Aieeee! Run for your lives!

With the glib confidence of an unreconstructed Lysenkoist, the National Review hoots at Jonathan Rauch's recent article about the fallacy of tax cuts as economic cure-all. Rauch focuses on a study on taxation vs. government spending conducted by Cato institute chair William Niskanen:

Niskanen recently analyzed data from 1981 to 2005....When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush.

Niskanen's explanation for this is simple economics: if you cut tax rates by 20%, people are essentially getting government services at a 20% discount. And when people are offered a discount, they tend to buy more of what's for sale.

Ah, but those hardy supply-siders at NR still believe that tax cuts will eventually 'starve the beast':

While Niskanen has accounted for the effects of the business cycle, he has not taken account of the possibility that tax cuts cause spending cuts after a few years. It may be, for example, that Ronald Reagan’s tax cuts helped doom Bill Clinton’s push for socialized medicine.

Oh, really? How?

And even if it were the case that tax cuts do not, by themselves, make it easier to cut spending, that would hardly negate the economic case for cutting taxes that punish saving, investment, and work.

It would only prove that there is no easy way to get a welfare state to reduce spending. And that is something that unhappy experience should already have taught us.

Should have, but didn't. Wishful thinking and pixie dust were so much more appealing.