Macworld has an article about the differences between iPhoto vs. Photoshop Touch on the new iPad for those wondering about this. They say:
Although both apps give you lots of tools for working with your photos, they are very different in terms of what they actually allow you to do. Photoshop Touch is geared more toward heavy editing and the creation of new images, whereas iPhoto is more for organizing, optimizing, and then presenting the images you already have.
Photoshop Touch has layers, but a maximum image size of 1600 x 1600 pixels. iPhoto doesn't have layers and only allows one effect at a time, but you can edit images up to 19 megapixels.