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Saturday, November 27, 2010

Bartlett: Junk Food Economics -- Starving (and Feeding) the Beast

Following up on my post this week, WSJ: A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending:  The Fiscal Times, Starve the Beast: Just Bull, Not Good Economics, by Bruce Bartlett:

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 Ñ 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.

http://taxprof.typepad.com/taxprof_blog/2010/11/bartlett-.html

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Comments

This article reminds me of Jerry Brown's approach to freeway construction in the 1970's: The more freeways California built, the worse traffic became. So the answer was obviously to stop building freeways. We all saw how that worked out.

If Starve the Beast does not work, that's no proof that Feed the Beast will work any better. Things might get a lot worse.

Posted by: AMTbuff | Nov 27, 2010 11:33:06 AM

The evidence you put forward seems to blunt the force of your argument. You say that Clinton raised the top tax rate by a certain percentage, and that government spending in terms of % of GDP fell by a certain amount, but does that really amount to a falsification of the theory? Why did you choose those data points in particular? Raising the top tax rate may or may not increase tax revenue (depending on what happens to other rates, loopholes and credits and deductions, the economy in general, etc.) Similarly, changes in government spending when expressed as a % of GDP may have more to do with changes in GDP than in whether the government is being more or less spendy. Why not make a straightforward comparison of how much government tax revenue changed over a certain time period and how much government spending changed over the same time period. You can even go with nominal spending for each value to keep it easy, since the effects of inflation cancel out. Seems like that would make for a much stronger argument than your apples-and-oranges statistics.

Posted by: Moorlock | Nov 27, 2010 12:50:41 PM

I am in favor of STB and here's why.

Spending favors the white, married breeders among us. National parks and forests are a good example, as are our public universities. We all pay for them, but only elite whites and their children benefit from them.

Taxing favors the married and the breeders among us. Any increase in taxes is likely to be an increase in taxing of single and childfree persons.

STB leads to printing of dollars to pay the spending bill and ultimately to inflation, of course. But inflation is a much fairer "tax" in that it taxes the married, the breeders and their brood, which targeted taxes never do.

Posted by: Jimbino | Nov 27, 2010 12:56:57 PM

Does anyone pay attention to anything Bruce Bartlett says any more? It has all become boringly predictable: pro-tax propaganda, straw man arguments, misstatements and exaggerations of the arguments he's discussing.

In this short excerpt alone, we see several classic examples: Republicans "almost universally" believe that "the one and only thing" they need to do is to cut taxes, this is "the entire" Republican budget strategy, and "no meaningful spending cuts are ever put forward".

Suggested experiment: take this article and black out the information that identifies the subject matter ("__________s believe that all we have to do to be ___________ is to ___________," etc.). Then submit to a high-school English class and ask for a grade on how well written or persuasive the article is. D is my guess.

Posted by: Nonce | Nov 28, 2010 2:42:28 PM

@Nonce. Your critique would be more persuasive if you listed some of the meaningful budget cuts put forth by Republicans.

Posted by: Publius Novus | Nov 29, 2010 7:05:46 AM

@Publius Novus.

Well, some plans have been all over the news.

E.g., Bowles-Simpson,
http://money.cnn.com/2010/11/11/news/economy/commission_top_10/index.htm. (I don't find a direct link to their proposal.)
OK, this is an example of a Republican and a Democrat proposing spending reduction.

Or Rep. Paul Ryan's proposal,
http://voices.washingtonpost.com/ezra-klein/2010/02/rep_paul_ryans_daring_budget_p.html.

Or Chris Edwards, Cato Institute, http://www.downsizinggovernment.org/balanced-budget-plan
(Are we drawing distinctions between Republicans and Libertarians on this?)

There are some quite radical proposals here. I'd find it hard to dismiss any of them as not meaningful.

Posted by: Nonce | Nov 29, 2010 9:31:37 AM