CATO INSTITUTE: DEFICITS DO NOT RESTRAIN SPENDING
May 28, 2004
For nearly three decades, many advocates of smaller government, including Nobel laureates Milton Friedman and Gary Becker, have endorsed the notion of "starving the beast." The idea is that since government will always spend whatever it receives in tax revenues, cutting taxes is an effective way to restrain the growth of government spending. Furthermore, this line of analysis suggests that we are unlikely to balance the budget or eliminate government debt by raising taxes. Tax raises will be consumed by increased spending.
However, economist William Niskanen of the Cato Institute says that empirical evidence since 1981 suggests that reducing federal taxes does not decrease the growth of federal spending. According to Niskanen:
- Between 1981 and 2000, federal spending increased by about one-half percent of gross domestic product for each one percentage point decline in the level of federal tax revenues relative to GDP.
- Since 2000, the first three years under the Bush administration are consistent with this relationship -- already, real federal spending has grown at the fastest rate since the Johnson administration..
Niskanen adds the strong negative relation between the federal spending and tax revenues has two main implications. First, a tax increase may be the most effective policy to reduce the relative level of federal spending. Second, supporters of "starve the beast" position have taken a far too relaxed attitude towards spending restraint.
Adopting political discipline on spending is naturally part of the solution, but Niskanen cautions that simply focusing on domestic discretionary spending will not be enough. Today, such spending accounts for just 18 percent of total outlays.
Source: William A. Niskanen, "Starve the Beast Does Not Work," Policy Report, April 2004, Cato Institute.
Browse more articles on Government Issues