Posted

September 03, 2010 03:40:06 AM

Date

2010-09

Author

Kumhof, Michael ; Laxton, Douglas ; Leigh, Daniel

Affiliation

International Monetary Fund

Title

To Starve or not to Starve the Beast?

Summary /
Abstract

For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Keywords

Starve-the-beast, tax cuts, spending cuts, budget deficits, government debt, non- Ricardian behavior, welfare analysis

URL

http://www.imf.org/external/pubs/cat/longres.cfm?sk=24178.0

Remarks

This is an objective, optimizing analysis of the currently popular, political argument for cutting taxes to force spending cuts. The authors conclude that under plausible assumptions, this policy could lead to negative output and welfare. Authors use a two-country model of the U.S. and the rest-of-the world (ROW). The likely negative output and welfare losses apply to both the U.S. and ROW.

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