Theory of fiscal illusion: Tax cuts increase the demand for government services, and smaller government isn’t ensured (Ura & Socker, Texas A&M).
… the evidence of the last few decades in Canada and the U.S. suggests tax cuts don’t shrink the size of government. They merely curtail government revenues.
A thought-provoking study by Texas A&M economists Joseph Ura and Erica Socker concluded that “starving the beast” does exactly the opposite of the theory. And it’s at the root of the fiscal mess in the U.S.
Tax cuts actually increase demand for government services, in the same way that lowering the price of gas increases consumption. The result is ever-expanding budget deficits, according to Mr. Ura and Ms. Socker. Tax cuts create a “fiscal illusion” – a sense that life is good and a “perception” that government services are better value.
The result is much like price controls, the economists say in their study, “Budget Deficits and Demand for Government: How Starve the Beast Policies Feed the Machine.”
“Reducing the tax burden without constraining spending creates the illusion of lowering the price of the basket of government goods and services, which, in turn, increases demand for government,” they say.
Even controlling for such variables as inflation, unemployment and the level of domestic spending, the study finds a statistical link between larger federal deficits and increased public demand for government. In essence, one follows the other.
The key for policymakers, according to Mr. Ura and Ms. Socker, is to steer clear of “revenue policies that obscure the actual costs of government programs and services.”
So-called tax breaks don’t shrink governments, they swell deficits – The Globe and Mail http://www.theglobeandmail.com/report-on-business/commentary/barrie-mckenna/so-called-tax-breaks-dont-shrink-governments-they-swell-deficits/article2283394/.
Formal publication as “The Behavioral Political Economy of Budget Deficits: How Starve the Beast Policies Feed the Machine” | Joseph Daniel Ura and Erica M. Socker, (Texas A&M University) | The Forum, v9, n2, at http://dx.doi.org/10.2202/1540-8884.1430
Working paper as “Budget Deficits and Demand for Government: How Starve the Beast Policies Feed the Machine” | Joseph Daniel Ura and Erica M. Socker, (Texas A&M University) | September 28, 2010 | SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684162