November 19, 2012

GIVEN THE HISTORICAL AVERAGE...:

Gorging the Beast : Tax cuts didn't starve big government. (Andrew Ferguson, November 26, 2012, Weekly Standard)

And then Niskanen, looking over 25 years of budget data, noticed something about STB: It didn't work. In fact, attempts to starve the beast by tax cuts seemed to lead to increased federal spending.

Niskanen looked at both spending and taxes as a percentage of GDP. On average, he found, if federal revenues declined by 1 percent, federal spend- ing increased by 0.15 percent. When revenues rose, on the other hand, relative spending decreased. A fur- ther study in 2009 by another Cato economist, Michael New, came to the same conclusion after the gluttonous administration of George W. Bush. Under Bush and his mostly Republican Congress, new benefits like subsidized Medicare drugs and increased federal education spending followed on the heels of large tax cuts.

Niskanen's explanation for the failure of STB was straightforward, a conjecture based on standard economics: When you cut the price of something, demand for it will increase. Lowering taxes without lowering benefits meant that tax- payers were getting the benefits at a discount. [...]

Why do tax increases lead to decreased spending? "Demand by current voters for federal spend- ing," he explained, "declines with the amount of this spending that is financed by current taxes." When you make them pay for government benefits out of their own pockets, in other words, voters will want fewer of them. The journalist Jona- than Rauch put Niskanen's point more pithily: "Voters will not shrink Big Government until they feel the pinch of its true cost."

For that reason, the great liber- tarian pot-stirrer said that spending would never decrease--that government would never get smaller--until federal revenues increased from 15.8 percent of GDP, where they are today, to higher than 19 percent of GDP: an amount totaling in the hundreds of billions of dollars.

...while today's taxes are abnormally low, 19% wouldn't be terribly high.
Posted by at November 19, 2012 5:37 AM
  
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