TY  - JOUR
AU  - Romer,Christina D.
AU  - Romer,David H.
TI  - Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13548
PY  - 2007
Y2  - October 2007
UR  - http://www.nber.org/papers/w13548
L1  - http://www.nber.org/papers/w13548.pdf
N1  - Author contact info:
Christina D. Romer
Department of Economics
University of California, Berkeley
549 Evans Hall, #3880
Berkeley, CA 94720
Tel: 510/642-4317
Fax: 510/642-6615
E-Mail: cromer@econ.berkeley.edu

David H. Romer
Department of Economics
University of California
Berkeley, CA 94720-3880
E-Mail: dromer@econ.berkeley.edu
AB  - The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes.  However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias.  To deal with these problems, this paper examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending.  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.  Examination of four episodes of major tax cuts reinforces these conclusions.
ER  -