The voices of Tax Policy Center's researchers and staff
For decades, a guiding principle for many conservatives was that tax cuts not only boost the economy directly but also by shrinking the size of government. The theory, known as “starve the beast,” creates what Nobel Prize winner Gary Becker and colleagues called the “double benefit of tax cuts.”
While attractive to small government conservatives, this theory has been disproved tax cut by tax cut, going back at least to the Reagan Administration. It has resurfaced now that President Trump and congressional Republicans pushed through the Tax Cuts and Jobs Act (TCJA). But, even though Republicans control both houses of Congress and the White House, it increasingly looks like the post-TCJA federal government is growing, not shrinking.
If starve-the-beast works, passing the TCJA and pulling more than $1.5 trillion in revenue from the government’s coffers over the next decade ought to result in significant spending reductions as policymakers respond to those new resource constraints. But the evidence suggests just the opposite.
More spending plans
Indeed, in an effort to reach a budget agreement, Republican and Democratic leaders are talking about boosting discretionary spending by about $300 billion over the next two years--roughly $80 billion for defense and $63 billion for domestic programs each year.
Then there is President Trump’s still-vague infrastructure program that is said to include about $200 billion in new federal money, at least another $100 billion in disaster relief from last fall’s hurricanes, what inevitably will be more money for border security and/or a wall on the Mexican border, and Trump’s paid family leave plan (last year’s version would have cost $19 billion).
Add is all up, and the nonpartisan Committee for a Responsible Federal Budget estimates that the deficit, which was $666 billion in 2017, could top $1.1 trillion in 2019. All this, of course, at a time of full employment and a relatively healthy economy.
Big budget cuts are DOA
Efforts to make significant spending reductions have gone nowhere. The President’s initial budget proposed deep cuts in domestic programs but it was dead on arrival in the Republican Congress. Repeated efforts to restructure Medicaid died in the Senate last year.
Although House Speaker Paul Ryan is deeply committed to overhauling entitlement programs such as Medicare and Social Security, his ideas appear to have no support from Trump or among the Senate GOP leadership.
Before embarking on its tax-cutting venture, the GOP should have looked back to 2006, when the libertarian economist Bill Niskanen wrote a short paper entitled, in part, “The Failure of Starve The Beast.” Bill, who never minced words, noted three problems: “It is not a plausible economic theory; it is inconsistent with the facts; and it has diverted attention away from the political reforms needed to limit government growth.” To Niskanen, who was a true small government conservative, the last was the claim’s greatest failing.
In a more detailed analysis of starve the beast, Christina and David Romer not only concluded the tax cuts fail to constrain government spending, they found that “tax cuts increase spending.”
The problem, of course, is that politicians—even many conservatives--don’t really like to cut overall government spending. And vanishingly few care really about budget deficits. That’s where starve-the-beast fails: Even today’s self-described conservatives would rather borrow to finance tax cuts than make tough fiscal choices. As my Tax Policy Center colleague Gene Steuerle says about the politics of deficit reduction, either through tax hikes or spending cuts, “If you lead, you lose.”
Congress has frozen some discretionary spending for years, but that’s not where the money is. Programs such as Medicare, Medicaid, and Social Security grow as the population ages. Without taking away benefits—often critical to the well-being of those eligible—it is hard to find budget savings. Congress could fundamentally restructure the programs to better fit the 21st century workforce, but, as Gene argues, overcoming inertia and political distrust is hard. The result: spending keeps rising in the absence of congressional action.
As Niskanen and the Romers argue, the relationship between tax and spending cuts is quite different than the starve-the-beast theory suggests. In President Reagan’s first term, tax revenue fell from 19.1 percent of GDP to 17.2 percent while spending rose from 21.6 percent of GDP to 22.2 percent. President George W. Bush cut taxes but then created a Medicare drug benefit and initiated a massive increase in military spending. During his presidency, revenues fell from 20.1 percent of GDP to 17.1 percent while spending rose from 17.6 percent to 20.2 percent. And the deficit exploded.
Big tax cuts do have some impact on the fiscal debate. As TPC’s Donald Marron notes, lower revenues may lead to some constraints on spending even if they are far more modest than starve-the-beast fans wish.
As long as Congress can borrow money at low interest rates, it does not need additional tax revenue to pay for increased spending. Interest rates have ticked up in recent months, but they’d have to rise a lot more before budget deficits attract much attention from policymakers. Someday, there will be a fiscal reckoning, likely leading to a round of spending cuts—and tax hikes. But it is hard to see that happening anytime soon, notwithstanding the wishes of many conservatives and the fears of many liberals.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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