June 13, 2006

Tax Cuts and Spending.

Reducing government spending to a level where expenses for defense and law and order constitute a substantial part of it is one of the cornerstones of conservative world view. That much is clear.

How to achieve this in the constrained domain of politics driven by interest groups is not so clear.

The standard approach of the Republican governments in the last few decades has been to rely on tax cuts and appeal to the starve the beast approach. The idea is to make sure governments have not much money to spend.

Elegant as this strategy appears, there is a catch. Governments can spend the money even if they don't have it! This is familiar to everybody. Successful businesses have developed since ancient times on the assumption that human beings want to spend their future income in the present.

Needless to say, this often leads to spending which is in excess to income, even of future. There is nothing to suppose that governments will behave more responsibly. In fact, there is ample reason to suppose the contrary. Governments have little incentive to spend responsibly.

Moreover, after cutting taxes Republican presidents could feel as if they have done their bit for the conservative cause, and proceed to attend to more immediate issues of concern - such as increasing the spending to appease the various politically crucial groups that may have been angered by the tax cuts to the wealthy.

Well, this is exactly what seems to have happened. Ironically this is the upshot of a study by William Niskanen, chairman of Cato Institute, a bastion of libertarian thought.

This is a short note by Niskanen himself. Some reports in the media on this can be found here, here and here.


At 5:41 PM, June 13, 2006, Anonymous Anonymous said...

WHO ON EARTH WOULD THINK THAT? The whole point of the bush/reganomic tax cut is to increase spending. The REAL problem is it doesn't work. FIRST, because the trickle down theory never did work but especially not now because NONE of the 'investing' is taking place in the USA. SECOND while the average family may have gotten $500 dollars back, the money they gave back to they wasted could have saved the average family $500 a month in health care costs if it would have been used on public health care. NOW THAT WOULD STIMULATE THE ECONOMY....12X$500=$6000 > $500 ESCPECIALLY IN THIS SERVICE ECONOMY

At 11:20 AM, June 14, 2006, Blogger Krishna said...

Nice points, Anon. Thanks.

At 5:53 PM, June 23, 2006, Anonymous Syam Krishna said...

Elegant as this strategy appears, there is a catch. Governments can spend the money even if they don't have it!

I'm afraid that this is no catch - but part of the strategy. Government's ability/willingness to increase budget deficits does not grow equally with tax cuts. In fact, by cutting taxes and increasing spending in the areas they like (defence, law & order) republicans are being ruthlessly efficient in the Starve the Beast approach.

At 2:18 AM, June 24, 2006, Blogger Krishna said...

It is probably true that it was never the intention of Republican politicians to cut the deficits. This is a more natural explanation of what is happening.


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