Starve the Beast Theory with a Lag
That didn’t take long. When William Niskanen produced a regression that suggested years in which taxes were low also tended to be years in which spending was high, one had to expect that the National Review would have some comment:
While Niskanen has accounted for the effects of the business cycle, he has not taken account of the possibility that tax cuts cause spending cuts after a few years. It may be, for example, that Ronald Reagan’s tax cuts helped doom Bill Clinton’s push for socialized medicine.
Not so original. Haven’t these fellows already suggested that the 1981 tax cut caused the 1990’s peace dividend? Besides, the 2001 and 2003 tax cuts were followed by that bloated prescription drug benefit that Bush is now using to brag about passing around free money.
But it is the rest of this paragraph that defies reality:
And even if it were the case that tax cuts do not, by themselves, make it easier to cut spending, that would hardly negate the economic case for cutting taxes that punish saving, investment, and work.
Yes, St. Reagan’s “work, saving, and invest” slogan. Only problem was that national savings FELL after the 1981 tax cut and national savings are lower today than they were in 2000.
Update: Nick Schulz takes this Niskanen regression in a different direction suggesting that we should raise taxes in order for Americans to demand spending cuts too. What I found interesting was his link to the latest from Jagadeesh Gokhale and Kent Smetters:
the nation’s fiscal imbalance has grown from around $44 trillion dollars as of fiscal yearend 2002 to about $63 trillion, mostly due to the recent adoption of the prescription drug bill (Medicare, Part D). The imbalance also grows by more than $1.5 trillion (in inflation adjusted terms) each year that action is not taken to reduce it. This imbalance now equals about 8 percent of all future GDP and it could, in theory, be eliminated by more-than doubling the employer-employee payroll tax from 15.3 percent of wages to over 32 percent immediately and forever – assuming, quite critically, no reduction in labor supply or national saving and capital formation. Equivalently, massive cuts in government spending would be required to achieve fiscal balance: The total federal fiscal imbalance now equals 77.8 percent of non-Social Security and non-Medicare outlays.
Of course, part of the solution might also be to repeal the income tax cuts enacted in 2001 and 2003 and to repeal the prescription drug benefit or otherwise find some means for paying for it.