Since 1981, the American people have been hearing the drum beat to reduce taxes in order to “starve the beast”, the federal government is too big. This ideology is held by many prominent conservatives, like supply side economist Milton Freidman and many current conservative office holders today. So over the last 30 years we have cut taxes and cut off the revenue that feeds “the beast”. How does it look?
According to the CATO institute and their former Chairman Mr. William A. Nisknen, this theory didn’t work at all. With almost 20 years of evidence, from 1981 through 2000 Mr. Nisknen noted in his chairman’s policy report that the size of the federal government GREW whenever federal taxes were reduced.
First, this position (starve the beast)* is not consistent with the evidence, at least beginning in 1981. In a professional paper published in 2002, I presented evidence that the relative level of federal spending over the period 1981 through 2000 was coincident with the relative level of the federal tax burden in the opposite direction; in other words, there was a strong negative relation between the relative level of federal spending and tax revenues.
Controlling for the unemployment rate, federal spending increased by about one-half percent of GDP for each one percentage point decline in the relative level of federal tax revenues.
For every 1% tax rate drop, federal spending INCREASED by .5% according to the CATO Institute.
The chairman goes onto say:
“One implication of this relation is that a *tax increase may be the most effective policy to reduce the relative level of federal spending”
So how does an INCREASE in taxes reduce the size of government?
The answer lies with sticker shock.
If we are forced to pay for our services rather than BORROW to fund the services we receive from the government, like medicare and other programs the waste starts to disappear.
In the next policy memo CATO issues, let’s hope it’s to withdraw from NAFTA,WTO and GATT, I won’t hold my breath.
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