China’s Economic Development Lessons for Pennsylvania

NOTE: This commentary was originally published on April 19, 2004.

Tax Day 2004 has come and gone, and as Pennsylvanians wrote their annual big checks to big government, they should now be asking themselves one simple question: What do the Chinese Communists know about tax and economic development policy that our governor and many state legislators apparently don’t?

Admittedly, it seems rather strange that Communist China could teach our constitutional republic anything about free-market economics. But some of China’s finance ministers have begun to recognize that increased taxes and massive government spending on “economic development” projects do not create lasting economic growth.

Recently, the Wall Street Journal reported that the People’s Republic is preparing a tax cut/reform plan that represents “a gradual shift away from using government spending to fuel growth.” While it is not certain that the Chinese plan will ultimately be implemented, it is clear that its architects understand the economic lessons of their government’s past central planning failures.

According to the Journal:

Economists say the plan fits a broader trend in China of putting more investment decisions— and money—in the hands of companies rather than the government. “It’s a significant boost for domestic companies,” said Citigroup economist Yiping Huang. “The government wants to reduce its control over the economy and to encourage the private sector to develop.”

The same, however, cannot be said for the vast majority of Pennsylvania’s leaders, who have been speeding headlong in the opposite direction for decades. Indeed, in just the past five months, they repeatedly mashed the proverbial tax-borrow-and-spend accelerator to the floor.

Last December, the Republican-controlled General Assembly joined Gov. Ed Rendell to raise taxes on Pennsylvanians by $1.1 billion, including a 10 percent personal income tax increase, a 35 percent cigarette tax hike, new taxes on cell phone service, and a plethora of fee increases. The governor’s current budget proposal also calls for new “fees” on production emissions and waste disposal, which would further hamstring the Commonwealth’s already struggling manufacturing sector.

Then just a few weeks ago, all but seven Pennsylvania legislators voted for the governor’s “economic stimulus” plan—to be paid off to the tune of nearly $100 million per year over the next 20 years. The more than $1 billion in new borrowing will be doled out to politically chosen—but not necessarily economically viable—projects.

The details of the stimulus package should be unsettling to Pennsylvania taxpayers, for it now appears that things have gotten so bad in the Commonwealth that our elected officials are choosing to subsidize venture capitalists with taxpayer money. Yes, indeed, Gov. Rendell and the General Assembly actually agreed that taxpayers should provide over $300 million of “venture capital” to venture capital companies! In other words, they want to force Pennsylvania taxpayers to take on risks that no private investor apparently will.

The sad reality is that these programs are neither new nor innovative. Despite the Governor’s claims to the contrary, this new infusion of taxpayer money will merely continue and amplify Pennsylvania’s failed past approach to economic development –that is, making state government the “investor of last resort.”

Indeed, one of the few areas in which Pennsylvania has led the nation is in the use of taxpayer money for “economic development.” In 1996, for example, Pennsylvania alone accounted for one-sixth of all state-based economic development spending in the nation. As recently as 1998, Pennsylvania outpaced every other state in terms of state-based economic development funding. By 2000, according to the National Association of State Development Agencies, Pennsylvania ranked 5th overall in economic development spending from all sources.

However, the Commonwealth’s economic results have been at the opposite end of the spectrum. And as the Chinese and other countries with centrally planned economies can attest, a high-tax, high-subsidy economic development policy simply leads to more tax avoidance—by means both legal and illegal—and fosters the development of thriving “black markets,” which operate entirely outside the boundaries of tax and common law.

Tax Day 2004 was indeed a dark one for Pennsylvanians—and if Gov. Rendell’s newest tax proposals are enacted, Tax Day 2005 will be even more painful. However, Pennsylvanians shouldn’t give up hope—after all, if the Chinese Communists are beginning to recognize the wisdom of tax cuts and moving away from government “economic stimulus” programs, there’s hope for the Commonwealth’s lawmakers yet.

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Grant R. Gulibon is a senior fellow 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.