Revenue reductions do not lead to spending cuts.

During the past few days, Dominic, Mark, Veronique, Charles, and John have all had a very informative discussion about budgeting and fiscal policy. The question of whether higher marginal tax rates can generate more tax revenues is an important one. Similarly, there are important empirical questions about the extent to which additional tax revenues will actually lead to deficit reduction.

Another fact to consider is whether tax revenue reductions will result in spending cuts. At one point, the “Starve the Beast” theory enjoyed a great deal of currency in conservative and libertarian policy circles. The theory was that reductions in tax revenues would incentivize Congress to reduce spending. Anecdotally, spending cuts do gain salience politically during times of high budget deficits.

However, a body of research analyzing federal expenditures and revenues shows that lower taxes do not correspond to lower spending. This was the finding of both a 2006 Cato Institute study by William Niskanen and a 2007 National Bureau of Economic Research study.  In 2009 I did my own analysis. I specifically analyzed components of the federal budget — such as nondefense discretionary spending — that might be particularly sensitive to revenue reductions. However, I found little evidence that tax revenue reductions resulted in spending cuts.

All of this puts fiscal policy analysts in a difficult position. It is unlikely that the United States will enjoy the high levels of economic growth necessary to balance the budget. Research shows that the tax code is at best a clumsy tool for incentivizing spending cuts. The authors are certainly correct that the best strategy for balancing the budget is through reducing spending. Accordingly, the onus is on conservative policy analysts, commentators, and yes, elected officials to convince the American public of the importance of cutting spending — particularly on entitlement programs.