Tax Increases Result In More Spending, Not Deficit Reduction

At NRO’s The Corner, Veronique de Rugy recounts her experience before the House Ways and Means Commission on debt and deficits and job creation.  One comment, in particular, caught my eye:

[AEI resident scholar Andrew] Biggs’s testimony was particularly interesting. He presented the conclusions of a recent paper he wrote with his colleagues Kevin Hassett and Matthew Jensen. In the article, the economists reviewed the extensive existing literature on fiscal consolidations. They also conducted their own data analysis to study that question. They used a large data set covering over 20 OECD countries and spanning nearly four decades to isolate over 100 instances in which countries took steps to address their budget gaps. Some of these fiscal consolidations were principally spending-based while others relied more on taxes. Here is what they find:

Our findings are striking: countries that addressed their budget shortfalls through reduced spending were far more likely to reduce their debt than countries whose budget-balancing strategies depended upon higher taxes.

The typical unsuccessful fiscal consolidation consisted of 53 percent tax increases and 47 percent spending cuts. By contrast, the typical successful fiscal consolidation consisted of 85 percent spending cuts. These results are consistent with a large body of peer-reviewed research.

I love it when empirical research confirms something intuitive. 

I have written several times before that the key to reducing the size of the debt and deficit is spending reduction, and that tax increases can’t do it.  Why?  Because politicians will simply spend that shiny new tax money as fast as or faster than in comes in.  Sadly, past experience shows that they can’t be trusted to do anything else. 

As a result, tax increases exacerbate the problem instead of alleviating it.  We have too much debt.  So politicians pass tax increases.  Then they spend the money on new projects and benefits.  That leaves us with the same — or more likely, vastly more — debt.  Yet the private economy has less money to grow the real economy. 

Then the cycle begins anew, with new programs siphoning off more money, and a higher tax and deficit baseline.

This is common sense, not rocket science.

Published in: on March 31, 2011 at 12:27 pm  Leave a Comment  

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