Tax Cut Zombies

Interesting NY Times op-ed, Tax Cut Zombies, by Paul Krugman, which addresses the “starve the beast” rationale for tax cuts:

At this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years -- and presided over record deficits -- public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending…

In other words, the starve-the-beast theory -- like missile defense -- has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts.

Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more.

Dan Shaviro (NYU) responds:

Cute, but in my view Krugman under-estimates the unfalsifiability of starve-the-beast thinking. Counter-factual hypotheticals mean never having to say you’re sorry. No matter how fast spending keeps rising as tax revenues fall, one can always say: “Yes, but if not for the tax cuts, there would have been EVEN MORE spending!” Because this argument rests on a counterfactual, it cannot directly be falsified. True, it can be tested empirically in the sense of testing past correlations between revenue levels and spending levels. Unfortunately, the research that has been done suggests that tax cuts are associated with spending increases, and tax increases with tighter spending, apparently because both respond to whether fiscal discipline is prevalent at any given time.

See Dan's further post here.