To Starve or not to Starve the Beast?

Author/Editor: Kumhof, Michael ; Laxton, Douglas ; Leigh, Daniel
Publication Date: September 01, 2010
Electronic Access: Free Full text (PDF file size is 976KB).
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 10/199
Subject(s): Budget deficits | Cross country analysis | Economic models | Fiscal analysis | Fiscal policy | Government expenditures | Tax policy | Tax reductions | United States | Welfare

Author's Keyword(s): Starve-the-beast | tax cuts | spending cuts | budget deficits | government debt | non-Ricardian behavior | welfare analysis.
Publication Date: September 01, 2010
Format: Paper
Stock No: WPIEA2010199 Pages: 36
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