When I encounter folks claiming that "tax cuts always (or generally) increase revenues" or that the Bush tax cuts have done so, I first explain to them that the concept of the Laffer Curve (which is really just basic algebra combined with common sense) reveals such an absolute statement to be nonsensical. At some point taxes would be so low that it obviously becomes silly to think that further tax cuts would provide enough incremental growth in the tax base to compensate. I then explain that cherry-picking anecdotal data does not constitute proper correlation analysis much less establish causation, so simply pointing to revenue growth following the Kennedy, Reagan and Bush tax cuts doesn't prove their point. One would have to look at the revenue trend at other times as well, such as revenue growth following the 1993 Clinton tax INCREASE, and the fact that revenues tend to grow regardless of tax rate changes. I then ask them why, if they are correct, there is almost universal agreement among even (well-credentialed) conservative economistsconservative, including supporters of tax cuts and Bush's own top economists, to the contrary -- that the Bush tax cuts, and tax cuts in labor and investment income in general (from a starting point of tax rates anywhere near current tax rates), have a substantial net negative impact on revenues. Finally, just for fun, I ask them if they believe in the "Starve the Beast" rationale for tax cuts. Believe it or not, they will usually say "yes". To which I reply, "How can the same tax cuts reduce revenues (to starve the beast) AND increase revenues at the same time?" Usually at that point one can hear crickets chirping for several seconds. Needless to say, no one has ever had an explanation for how they could hold those two mutually exclusive beliefs.

TRUE fiscal conservatism must mean, first and foremost, fiscal RESPONSIBILITY. Given our enormous unfunded liabilities (even if scaled back to the degree politically feasible), our unsustainable fiscal course, and the fact that tax cuts have a large net negative impact on revenues*, tax cuts today are not responsible, and hence, not fiscally conservative. See my smackdown of Rudy Giuliani on this point during the campaign. * The net revenue impact of cuts in corporate income tax rates from current rates is apparently not well-established. My comment refers to tax cuts in individual labor and investment income, although, given the unknown regarding corporate taxes, the more prudent course would probably be not to risk lower revenues with tax cuts OR tax increases unless and until we have some better guess as to the likely revenue impact, or more precisely, the likely impact on debt-to-GDP.

Some supply siders, at least non-economists, believe that even if tax cuts lose revenue in the short run, they must eventually lead to higher revenue due to the compounding effect of the incremental growth they will generate. Even assuming, arguendo, that this incremental growth occurs (as it probably would if the tax cuts were accompanied by spending cuts), they are overlooking the time value of money and NPV. Even if, in real terms, such incremental growth leads to higher revenues, ceteris paribus, ten years out, obviously a dollar that far out (and beyond) is worth much less than each dollar lost in the meantime. And of course, even if in Year 11 revenues are higher than they would have been without the tax cut, NPV analysis would have to include the cumulative losses plus the added interest expense.

I am still not convinced that there isn't merit in the "Starve the Beast" approach. Specifically, an alternative model is that large new spending programs continued to be instituted through the mid 1970s, until large deficits started to appear. Since that time, large new programs were largely held in check, aside from the MMA, which had its popular roots in the 2000 election which was conducted in a time of unprecedented budget surpluses. During the time period of large deficits (70s-90s), we saw spending reductions in the military, SS (which admittedly was a shared-sacrifice approach, but also had significant spending cuts), and welfare programs. Substantial other programs were not passed, at least in part because of budget problems ('94 HC reform). Now that large deficits are again part of the landscape, the largest "changes" being proposed by candidates are spending cuts (Iraq war), regulatory reforms, with only drop-in-the-bucket costs being assigned to healthcare reform ... amounts small enough that lip-service arguments can be provided that they will pay for themselves. In the face of the aforementioned anecdotes and state-level evidence not mentioned, I stand by the common-sense argument that it is easier to pass large, new spending increases in time of fiscal fullness, and harder when the coffers are dry.

Victor, Your point makes intuitive sense and may be correct, but not necessarily. First, in case you were responding to my point, I was just saying that many people hold the mutually exclusive beliefs in "starve the beast" and "tax cuts increase revenues". On the "starve the beast" theory, there is debate among economists (which I am not) and the jury is out among them on whether or not lower taxes induce lower spending. It may seem intuitive that lower revenues would induce lower spending, but an intuitive argument is made the other way as well -- that borrowing to spend rather than taxing to spend shields taxpayers from the pain of spending and reduces the incentive to curb spending. In addition to this intuitive aspect, the empirical evidence is debated. A debate emerged among some economists after this (2004) piece ( http://www.cato.org/pubs/policy_report/v26n2/cpr-26n2-2.pdf ) by William A. Niskanen, Chairman of the Cato Institute and former member and acting chairman of President Reagan's Council of Economic Advisers. He holds a Ph.D. in economics from the (famously free-market) University of Chicago, which has honored him with a lifetime professional service award. Niskanen concluded that tax cuts led to HIGHER, not lower spending. Conservative economist Gregory Mankiw, who was Chairman of W Bush’s Council of Economic Advisors and is an economics professor at Harvard, noted (in 2006) that another prominent economist reached the opposite conclusion, with some differences in methodology (with perhaps some advantages), albeit with less recent data vs. Niskanen's analysis. Mankiw also notes that (activist “progressive” economist and blogger) Mark Thoma was very critical of Niskanen’s methodology http://economistsview.typepad.com/economistsview/2006/05/a_closer_look_a.html. Mankiw concluded that “Until someone sorts out these apparently conflicting results, it is (as Thoma suggests) premature for anyone…to conclude that Niskanen has the last, or even the most persuasive, word on the topic.” http://gregmankiw.blogspot.com/2006/06/starving-beast.html. More recently, economists Christina and David Romer analyzed the question and found that (quoting the abstract of their paper) “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.” http://www.nber.org/papers/w13548 The Romers are economic advisors to Obama, although conclusions they have reached in their studies have been cited by conservatives advocating tax cuts (on the basis of GDP growth), and The Economist magazine described them (5/10/07) as having “impeccable neoclassical [economist] credentials” (meaning strongly favoring free markets as a means of efficient allocation of resources). http://www.economist.com/world/na/displaystory.cfm?story_id=9163589. Discussion of the Romer study at http://www.econbrowser.com/archives/2007/04/new_estimates_o.html and http://streetlightblog.blogspot.com/2007/04/macroeconomic-effects-of-tax-changes.html My personal sense is that "starve the beast" may work to some extent, but even if so, it doesn't work nearly well enough to assume that lower taxes today will lead to sufficiently lower spending tomorrow. Sorry for not making the links live. No time right now.

I don't know why a simple topic is made to be complicated. If existing tax policies cause suboptimal use of monies and assets, then changes to tax policies may allow those monies to be better used. In some (but not all) cases, the improved use of those monies and assets also increases total tax revenues. The complicated aspects are figuring out what suboptimal asset use is due to a particular tax policy and estimating the impacts of changing the tax policy to improve asset use.

I'm someone who things we need substantial tax cuts but doesn't think that such tax cuts will increase government revenues. Indeed, we need to be sure we decrease tax rates enough that goverment revenues decline substantially. The problem isn't too little revenue, it's too much spending. I think that arguing about what decreasing taxes does to gov't revenues is a way of sidestepping the main issue: What leads to the best outcome for society. The goal of a society--contrary to what many commentators implicitly suggest--is not to maximize government revenues. BTW, from my personal experience, I choose not to take on contact jobs now (with ~50% marginal tax rates) that I would in a lower tax environment. I am confident that some of these businesses would have done better had they been able to hire me.

The goal is to be re-elected. Period. For Republicans, that means funneling money to campaign contributors through both tax cuts and federal spending to large corporations (Haliburton, farm-aid, drug coverage). If you approach this subject on a policy level, you won't get anywhere, since the motivation is not "societal optimization", it's "fill my pockets and the pockets of the people I see at the Yacht club."

Victor is painting with a little too broad a brush. "During the time period of large deficits (70s-90s), we saw spending reductions in the military, SS (which admittedly was a shared-sacrifice approach, but also had significant spending cuts), and welfare programs." I am not sure this actually survives encounter with Table 1.1 of the 2008 Budget. http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf Certainly the early eighties were the exact opposite of 'spending reductions in the military', nor despite the starve the beast rhetoric was Reagan particuarly effective in restraining Congressional spending on the domestic side, at a minimum we could use some examples. For example I did a search on 'Reagan spending veto' and came up with this from a very Reagan friendly American Heritage site (I don't know if the problems are in the formatting or the editing, some words and numbers seemed to have dropped out, but the overall message is clear. http://www.heritage.org/Research/GovernmentReform/bg443.cfm After praising Reagan's language and urging an aggressive veto based strategy they have to admit "Indeed, government spending under Reagan as a pescentage of GNP, has accelerated at a faster pace than under Carter program that the White House has sought to terminate, including Amtrak, Job Corps, the.Smal1 Business Administration, and Export-Import Bank direct loans, to name but a few which he chose to sign rather than veto. The 1983 Dairy and Tobacco Bill, for instance, contained massive subsidies for milk producers and North Carolina tobacco growers. It was incompatible with Reagan's firmly stated goal of shifting U.S. agriculture back to market-oriented conditions. Nevertheless, the President signed it into law. Authorization Bill, which, despite its name, was little more than a package of pork barrel social spending programs that the White House has been trying to eliminate. Grants, Low Income Energy Assistance, and various Department of Education programs. And last fall a Vocational Education authorization bill won the President's signature, despite his insistence that vocational education is primarily a responsibility of state and local governments (???) percent above his budget request " They myth of Ronald Reagan as actual scourge of out of control Great Society spending doesn't survive either the numeric challenge presented by actual budget numbers or the test of time. Not everything just gets swirled down the memory hole.

Bruce, Just an important note: To be precise, the question of whether or not "starve the beast" works AT ALL (as opposed to significantly or sufficiently to avoid higher deficits or reach some other target) is not necessarily proven or disproven by the direction of actual spending trends (i.e., if spending went up or down following revenue declines or following lower revenues, ceteris paribus, following a tax cut), but is rather a question of whether or not spending was lower THAN IT WOULD HAVE BEEN OTHERWISE (i.e., ceteris paribus -- had revenues been higher).

Military spending as % of GDP fell from 5.5% to 3.0%, '75 to '00 ... I mentioned this category because my prior belief is that the 1990s peace dividend was brought about primarily by world events rather perceived budgetary "shared sacrifice". Therefore, the improved budget environment in the late 1990s is pale evidence against the "starve the beast" notion. And I'll be the first second to admit that these 100ish-word comments are too broadly painted. Two categories worth investigating are domestic discretionary and new mandatory programs. Domestic discretionary has been under intense budget pressure for decades now and I suspect that a good part of that pressure has been brought about by budget deficits. I view this political development as highly unfortunate because in my view this is the category of spending that defines much of the "good" that government can do (although this category has much waste, too). The salaries for our judiciary are just one of the latest cases in point. The second category is the one I mentioned ... under what circumstances do large and new entitlements gain steam. I would be interested in econometric or other more careful arguments to specifically counter-act my prior here, which is that these large initiatives become inevitable during periods of relatively low budget pressures (even though they may end up passing in less rosy budget times ... Medicare expansion in '74, MMA in '03, etc.). This is an extremely difficult argument to prove or disprove quantitatively. Brooks I appreciate your reasoned counterarguments. I was previously familiar with some of those references, but not all. And I haven't reviewed all due to time constraints. Feel free to point me to specific references, or to advance the counter position. Last point of clarification: I am not trying to advance the specific proposition that tax cuts, today especially, would lead to lower future spending. It may be that how you get to the "starved" position may matter greatly. And I also suspect there may be a preference shift in the general population regarding the size of government. I am merely saying that I believe the state of "being starved" carries with it increased political resistance to increases in spending, all else equal. In such an environment, an increased desire for government action will tend to evidence itself in unfunded mandates and calls for changes in regulatory schemas rather than funded government programs. Not unlike what we are largely seeing today. Sorry for length; I'm done, but will revisit to read any references people provide.

"Military spending as % of GDP fell from 5.5% to 3.0%, '75 to '00" Well that will happen when you take endpoints that start with the last year of a horribly expensive war and end with the year before the country embarks on two new horribly expensive wars and ignore a hugely expensive military build up in between. Victor its called 'cherry picking'. The full range of data doesn't support your conclusion. And the specific examples you cite (74 expansion of Medicare, 03 introduction of Part D) as you admit undercut the Starve the Beast narrative. Republicans love their tax cuts and hate most social programs (except those that funnel most of their benefits to Big Pharma and Insurance companies). Your argument is just an attempt to elevate ideology to actual policy principle. 'Small government' is for the Republicans a talking point and not in practice an organzing principle. When it supports their purposes they will tax cut and spend as if dollars meant nothing at all.

Military spending as % of GDP was never below 4.7% from 1970-1992 (and often higher, esp. in early 1980s) ... it has never been that high since (leveling at 3% in the late 1990s and since escalating to 4%). ... I fear I miscommunicated if you read my posts to argue that Part D was an *exception* to my logic. Rather, in my first post, I tried to argue that the political dynamic that caused Part D was rooted in the 2000 campaign, a period that was characterized with how best to spend the massive projected surpluses that we were confronted with as a nation. This is in contrast to failed prior attempts (mostly during times of large deficits) to expand Medicare to cover drugs, a senior's catastrophic illness (Reagan second term), or expanded government expenditures on all healthcare costs (HRC's reform).

I have no proof, but I believe I represent many people who call themselves fiscal conservatives (as I do) with my take on Supply Side Economics. I don't believe that cutting taxes automatically raises revenue. I think most will agree that if marginal tax rates are high enough, cutting taxes will raise revenue. So an interesting question is where is the optimum rate for maximum revenue? I think that we are somewhat below that rate, so that cutting taxes lowers revenue some but less than typical projections would show. However, I agree with the author of "The Goal" above -- government revenue maximization is not a worthy goal. This is where the "Starve the Beast" argument enters. I believe that government is typically inefficient and that it should be used sparringly to create solutions. In this sense, I think the optimum tax level should be well below the rate that generates maximum revenue. Incentives matter. When taxes are high people work less. Maybe not work-aholic CEOs, but many potential two-income families will stay single income. Tom provides another good example above -- choosing to pursue hobbies instead of additional consulting-type work. The lack of incentive to be efficient is what hounds government. With no profit motive, complacency drives the ship. Work becomes about the path of least resisitance, instead of the path of maximum value. Like Victor, I believe starving the beast works. But I also realize that macroeconomic issues like this are so fully confounded by mixed, uncontrolled variables that there is no way to prove it is or is not effective. How do you think Paul Krugman can operate with such acclaim alongside Milton Friedman? Finally, I would like to address Brooks' points. I believe that many politicians would ultimately justify their tax cutting stances with some form of willful disregard for NPV analysis, because they support a starve the beast type hypothesis. I, for one, love the "Blue Dog" Democrats, but I am far more interested in spending restraint and limited government than I am in a balanced budget.

"During the time period of large deficits (70s-90s), we saw spending reductions in the military," "Military spending as % of GDP was never below 4.7% from 1970-1992 (and often higher, esp. in early 1980s)" Unless the nominal dollar value of GDP shrank between 1970 and 1992 (which of course it didn't) these two statements kind of collide. I still see a 'starve the beast' conclusion in desperate chase of an argument.

Bruce, Victor was engaging in civil dialogue with you. Your subject line was unnecessary, insulting and completely uncalled for. Please be civil.

But frankly I am just going to go away and stay away. Because I don't see a lot of commitment to honest argumentation here. It is one thing to put up directly contradictory statements in two different threads on two different blogs, but it is another thing to put up a deceptive data point and then when caught come back and try to claim you were making some other point all in the same comment thread. Which is what Victor did. _______________________________ BTW Infinite Future Horizon numbers for calculating retirement security policy are a crude gimmick that is designed to facilitate scaremongers, an opinion I expressed when I first encountered them in a post or comment by you at DeLong's back I think in 2005, especially when used without qualification as such. Social Security is still not broke and I really doubt that LMS can pass the No Economist Left Behind challenge. Good bye. Perhaps we will meet on more neutral ground.