Tax cuts increase government spending
June 20, 2012 Leave a comment
In a post yesterday, Ezra Klein hit on one of my favorite little unknown facts about economic policy: the best evidence suggests that tax cuts lead to spending increases, not spending cuts. William Niskanen, head of Cato and libertarian economist is respnosible for this nugget that Republicans completely ignore. Here’s Ezra:
Norquist might say that the implication is a “starve-the-beast” strategy: You hold tax rates down and you eventually force massive spending cuts. But we have the evidence on starve-the-beast strategies: They don’t lead to spending restraint, but to deficits. Here’s the late William Niskanen, who served as one of Reagan’s top economists and later studied (pdf) the fiscal effects of starve-the-beast:
The relative level of federal spending over the period 1981 through 2000 was coincident with the relative level of the federal tax burden in the opposite direction; in other words, there was a strong negative relation between the relative level of federal spending and tax revenues. Controlling for the unemployment rate, federal spending increased by about one-half percent of GDP for each one percentage point decline in the relative level of federal tax revenues. Although not included in the sample for this test, the first three years of the current Bush administration were wholly consistent with this relation.
Got that? Tax cuts caused spending to rise, which caused deficits to grow. As Niskanen put it, “the demand for federal spending by current voters declines with the amount of this spending that is financed by current taxes. Future voters will bear the burden of any resulting deficit but are not effectively represented by those making the current fiscal choices.”
Boom. That’s Grover Norquist’s head exploding. Okay, not really. He clearly has an unusually good ability (like most elite Republicans) to re-shape empirical reality to his own worldview. If you haven’t read it, take a look at Jonathan Rauch’s “Stoking the Beast.”