Saturday, November 27, 2010
A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down. ...
Because of its obvious ridiculousness, one seldom hears conservatives say openly that tax cuts automatically reduce spending. But it still underpins the entire Republican budget strategy — tax cuts never have to be paid for, no meaningful spending cuts are ever put forward, earmarks and foreign aid are said to be the primary sources of budget deficits, and similar absurdities.
But there is a flip side to STB at work as well. If tax cuts starve the beast, then it logically follows that tax increases must feed the beast. This variation of STB was on full display in a Nov. 21 Wall Street Journal op-ed article by Wall Street Journal editorial writer and Republican operative Steve Moore, who founded the Club for Growth, which gives vast sums to Republican candidates, and Ohio University economist Richard Vedder.
The Moore-Vedder article argues strenuously that tax increases must never be considered no matter how big the deficit is. The reason, based on research Vedder has been updating since the 1980s, is that tax increases always feed the beast, leading to spending increases larger than the tax increase. Originally, he said that spending would rise $1.58 for every dollar of tax increase, leading to an increase in the deficit rather than a reduction. Vedder now says that spending only rises $1.17 for every dollar of tax increase.
By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6% from 31%, should have caused a massive increase in the federal budget deficit. In fact, it did not. Spending was 22.1% of GDP in 1992 and it fell every year of the Clinton administration, to 21.4% of GDP in 1993, 21% in 1994, 20.6% in 1995, 20.2% in 1996, 19.5% in 1997, 19.1% in 1998, 18.5% in 1999, and 18.2% in 2000. ...
Starve the beast is a crackpot theory, and its flip side that higher taxes invariably feed the beast is no better. They are just self-serving rationalizations for Republican budgetary irresponsibility.Note: A few years ago, I went into great detail explaining the origin and development of STB in an academic journal. My article is available online for those with an interest in the gory details. In July, I posted a bibliography of more recent academic research in The Fiscal Times √ë all of which shows no evidence whatsoever that tax cuts reduce spending. More recently, the International Monetary Fund has confirmed this conclusion in a September working paper.