Help me find info showing both sides where they need to compromise

October 3, 2008 8:12 AM

I seem to remember reading about a study which showed a correlation between higher taxes and lower spending, can you help me find it?

I believe the argument went something along the lines that when taxes are higher people tend to pay more attention to government spending, and the greater scrutiny tends to discourage waste and unpopular spending.

A corollary was that lowering taxes actually encourages higher spending and creating deficits and driving up the debt.

I'd really like to find this study to see how well supported it actually was and if it would be useful for helping find a compromise between Republicans who are vehemently anti-tax and Democrats who are less inclined towards fiscal responsibility.

posted by Reverend John to Law & Government (6 answers total)

I've actually read exactly the opposite, although I'll admit it was years ago. At the time (mid 90s), the White House was saying that for every dollar of increased taxes, spending increased by over a dollar and a half. I'd imagine it wouldn't be too hard to find a cite for that.

Democrats who are less inclined towards fiscal responsibility

That sounds a little axe-grindy, by the way.
posted by JaredSeth at 8:33 AM on October 3, 2008

Response by poster: I was trying to be fair and balanced, guess I overdid it :-)
posted by Reverend John at 8:39 AM on October 3, 2008

Best answer: Here is one study in the National Tax Journal that argues that government spending increases in response to higher revenue. From page 8 (page 126 in the print version):

These results imply that government spending responds positively to news that there is more revenue to spend. Our column 2 estimates suggest that a 10 percent surprise in revenue would lead to an increase in spending of about 5 percent. The long run impact of this type of spending binge may be quite dramatic, since spending has a great deal of persistence.

So that seems to diagree with your assertion. They do note that the strength (and to a lesser extent, the validity) of their results depends on the last few datapoints. Their study includes data from 1950-2000.

Here is an economist arguing that the two are not causally related. Rather, he argues, the size of government and tax rates are determined independently by voter preference:

But couldn't it be that...the preferences of people who live in each country, explains both taxes and the size of government? Countries that want larger government choose higher taxes, and countries that want smaller government make the opposite choice. Trying to force causality where none exists - cutting taxes and hoping the size of government falls when the majority of people do not want such cuts in government - will not work. It may be that the preferences in the U.S. are inconsistent and, for now at least, people demand both large government and low taxes, or it may be that current policy is out of step with what people want. But it is preferences that determine the size of government, not the amount of revenue collected.

So there may not be a definitive answer, at least for the US.
posted by jedicus at 9:26 AM on October 3, 2008

Response by poster: Thanks for the info, for what its worth I've partially found what I was originally thinking of:

Tax Cuts = More Spending?
Tax Cuts Grow Government

I haven't yet found an online source of the Niskanen research. I appreciate the different points of view though.
posted by Reverend John at 12:25 PM on October 3, 2008

This?
http://ideas.repec.org/a/eee/moneco/v4y1978i3p591-602.html

or this?
http://www3.interscience.wiley.com/journal/119275079/abstract?CRETRY=1&SRETRY=0
posted by bondgirl53001 at 2:40 PM on October 3, 2008

This discusses it as well.
posted by kingjoeshmoe at 1:58 PM on October 5, 2008