Stuart Benjamin raises the interesting question of whether depriving the government of tax revenue actually limits government spending. Here is a link to relevant research by Bill Niskanen, a fine economist. As resident economist on VC, I thought I would offer a few observations:
1. The time period under consideration, 1981 to 2000, is a very short one. How many data points do we really have? If you count a term of an administration as a single data point, we have only five data points.
2. In this sample period, “starving the beast” doesn’t seem to keep spending down. This ought to shake our belief that the evidence suggests that cutting taxes will keep down spending. But given the small number of data points, and the difficulty of specifying the correct macroeconomic model, I would not draw any lesson beyond agnosticism.
3. Has there been a structural shift in this problem since 1981? Maybe we have had two Republican Presidents, Reagan and Bush, who think that America is so great that deficits don’t matter very much. That is the simplest explanation, though of course not the only possibility.
4. The cited result that divided government keeps down spending is usually true, though of course the Nixon years are an exception.
5. The hard-core advocates of the “starve the beast” strategy probably would argue we have yet to try it. After all government spending, including domestic spending, is now higher than ever before. A few tax rates have been cut but many other rates have a higher bite than before. The AMT matters more than ever before. Is it “starving the beast” to throw a few trillion Twinkies at the gorilla in the cage?
6. That being said, a real strategy of starving the beast is not politically feasible in today’s world or anytime soon.
7. If you really wish to pursue this question, it is my belief that Kevin Hoover is one of the top experts.
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