Penn State economists: Tax cuts not best way to improve economy

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UNIVERSITY PARK, Pa. — High-tech training may trump tax breaks for creating more jobs and improving a state’s economy.

A team of economists found that lower state taxes were not statistically associated with a state’s economic performance, said Stephan Goetz, ag economist in the College of Agricultural Sciences at Penn State.

“The tax climate was not linked to either growth or income distribution.”

Skimp on services?

Goetz, who serves as director of the Northeast Regional Center for Rural Development, said states that favor low taxes do not necessarily spend funds efficiently. They may skimp on funding needed public services such as road maintenance and education.

Those costs often are transferred to businesses directly or become obstacles for businesses seeking to attract qualified workers to the state.

“It’s essentially a case of you get what you pay for,” Goetz said. “You can’t attract businesses if you can’t provide needed public services.”

Technology a key

While lower taxes were not factors in economic growth, the researchers said policies that promoted the use of high technology and entrepreneurship were significantly correlated with job creation and economic growth.

States with more technology classes in school, higher domain name registrations and more people online tended to economically outperform states with a lower emphasis on technology.

“It does indicate that states that have already moved into the online economy are better able to create jobs,” Goetz said.

Goetz said lowering taxes is often categorized as a race-to-the-bottom policy and investing money in technology is considered a race-to-the-top strategy.

Racing up or down?

“Race-to-the-top policies are generally defined as those involving investments in education, entrepreneurship and infrastructure,” said Goetz. “In contrast, race-to-the-bottom policies involve competition among the states for jobs by using lower taxes and industrial recruitment incentives.”

Goetz said that the importance of finding the right mix of race-to-the-top and race-to-the-bottom policies to stir economic recovery is growing for state officials.

“Economic growth is an important issue that preoccupies economists,” said Goetz. “It’s especially important with the lackluster economy and the threat of a possible double-dip recession.”

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1 COMMENT

  1. What a crock of Snot! So Penn State ( who is having their funding cut in budget cuts in PA) says you have to raise taxes to have a good economy. I think they have government economy confused with private economy. I know for a fact that when my taxes are lower, I have more money to work with and ironically I buy more stuff when I have more money, usually from a neighbor or nearby business which strangely gives them more money to work with. However, when the state or fed taxes me more heavily, I cut spending out of my budget which means I buy less stuff. Weird how that works.

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