Bush Administration Tax Policy: Starving the Beast?

Introduction

This is the seventh installment in a series that summarizes and evaluates tax policy in the Bush administration. Prominent public supporters of the tax cuts are sometimes willing to acknowledge, at least privately, the weakness of many of the various public justifications for the policies, including the supposed effect on long-term growth or as a short-term stimulus. The supporters will nonetheless maintain that the tax cuts were still a good idea because the “real” purpose was to contain the size of government. This article examines links between the enacted tax cuts and the goal of “starving the beast” — that is, holding down government spending.

The notion that the Bush tax cuts were justified by an effort to “starve the beast” is really several statements rolled into one: First, that reductions in revenues are the best way to control spending; second, that the structure of the Bush tax cuts was justified by the goal of controlling spending; third, that the tax cuts actually did reduce spending; and fourth, that spending was too high in 2001 or was going to be too high in subsequent years in the absence of the tax cuts. In assessing those claims, we reach the following conclusions:

• It is at best unclear whether tax cuts are effective in restraining spending. The data appear more consistent with the view that once fiscal discipline erodes on one side of the budget, it tends to erode on the other side, too.
• Aiming to reduce spending does not justify regressive tax cuts. In fact, because most spending cuts would be regressive, a tax cut aimed at reducing spending could, on fairness grounds, be reasonably expected to compensate by being progressive.
• It is hard to believe that the tax cuts were effective in reducing spending, as spending has risen significantly in defense, nondefense, and entitlement categories.
• Regardless of the legitimacy of starving the beast as a justification for the original 2001 tax cuts, the theory does not apply to the case for making the tax cuts permanent because the government will face budget deficits in the medium and long term even in the absence of extending the tax cuts.