Tax cuts to "starve-the-beast"

“David Romer: [A] major motivation that people have put forward for cutting taxes is their concern that government is too large. ....

This is something that Ronald Reagan was very explicit about. It was one of the motivations for his tax cuts, and it goes under the name of the "starve-the-beast" hypothesis. The "beast" is government and its "food" is the revenues. Despite its importance, there's been very little empirical work on this ....

In the paper ..., we go through the history of tax changes and take out the ones that are motivated by decisions that had already been made to increase spending, take out ones that are coming not from policy at all but from developments in the economy, and the like. We try to isolate changes in taxes that seem truly legitimate for testing the starve-the-beast hypothesis.

And what we find is no evidence for starve-the-beast. There's no systematic tendency for spending to fall after tax cuts relative to what it otherwise would have been.

Region: I was quite surprised by that.

Christina Romer: We didn't know what we were going to find. .... But ... we thought the results would be interesting whichever way they came out.

Region: But you did find that tax cuts were followed by something else.

Christina Romer: Right. Tax cuts led, eventually, to tax increases. Basically, something has to give; there is a government budget constraint. What we thought gave when you cut taxes was spending, but we seem to find that in postwar U.S. history what actually gives is the tax cut itself. A substantial fraction of a tax cut is typically undone in the subsequent five years.”

"Christina and David Romer Interview", The Region, Federal Reserve Bank of Minneapolis (September 2008).

http://www.minneapolisfed.org/pubs/region/08-09/romers.pdf

http://www.minneapolisfed.org/publications_papers/issue.cfm?id=283


David H. Romer and Christina D. Romer both teach at the University of California at Berkeley, where he is Herman Royer Professor of Political Economy and she is Class of 1957-Garff B. Wilson Professor of Economics.

The “starve-the-beast” strategy was pushed by Ronald Reagan and the supply-siders in the 1980s and by George W. Bush in the 2000s in an attempt to put a fiscal straightjacket on Congress to rein in its spending. In fairness, the resulting deficits emerging out of the strategy seemed to have no more effect on the desire of Presidents to spend than it had on Congress. In the end, it would seem government spending went merrily on its way, dragging up taxes in its wake.

Before one throws away the idea of starving the beast, however, it would be useful to know what spending would have been without this strategy. I would suspect it would be much higher than it is, and if the strategy did not lower or even restrain spending, it at least made it lower than it would have been otherwise.

The interview excerpted above with husband-and-wife team Christina Romer and David Romer covers a wide range of topics. Each received in 1985 a PhD in economics from MIT, currently teach at the same rank at the University of California-Berkeley, and have co-authored many studies. When asked to describe their working relationship, Christina Romer responded "We can be brutally frank". David Romer added "Exactly. We can be more frank in our criticism because there's plenty of time to iron out the differences."

Thanks to Larry Willmore for the Tdj.