Tuesday, May 16, 2006

Stoking the beast

Jonathan Rauch, in the June issue of The Atlantic Monthly, discusses the counter-intuitive analysis of Cato chairman William A. Niskanen (subscription only):

To the naked eye, Starve the Beast looks suspiciously counterproductive. After all, spending (as a share of the gross domestic product, the standard way to measure it) went up, not down, after Reagan cut taxes in the early 1980s; it went down, not up, after the first President Bush and President Clinton raised taxes in the early 1990s; and it went up, not down, following the Bush tax cuts early in this decade.

Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, "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.

The reason: Cutting taxes while leaving spending unchanged "reduces the apparent cost of government," giving taxpayers the appearance of being "on sale." Hence, people buy more or it. Niskanen figures that the sweet-spot -- the tax rate where government spending does not change -- is a tax rate of 19% (we are now at an effective rate of 17.8%, and government spending is increasing).

Note that the data Niskanen compares are the tax rate and the rate of increase in government spending. That is, if a fixed tax rate l is below the sweet-spot, government spending will increase at a fixed rate over time.

This is disastrous math for tax-and-borrow conservatives. As Niskanen says, "I would like to be proven wrong." And he might be. The lesson for Democrats: raising taxes and getting rid of pork are one and the same.

Go to the Atlantic's Post & Riposte for the online discussion of the article.

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