Do Tax Cuts Starve the Beast?

Do Tax Cuts Starve the Beast?

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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.

In a Fall 2009 article, political scientist Michael J. New of the University of Alabama concluded that “revenue reductions are not an effective mechanism for limiting the growth of government spending…. I find statistically significant evidence that low levels of federal revenues actually stimulate expenditure growth. This conclusion is in direct contrast to the predictions by proponents of starve the beast.”

In another Fall 2009 article, University of Mississippi economist Andrew T. Young found, contrary to starve the beast theory, that "tax increases-even temporary-may serve to decrease expenditures by forcing the public to reckon with the cost of government spending."

In the Spring 2009 issue of the Brookings Papers on Economic Activity, University of California, Berkeley, economists Christina Romer and David Romer published an article examining the history of tax changes, which found “no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending.”

In a Summer 2007 article, I thoroughly reviewed the history and development of starve the beast theory. I identify Alan Greenspan’s July 14, 1978, testimony before the Senate Finance Committee, shortly after passage of Proposition 13 in California, as the point at which starve the beast theory started to become Republican orthodoxy. Said Greenspan on that occasion, “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenues available and trust that there is a political limit to deficit spending.”

In a Fall 2006 article, Cato Institute economist Bill Niskanen found three major problems with starve the beast theory: “(1) it is not a plausible economic theory; (2) it is inconsistent with the facts; and (3) it has diverted attention away from the political reforms needed to limit government growth.” He concluded that it is a “fantasy” to think that tax cuts would even restrain spending growth.

In a November 15, 2004, article, Brookings Institution economists William Gale and Peter Orszag looked at whether the tax cuts of the George W. Bush administration were restraining spending and found no evidence; on the contrary, they found that the abandonment of fiscal discipline on the tax side of the budget encouraged a reduction in fiscal discipline on the spending side as well.

At a press conference on August 24, 2001, George W. Bush defended his policy of cutting taxes on starve the beast grounds. Said Bush, his tax plan would provide “a fiscal straightjacket for Congress” that would reduce the growth of government.

On February 5, 1981, Ronald Reagan strongly endorsed starve the beast theory in an address to the nation. Said Reagan, “Over the past decades we've talked of curtailing government spending so that we can then lower the tax burden. Sometimes we've even taken a run at doing that. But there were always those who told us that taxes couldn't be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.”

Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily and writes a weekly column at The Fiscal Times. Read his most recent column here. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).

Previous posts:

July 13: Focus on Value-Added Tax
July 12: Focus on Stimulus 
July 9: Weekly Roundup 
July 8: Focus on State and Local Governments

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.