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Commentary By Brian Riedl

The GOP's Spending Blowout Invalidates 'Starve the Beast' Tax Cuts

Economics, Economics Tax & Budget, Tax & Budget

Washington’s recent deficit-blowout should finally kill the “starve the beast” hypothesis. This idea – which initially caught fire with conservatives in the 1980s – is that the most effective way to shrink government is to first cut taxes and “starve” the government of funding. At that point, the hypothesis goes, deficit-focused politicians will have no choice but to reduce spending accordingly.

So how does “starve the beast” explain that – just 49 days after signing into law the largest tax cut in 16 years – President Trump signed the largest spending expansion in 8 years?

It turns out that tax cuts did not starve the beast. The beast simply grabbed a plate of deficit-finance and continued eating.

As a free market economist, I naturally support tax relief. The tax overhaul bill contained several important provisions, such as finally aligning America’s outdated corporate tax code with the rest of the world. However, there was no basis to believe the bill would bring spending restraint. In fact, tax relief is often followed by spending increases, because lawmakers who dismiss deficit concerns in tax policy also surrender any persuasive deficit argument against new spending.

“It turns out that tax cuts did not starve the beast. The beast simply grabbed a plate of deficit-finance and continued eating.”

Before the latest tax cuts were enacted, many congressional Republicans had hoped to spend 2018 addressing the soaring entitlement costs that are primarily driving long-term budget deficits. Instead, tax relief, despite its merits, poisoned the well for entitlement reform. The corporate tax reforms are just 3 percent as large as the unsustainable Social Security and Medicare deficits over the next decade. Yet even a modest slowdown in the growth of benefits to keep these vital programs solvent could be twisted into accusations of slashing grandma’s benefits simply to pay for Fortune 500 tax cuts. Thus, the day after sending the tax bill to the president’s desk, congressional leaders postponed entitlement reform indefinitely.

Tax cuts are actually often followed by more federal spending. President Ronald Reagan’s 1981 tax cuts were followed by a significant defense buildup. President George W. Bush’s 2001 tax relief was followed by massive spending increases in areas like education, farm subsidies, and Medicare prescription drugs, as well as a lack of offsets for later war spending. And now President Trump’s recent tax cuts were followed by the evisceration of the discretionary spending caps.

It can be argued that tax reductions prevented what could have been more spending. Recall that the Bush tax cuts were enacted under a projected 10-year surplus of $5.6 trillion that Republicans feared would otherwise be diverted into an even larger spending surge. Yet even after the projected surplus evaporated (due in part to the 2001 recession), the Republican spending spree continued.

The more accurate way to define eras is austerity versus indulgence. During the presidencies of George H.W. Bush and Bill Clinton, austerity took the form of tax increases, deep defense cuts, and each party blocking the other’s expensive initiatives. The budget was balanced by 1998.

President Barack Obama presided over each type of era. In 2009 and 2010, a unified Democratic Congress and president enacted $1 trillion in spending hikes and tax cuts during the Great Recession. Regardless of whether one believes this stimulus aided in the modest economic recovery (I am skeptical), we can agree that lawmakers were justified in setting aside deficit concerns during an economic collapse. By 2011, the recession was over and a new House Republican “tea party” majority returned Washington’s focus to deficit reduction and austerity. Over the next six years, the president and Congress enacted one of the largest spending reductions in decades – the Budget Control Act – and raised taxes by $80 billion annually on upper-income families. These reforms combined with the improving economy to reduce the deficit from $1.4 trillion to $438 billion by 2015.

In fact, the deficit fell so far that Americans stopped caring about it. A recent Pew poll ranked deficit reduction near the bottom of voter priorities. Thus, lawmakers are now cutting taxes, and reversing previous defense and domestic spending cuts.

The pendulum is swinging back. Annual budget deficits exceeding $1 trillion next year and $2 trillion a decade from now will surely get the attention of voters. The projected 30-year budget deficit tops $80 trillion – and comes almost entirely from the projected cash deficits of the Social Security and Medicare systems (and the resulting interest costs). To be saved, those programs require immediate reforms – and they would have even absent tax reform, the deficit effects of which are minuscule compared to the Social Security and Medicare liabilities.

There are often many persuasive arguments for tax relief. Starving the beast is not one of them.

This piece originally appeared at the Washington Examiner


Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here

This piece originally appeared in Washington Examiner