Do Tax Cuts Starve the Beast? The Effect of Tax Changes on Government spending”, manuscript (2008)
| Citations: | 3 - 0 self |
BibTeX
@MISC{Romer08dotax,
author = {Christina D. Romer and David H. Romer and Raj Chetty and Christina D. Romer and David H. Romer},
title = {Do Tax Cuts Starve the Beast? The Effect of Tax Changes on Government spending”, manuscript},
year = {2008}
}
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Abstract
THE EFFECT OF TAX CHANGES ON GOVERNMENT SPENDING The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To deal with these problems, this paper focuses on the behavior of spending following legislated changes in taxes not motivated by current or planned changes in spending, a desire to reduce a persistent budget deficit, or short-run macroeconomic considerations. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions.
