A recent study, by William Niskanen of the Cato Institute, found that the conservative "starve the beast" strategy does not work. Indeed, since 1981, he found that tax cuts tend to produce more spending, while tax hikes produce less.
Quote:"Starve the Beast" Just Does Not Work
For nearly 30 years, many Republicans have asserted that the best way to control federal spending is to "Starve the Beast" by reducing federal tax revenue. Moreover, this assertion has been endorsed by two Nobel-laureate economists, Milton Friedman and Gary Becker.
There are at least three problems with this perspective:
It is most implausible that reducing the tax burden of government spending on current voters would reduce the level of government spending that Congress would approve. In private markets, there is a consistent negative relation between the price of a good or service and the amount demanded.
The "Starve the Beast" assertion is inconsistent with the facts, at least since 1980. My study finds that there was a strong negative relation between the federal spending percent of GDP and the federal revenue percent of GDP from 1981 through 2005, even controlling for the unemployment rate.
An increased belief in the "Starve the Beast" assertion has substantially reduced the traditional Republican concern for fiscal responsibility - leading to a pattern of tax cuts, increased spending, and increased deficits. This pattern has been strongest during the current Bush administration, primarily because the Republicans control both the administration and a majority of both houses of Congress.
In 2005, federal revenues were 17.8 percent of GDP. My estimate is that an increase of federal revenues to about 19 percent of GDP would be necessary to stabilize the federal spending percent of GDP. Control of at least one house of Congress by the Democrats, however, is likely to be necessary to achieve this outcome. Republicans should not consider this inconsistent with Reaganomics. After the major reduction in marginal tax rates in 1981, Reagan approved tax increases in each of the next three years and a major tax reform that increased federal revenues in the short run.
http://www.cato-at-liberty.org/2006/05/11/starve-the-beast-just-does-not-work/
"Starve the beast" is so central to the GOP approach to governing that the reaction to Niskanen's study is a case study in how the conservative movement reacts when its views are disproved.
Near silence.
Maybe because it reveals the way the GOP plays fast and loose with it true goals.
Democrats are willing to inflict pain on constituents in the form of spending cuts in order to balance the budget but not in order to give tax cuts to the rich. So, when Republicans agree to raise taxes, large numbers of Democrats will join them to cut spending. This happened in 1982, '83 and '90. Democrats did it themselves in '93.
But when Republicans cut taxes, Democrats refuse to give them cover to make politically unpopular spending cuts. Republicans feel obliged to prove to voters that tax cuts aren't hurting their cherished programs. The latest case in point: the Bush tax cuts resulted in a Bush spending boom.
Niskanen's point--that since 1981 tax cuts go with spending increases, not spending restraint--is a fact. It is not a statistically significant fact, however--it may well be just our bad luck, where piece one of bad luck is named "Reagan" and piece two is named "Bush."
It's not that tax cuts provoke spending increases, it's that politicians--overwhelmingly Republican politicians these days--who seek to unbalance the budget unbalance it on both sides: tax cuts for the rich and Medicare spending that enriches Big PHRMA.
Stumble It!
Tweet This
Bookmark on Delicious
Share on Facebook
Share on MySpace