Cut Taxes and Spend

The beast still eats


From Milton Friedman to Ronald Reagan, fiscal conservatives have hoped tax cuts could keep government from overspending by denying it revenues—a theory dubbed "starving the beast." A new study by University of California at Berkeley economists Christina D. Romer and David H. Romer, published by the National Bureau of Economic Research, indicates that the beast is thriving despite the tax cuts of the last three decades. Government spending seems to march on regardless of revenue or tax rates.

The economists studied the effects of four major legislated changes in U.S. tax rates and policy since World War II, choosing episodes where the "starve the beast" motivation was most conspicuous. After looking at the data every which way, with multiple regressions and time lags, and accounting for wars and military spending, they found that the one thing most clearly connected to tax cuts was not spending cuts but future tax increases.

"Although a tax cut leads to a sharp fall in revenues in the short run, it does not have any clear impact on revenues at horizons beyond about two years," the economists write. "Between one-half and four-fifths of the tax cut is offset by legislated tax increases over the next several years."
And spending cuts? "In no episode [of postwar American tax cuts] was there a discernible slowdown in spending following the tax cut," the economists conclude. "Indeed, in all of the episodes, there was an acceleration of spending." The beast finds its food, no matter what.