28 Pages Posted: 11 Sep 2004
Date Written: December 27, 2005
The strategy of "starving the beast" involves cutting taxes today with the expectation that spending cuts will follow tomorrow. Various heuristics and biases help to explain the likely effects of the strategy. In four experiments conducted on the World Wide Web, subjects chose general levels of taxation and public spending from differing hypothetical starting points. In general, subjects wanted to reduce both taxes and spending, preferring balanced budgets and even surpluses to deficits. When asked about specific spending cuts, subjects showed a reluctance to make cuts, leading to large and persistent deficits. "Starving the beast," by pairing specific tax cuts with the general, abstract idea of spending cuts, can thus succeed in a population preferring fiscal balance. Once the deficit is created, it will likely persist, influencing future policy preferences, due to an anchor and underadjustment bias. Left indeterminate is what happens in any subsequent period of deficits, when a balanced budget constraint is imposed: in such cases, loss aversion vis a vis tax increases is pitted against loss aversion vis a vis spending decreases. Our experiments suggest a role for framing in making policy choices under these conditions.
Keywords: taxation, budget deficits, heuristics and biases
JEL Classification: E62, H11, H20
Suggested Citation: Suggested Citation
Baron, Jonathan and McCaffery, Edward J., Starving the Beast: The Psychology of Budget Deficits (December 27, 2005). U of Penn, Inst for Law & Econ Research Paper 04-21; USC Law and Economics Research Paper No. 04-24; and USC CLEO Research Paper No. C04-21. Available at SSRN: https://ssrn.com/abstract=589283 or http://dx.doi.org/10.2139/ssrn.589283