StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

More Starve the Beast Nonsense

14 Jul 2010
Posted by Bruce Bartlett

Over the weekend, Sen. John Kyl, R-Ariz., asserted that despite the large budget deficit, tax cuts must never be offset, budgetarily. This view is consistent with a philosophy long held in Republican circles that tax cuts without any offsetting spending cuts are the epitome of fiscal responsibility because they will somehow automatically “starve the beast.” Starve the beast theory has been the subject of much recent academic research, all of it showing that there is no truth to it whatsoever. Indeed, the literature shows that the effect is actually perverse; leading to higher spending because the tax-cost is reduced by tax cuts. I provide links to a number of recent academic studies on this point in my Fiscal Times post today.

Taxes Pay for themselves?

Mr. Bartlett...

Thank you for pointing out some studies - as layperson I am finding your Notations really interesting, and a great tool to delve a bit more into good economic commentary.

A question about this though: Sen. McConnell yesterday echoed Sen. Kyle's view of taxes, but then said that taxes pay for themselves through economic activity. Do you know of studies that either lend support to this view, or demure from this view?

I intend to address this is a future post.

A lot depends on what studies are freely available online. 

It is insanity to believe

It is insanity to believe that "starve the beast" is what is responsible for perpetually higher government spending. "Starve the beast" may well be ineffectual. But that is because NOTHING can stop perpetual increases in government spending.

NO government spending program has EVER been reduced except for military spending after a war. The last time federal spending (x post-war defense) dropped was in FY 1927. The last time federal spending (x post-war defense) dropped over sustained years was 1922-1927. That's the Calvin Coolidge administration. And even then, federal spending was 300% more than it had been before WW1 because of the interest on the war debt.

There are no more elected Republicans who believe in the "Calvin Coolidge" vision of the role of the federal government (or "Calvin Coolidge" tax rates -- of 1.125% on incomes under the equivalent of $200,000 today - and only the richest 2% actually paid any taxes). And when they do pop up outside the beltway (today called "libertarian"); you are the first one who squawks about how "irresponsible" they are. Which we/they aren't -- but most certainly are a career/income threat to people in DC.

Your version of "fiscal responsibility" --- "golly maybe if we redefine 'spending' into 'spending as a % of something else'" or "fiscal responsibility means chanting wastefraudabuse and cutting surplus pencils" or "golly let's not talk about spending because that's too tough so let's just accept spending as a given and talk about deficits instead" -- is PRECISELY what is driving the US into an economic hole.

The Politics of the Starve the Beast Argument

There are the Milton Friedman type Republicans who believe that government spending should be reduced. They believe that, but they just can't get elected to Congress in 80% of the distrcits in the US, nor to the Presidency, actually specifying the spending and taxation policies consistent with such a view.

Paul Ryan proposed a Roadmap that still preserved Social Security and Medicare, still a long way from Friedman's goal of eliminating those two programs. Now Friedman was no political dummy, and neither are the Republicans. Democrats win votes by taxing the rich and spending on the majority. Republicans could win votes by reducing taxes for everyone and limiting spending growth to the point that is politically viable.

While Republicans have a philosophical desire to reduce spending and cut entitlements, the majority of the electorate doesn't concur, yet. So they come up with a rationalization "Starving the Beast" as their best strategy for leading the electorate to the Republican way of thinking. Republicans can claim success as long as the rate of growth of government spending has been slowed more than would have occured with more tax revenue. They don't have to show an actual decrease in spending. Looking at the examples of European states, it's hard to argue with their rationale.

The practical result of Starving the Beast is that net interest on the debt occupies a larger percentage of the federal budget that will crowd out the spending programs opposed by Republicans, unless Democrats want to take political responsibility for raising taxes -- and thereby lose votes.

So far, the strategy seems to be working just fine for the 2010 midterm elections.

If we want to eliminate the political gain from advocating fiscally irresponsible budget strategies, then the level of public debt must cease being a dependent variable of divergent spending and taxation policies. The level of public debt must become an independent variable that forces congruence of spending and taxation policies.

But do tax cuts stimulate the economy?

Theoretically, tax cuts could increase government revenues provided that the stimulation to the economy exceeds the loss in revenue due to the cut in tax rates.

Angry Bear recently examined this question on his website and found that the evidence doesn't support the idea that Federal and states tax cuts have stimulated the economy in the past.

In fact, the data he found appears to suggest that tax increases stimulate the economy instead.

Before you say this is nonsense, recall the idea behind the Laffer curve. The idea was that US tax rates exceed the point of generating maximum government revenue. What Angry Bear is suggesting is that we're on the opposite side of the peak of the curve. If he's right, then raising revenue through higher taxes is more effective than private investment in stimulating the economy - possibly because the government spends all of the money it collects in taxes.

Starve the Beast

‘...a philosophy long held in Republican circles that tax cuts without any offsetting spending cuts are the epitome of fiscal responsibility because they will somehow automatically “starve the beast.”’

It’s hard to fathom that anyone would believe these cuts would come automatically, yet with no obvious plans for cutting government programmes—with an ensuing rise in both the deficit and debt—this delusion is as robust as the fabled ‘beast’ itself.

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