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Wednesday, April 05, 2006

Starve the Beast Theory "Is as Dead as the Dodo"

I agree with Bruce Bartlett. The current federal budget path is unsustainable and taxes will have to be increased at some point to put the budget on a sustainable path. Exactly how taxes should be raised is debatable, and I'm certain we would disagree on the need and desirability of expenditure cuts in areas such as social insurance programs to achieve balance.

Bartlett argues that a VAT is the best way to increase taxes. VATs are  regressive, but they're an important source of revenue for highly progressive tax-and-transfer systems, so their characteristics depend upon the details of the implementation. However, one thing I do know, making estate tax repeal permanent while introducing a VAT would be a nasty case of bait and switch:

Tax Cuts Don’t ‘Starve the Beast’, by Bruce Bartlett, Commentary, NY Times: ...Most conservatives believe that the best way to downsize government is to take away its allowance, as Ronald Reagan once put it. In other words, tax cuts will lead to spending cuts. This is a theory I once subscribed to. Back in the days when people cared about federal budget deficits, there was a case to be made that intentionally increasing the deficit by reducing revenues would put downward pressure on spending. Today, unfortunately, the evidence seems to point in exactly the opposite direction.

At the time that I drafted the Kemp-Roth tax bill, in 1977, the Republican Party still believed that budget deficits were evil. Republicans would often even support tax increases, such as in 1969, to balance the budget. But they came to believe that higher taxes only encouraged higher spending—until a politically intolerable deficit emerged, at which point they would again be pressured to support tax increases. Eventually, Republicans like Newt Gingrich would charge that their party had become the tax collector for the welfare state. ...

At this point, in the late 1970’s, a few conservatives like Jack Kemp ... said to heck with the balanced budget. Let’s just cut taxes and see what happens. Mr. Kemp predicted that economic growth would rise so much that revenues might not even fall.

Most mainstream conservatives didn’t buy Mr. Kemp’s strategy right away. But after Californians passed Proposition 13 in 1978, they could see that tax cutting was politically popular. They had also learned the hard way that trying to cut spending at a time when revenue was rapidly rising was politically impossible.

So Republican Congressional leaders and conservative economists like Alan Greenspan ... came to support tax cuts as a strategy to force spending cuts. David Stockman, who was ... director of the Office of Management and Budget under President Reagan, was among the most enthusiastic converts to what came to be called the “starve the beast” theory of taxation.

This led to a coalition of three groups — supply-siders who thought tax cuts would increase revenues, libertarians who were in favor of all tax cuts, and traditional conservatives who wanted to cut spending and balance the budget. Ronald Reagan, embodying all three perspectives, unified the Republican Party around the idea of reducing tax rates without specifying any complementary spending cuts (which would have cost him support among those who might have lost government benefits).

In the 1980’s, there was some evidence that the starve-the-beast theory worked. Almost every year, budget deals cut spending a bit, although tax increases were always part of the mix. Ultimately, President Reagan supported tax increases that took back about half of his 1981 tax cut.

Nevertheless, the idea that tax cuts would downsize government became Republican dogma. Today, most Republicans in Congress view tax cuts as the only thing needed to reduce the size of government—and the connection between deficits and spending seems forgotten. Now Republicans raise spending and cut taxes at the same time.

As a consequence, the old starve-the-beast theory has been turned on its head. ... I think that higher taxes are inevitable, as I have explained in previous posts. If conservatives recognize this reality, perhaps they can force meaningful spending cuts as their price for supporting them. In any case, the starve-the-beast theory is as dead as the dodo.

    Posted by on Wednesday, April 5, 2006 at 12:15 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (55)


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