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To starve or not to starve the beast?

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  • Kumhof, Michael
  • Laxton, Douglas
  • Leigh, Daniel

Abstract

For thirty years, prominent voices have advocated a policy of starving the beast – cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions, the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Suggested Citation

  • Kumhof, Michael & Laxton, Douglas & Leigh, Daniel, 2014. "To starve or not to starve the beast?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 1-23.
    • Handle: RePEc:eee:jmacro:v:39:y:2014:i:pa:p:1-23
    DOI: 10.1016/j.jmacro.2013.10.005
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    2. Peter A. Schmid, 2013. "The destabilizing effect of company income taxation," Society and Economy, Akadémiai Kiadó, Hungary, vol. 35(3), pages 365-388, September.
    3. Konov, Joshua Ioji, 2012. "Market Economy under Rapid Globalization and Rising Productivity," MPRA Paper 48750, University Library of Munich, Germany.

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    More about this item

    Keywords

    Starve-the-beast; Budget deficits; Government debt; Non-Ricardian behavior; Welfare analysis;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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