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

62 Pages Posted: 31 Oct 2007  

Christina D. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

David H. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2007

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.

Suggested Citation

Romer, Christina D. and Romer, David H., Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending (October 2007). NBER Working Paper No. w13548. Available at SSRN: https://ssrn.com/abstract=1024965

Christina D. Romer (Contact Author)

National Bureau of Economic Research (NBER)

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University of California, Berkeley - Department of Economics ( email )

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510-642-4317 (Phone)
510-642-6615 (Fax)

David H. Romer

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-0822 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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