Want the Government to Cut Spending? Well, Raise Taxes!

[JPhillips]

An interesting if not complete study by the folks at Cato. The conclusion boils down to:

Niskanen recently analyzed data from 1981 to 2005 and found....“no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

....“I would like to be proven wrong,” says Niskanen. No wonder: for the modern conservative coalition, the implications of his findings are discomfiting, and in a sense tragic.

The article can be found here,

http://www.theatlantic.com/doc/prem/200606/tax-cuts

[JonInMiddleGA]

I'll admit up front that I don't have time to get into the full article right now, so maybe I'm just misunderstanding something from the snippet, but ... I'm not sure where I see this as big news.

Hell, there are people in 25 year comas that could tell you that nothing really stops government spending. And tax hikes nor tax cuts do one damned thing about spending.

Nor do I believe anything is ever going to, short of complete economic collapse (and even then I'm not sure). There's simply too many people with their hand out for it to ever stop, the best I think we can hope for at this point is to slow it down as much as possible.

[-Mojo Jojo-]

Originally Posted by JPhillips

An interesting if not complete study by the folks at Cato. The conclusion boils down to:



The article can be found here,

http://www.theatlantic.com/doc/prem/200606/tax-cuts

Why is this surprising? When people feel the pain of their spending, they reduce it. When it's all just funny money, they don't care...

[Huckleberry]

I don't understand either of the two replies.

The study shows that there is something that does reduce spending. That something is tax hikes.

And this isn't about private spending, it's about government spending. The government apparently spends more when they have less money.

Unless, of course, the article reaches the conclusion that tax cuts do actually produce more overall tax revenue. Which is something people will argue about forever.

[-Mojo Jojo-]

Let me be a little more explicit: if there is no relation between taxation and government spending, there is no incentive to control spending. No one cares. The impact will be felt a long way down the road and voters clearly don't care about that. But if there is a direct relation between spending and tax rates (say you're trying to maintain a balanced budget), people will definitely care how much you spend.

[JonInMiddleGA]

Huckleberry, after reading the snippet for the 3rd time, I finally caught it.

I read it as: a hike affected spending by the same amount as a cut

I finally got that it says a hike slows growth by a corresponding amount as a cut raises it.

The problem was in my reading of it (although I'm not wild about the sentence construction the author used).

[JPhillips]

What the study shows is that the "starve the beast" approach to cutting the government doesn't work and in fact increases the growth of the government.

The study intrigued me because I'm always drawn to research that shows the "common sense" approach is wrong. Of course having this knowledge won't change anything, but its nice to know that when politician X talks about cutting taxes to curb government growth he'll most likely be proven wrong.

[st.cronin]

I don't believe the conclusion is appropriate. A correlation does not mean that one causes the other.

[Aardvark]

Well, some reasons why cutting taxes doesn't cut Federal spending may have to do with examples of tax cutting by generally fiscally irresponsible administrations.

Under Reagan, we had tax cuts, but also defense spending was increased to outspend the USSR (which hastened its collapse.)

Under Bush, we had tax cuts, and then a war, which was paid for by increasing debt.

[MrBigglesworth]

Originally Posted by Aardvark

Well, some reasons why cutting taxes doesn't cut Federal spending may have to do with examples of tax cutting by generally fiscally irresponsible administrations.

Under Reagan, we had tax cuts, but also defense spending was increased to outspend the USSR (which hastened its collapse.)

Under Bush, we had tax cuts, and then a war, which was paid for by increasing debt.

The theory of the basis behind the results is basic economics: when taxes are going down, you feel like you are getting more value for your money. Therefore, you want more services. When taxes go up, the value to you of those services goes down, so you want less services.

[IwasHere]

I thought the article said that "the more money you make the less money you spend"?

[kcchief19]

Originally Posted by Huckleberry

I don't understand either of the two replies.

The study shows that there is something that does reduce spending. That something is tax hikes.

And this isn't about private spending, it's about government spending. The government apparently spends more when they have less money.

Unless, of course, the article reaches the conclusion that tax cuts do actually produce more overall tax revenue. Which is something people will argue about forever.

JIMGA's on it, but this has nothing to do with tax revenue. Essentially it says that a tax hike leads to slower spending growth while cutting taxes leads to faster spending growth.

Note that neither actually REDUCE spending. Spending still increases, just at slower rate.

[kcchief19]

Originally Posted by st.cronin

I don't believe the conclusion is appropriate. A correlation does not mean that one causes the other.

I don't necessarily disagree, but this at least correlates two things that logically fit together. Politically, I have no doubt that if you are to raise taxes the mindset of politicians is that you better cut spending too so as to appear fiscally reponsible.

It's not like the study says that government spending grows at a slower rate when the American League wins the all-star game or government spending grows in correlation to women's dress hem lengths.

[st.cronin]

Originally Posted by kcchief19

I don't necessarily disagree, but this at least correlates two things that logically fit together. Politically, I have no doubt that if you are to raise taxes the mindset of politicians is that you better cut spending too so as to appear fiscally reponsible.

It's not like the study says that government spending grows at a slower rate when the American League wins the all-star game or government spending grows in correlation to women's dress hem lengths.

Right. It would be sensible to conclude that the two have a common cause, not that one causes the other.

[Warhammer]

Originally Posted by Aardvark

Well, some reasons why cutting taxes doesn't cut Federal spending may have to do with examples of tax cutting by generally fiscally irresponsible administrations.

Under Reagan, we had tax cuts, but also defense spending was increased to outspend the USSR (which hastened its collapse.)

Under Bush, we had tax cuts, and then a war, which was paid for by increasing debt.

Reagan actually cut spending when he first came into office. Then, much of the spending increases were forced upon Reagan by Congress.

Also, don't forget that under Bush I, he promised to raise taxes if spending was kept in check, but Congress thumbed its nose at him and raised spending anyway.

[MrBigglesworth]

Originally Posted by Warhammer

Reagan actually cut spending when he first came into office. Then, much of the spending increases were forced upon Reagan by Congress.

I think that this is slightly revisionist. Reagan cut spending when he first came into office, but the spending cuts he did were wildly unpopular. The GOP got killed in the midterms, and it forced Reagan to change course.

[Warhammer]

Originally Posted by MrBigglesworth

I think that this is slightly revisionist. Reagan cut spending when he first came into office, but the spending cuts he did were wildly unpopular. The GOP got killed in the midterms, and it forced Reagan to change course.

That isn't the reason why spending shot through the roof. What happened was Reagan increased military spending, and in exchange for that more social programs increased. Reagan played politics to get what he wanted. The upshot was, it did bankrupt the Soviets. I believe it wasn't until late 82, early 83 that he really began to take on the Soviets.

[MrBigglesworth]

Originally Posted by Warhammer

That isn't the reason why spending shot through the roof. What happened was Reagan increased military spending, and in exchange for that more social programs increased. Reagan played politics to get what he wanted. The upshot was, it did bankrupt the Soviets. I believe it wasn't until late 82, early 83 that he really began to take on the Soviets.

I think you are correct, but that you are basically saying the same thing that I am. I think that GOP losses in congress made it so that Reagan had to compromise a lot more, in that he wasn't able to push through anything that he wanted like Bush was able to do during his first term.

[QuikSand]

Originally Posted by kcchief19

I don't necessarily disagree, but this at least correlates two things that logically fit together. Politically, I have no doubt that if you are to raise taxes the mindset of politicians is that you better cut spending too so as to appear fiscally reponsible.

My guess too.

[Aardvark]

Originally Posted by kcchief19

I don't necessarily disagree, but this at least correlates two things that logically fit together. Politically, I have no doubt that if you are to raise taxes the mindset of politicians is that you better cut spending too so as to appear fiscally reponsible.

Also, politicians that are fiscally responsible are likely to balance the budget by cutting spending and raising taxes, but politicians who are fiscally irresponsible are likely to do the opposite, whether driven by political expediency or ideology.