The Effect of Personal Income Tax Rates on Individual and Business Decisions - A Review of the Evidence

An important goal of a state's economic policy is to create an attractive place to do business and well paying jobs for the future so that Rhode Island 's talented and well educated youth choose to pursue careers at home rather than in neighboring states. As discussed in greater detail, high state PIT rates make it more difficult for a state to achieve this objective. Federal and state governments frequently use progressive personal income tax (PIT) rate structures to address concerns about income inequality. However, the ability of state governments to do so may be limited because high PIT rates may adversely affect business location decisions, work effort, the form of compensation (e.g., fringe benefits, stock options, etc.), capital investment, and economic growth. The purpose of this study is to review the evidence regarding the effect of high state PIT rates on business and individual decisions.