Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending

Christina Duckworth Romer and David Romer ()

No 13548, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. 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.

JEL-codes: E62 H50 H60 N12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: Written
Note: DAE EFG ME PE
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