaving the state altogether—which leads to lower-than-expected government revenue.
Pennsylvania’s past and current business tax policies—which include the 3rd highest corporate income tax rate in the nation, as well as its status as one of the few states that taxes both business income and assets—perfectly illustrate this effect.
Thankfully, throughout the past century, several prominent American public officials have grasped the concept that higher tax rates don’t mean more tax revenue. One of the first to articulate this truth was Pennsylvanian Andrew Mellon, United States Treasury Secretary for three presidents. In his 1924 book, Taxation: The People’s Business, he wrote:
The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.
Secretary Mellon’s words accurately reflect the current economic climate in Pennsylvania— one that the House Democrats’ proposal would only exacerbate. Instead, they should heed the words of one of the most revered figures in their party’s history, President John F. Kennedy, who clearly understood the economic wisdom of tax cuts. In his famous 1962 speech to the Economic Club of New York, President Kennedy declared that an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits…. In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.
Pennsylvania has experience with the destructive fiscal and economic effects of business tax increases. After then-Gov. Robert Casey and the General Assembly raised the corporate net income tax (CNIT) from 8.5 percent to 12.25 percent in 1991, revenues jumped by more than 60 percent the next year. However, Pennsylvania businesses didn’t just meekly accept the tax hike—they responded by changing their behavior so significantly that CNIT revenues actually failed to reach 1992 levels in both 1993 and 1994, and the Commonwealth’s economy has yet to fully recover.
Those seeking tax “fairness” by closing Pennsylvania’s tax “nooseholes” should prepare to be disappointed. For in the words of former Congressman Jack Kemp, a prominent architect of President Ronald Reagan’s tax cuts of the 1980s:
At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.
“High tax rates on low production”: A fitting epitaph for Pennsylvania’s economy, circa 2004.
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Grant R. Gulibon is a senior policy analyst at The Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg, PA. Permission is hereby granted to reprint in whole or in part, provided the author and his affiliation are cited.