Starve the Beast: Still the Path to Smaller Government?

“Starve the beast” has been the go-to strategy of American conservatives to restrain government spending since the 1970s, but in light of the reality of ever-increasing profligacy and ballooning debt and deficits even in the face of repeated tax cuts, “starve the beast” has gotten a bad rap. My hot take is that this bad rap is entirely undeserved, and that tax-cut strategies have indeed served to restrain government spending.

One might ask incredulously “how can this be?” After all, the Trump administration pushed through a big tax cut and then proceeded to balloon the federal budget, as did the Bush administration before it…and the previous Bush administration, and the Reagan administration. Every single Republican Presidency after the 1970s tax revolts resonated within the conservative movement in fact!

Starve the Beast actually works?

A fair critique, but we should consider this in light of the broader context. Every recent Democratic administration except one, Bill Clinton’s, has also ballooned federal spending and the budget deficit, and have tended to hike taxes. Say what you want about “starve the beast”, but “feed the beast” appears to be at least as ineffective at first glance.

Upon a second glance too, it turns out; all the studies that have been done on the topic collectively come to the surprisingly robust conclusion that tax hikes tend to result in spending hikes, and not just spending hikes in tandem with the tax hikes, spending hikes as in for every $1 of new tax revenue raised spending goes up by something like $2!

These findings are often deployed in arguments against tax hikes, but the unsung corollary of these findings that “feed the beast” backfires is that “starve the beast” actually works! It’s just that there is a background trend of growth in government spending, so a modest tax cut results in slowing the rate of growth in government spending relative to what it would have been otherwise, as opposed to triggering actual spending cuts.

Nevertheless, it follows logically that a sufficiently strong application of “starve the beast” would overwhelm the background trend and tend to result in actual spending cuts, shrinking the size of government. It’s just that the amount of tax-cutting needed to do this is beyond anything the Republicans have ever seriously contemplated.

The Trump tax cuts were among the bigger ones enacted in recent history, but even they come to $1.5 trillion. That sounds like a big number, but it’s over the course of 10 years, so it amounts to $150 billion per year; for comparison federal revenue at the time was $3.3 trillion. So it only cut federal revenues by 4.5% total. To be fair that might be expected to have some effect, but it’s just not that peppy.

Be careful what you wish for?

Worse still, conservatives’ wishful thinking that “tax cuts pay for themselves!” turns out to be true to some extent; cutting taxes really does seem to boost the economy, and hence federal revenues. In related news, by 2021 the federal government was enjoying record-high revenues after the biggest year-over-year surge in 44 years!

“Tax cuts pay for themselves” might help sell people on the idea of cutting taxes, but if tax cuts lead to federal revenues actually increasing then per “starve the beast” theory they won’t lead to spending cuts, because for “starve the beast” to actually work to shrink government spending (instead of just slowing down its growth) federal revenues need to decrease!

Indeed, federal revenues have tended to increase through thick and thin, so per starve-the-beast’s own assumptions we should expect spending to go up, possibly by more than the revenues have increased, which is in fact what has happened!

Republicans’ conflicting Goals

The big obstacle to realizing a true “starve the beast” strategy is that Republicans want tax cuts to pay for themselves so they can shrink the deficit without having to enact allegedly unpopular spending cuts, and they also want the tax code to be simpler and flatter, often holding some version of a flat tax up as the ideal.

From some technocratic perspective (I’m looking at you, Beltway Libertarians!) a broad tax base with a low flat rate might be the ideal, but politically it’s hard to realize, because making the income tax system flatter means cutting taxes primarily for rich people.

Republicans try to square this circle by saying the benefits trickle down throughout the whole economy, and to a large extent that’s even true (Trump’s corporate tax cuts resulted in a lot of pay and benefit increases!), but the fact remains ordinary people are much more motivated by getting their taxes cut directly than by any kind of trickle-down (or trickle-up even!) benefit from other people’s taxes getting cut.

A simpler tax code, while beneficial in many respects, also impinges upon a mindbogglingly wide variety of special interest groups, many of which are comprised of rather ordinary people. Trying to take their tax loopholes away from them stokes opposition from these groups.

Opposition is stoked so much by these ancillary goals that the most Republicans can do when they enjoy a trifecta is pass a modest tax cut primarily targeted toward rich people that takes a few loopholes away from the less-powerful interest groups, which never results in anything more than a slowdown in spending growth.

The Mellon Tax Cuts: lighting the Way to a different Path?

Depressing stuff, but alternative and more visionary approaches seem to be viable. Notably, the Harding and Coolidge administrations, under the guidance of their Treasury Secretary Andrew W. Mellon, seemed to prioritize simply cutting taxes over goals like flatness or simplicity far more than any subsequent Republican administration. They also managed to cut taxes much more than any subsequent Republican administration. Probably not a coincidence.

Abolish Payroll Taxes!

As insipid as the Trump tax cuts were, Donald Trump himself had moments of greater vision, such as when he proposed in 2020 to abolish payroll taxes altogether. Now that’s something that could really starve the beast! So much so it elicited gasps from many quarters as a threat to Social Security and Medicare; he was on the scent! Only to, in true Trumpian fashion, backtrack and forget the whole thing soon thereafter.

Nevertheless, the fact remains: if all payroll taxes were gotten rid of that would shrink federal revenues by $1.4 trillion…per year. Over the course of ten years that amounts to a $14 trillion tax cut!

It also amounts to an instant 15% (!) hike in take-home pay for all but the highest-income workers. For the median American household, which earns $70,000 per year, their taxes would be cut by $10,710 per year. That’s $892 per month extra put right into their pockets! Kinda horrifying to contemplate most people are paying that much in just payroll taxes, but it could be made into a really big idea politically. Indeed, it’s surprising to me Republicans haven’t already coalesced behind a payroll tax cut.

Raise the Standard Deduction, by a Lot!

Another really easy and powerful idea would be drastically increasing the standard deduction for the federal income tax proper. Currently it stands at $12,000, already increased modestly by the Trump tax reform (after one accounts for getting rid of the personal exemption), but it could stand to be increased much further.

Indeed, it’s kind of insulting that you have to pay tax on income after your first $12,000 per year, which isn’t even enough to cover the median person’s housing costs, let alone the other essentials of living. $30,000 really ought to be the bare minimum; simply tripling the standard deduction, to $36,000, would attain that figure, and be a great talking point in the next election.

That would already be a drastic tax cut targeted right at the low-income and working-class, but an even peppier idea would be hiking the standard deduction to $100,000, which would eliminate income taxes for middle-income people altogether.

More Tax Cuts for the 99%

Peppier still would be raising the standard deduction to exempt all but the top 1% from paying income taxes, which would be a deduction of a whopping $540,000. Due to progressive tax rates and today’s steep income inequality this drastic step would only eliminate 60% of federal income tax revenue, since the top 1% pay about 40% of the income taxes.

Raising the standard deduction to $540,000, 45 times what it is now (!), would cut federal revenues by $772 billion per year, amounting to an $8 trillion tax cut over the course of ten years.

Together with abolishing payroll taxes that amounts to a $22 trillion tax cut over the course of 10 years. If that doesn’t starve the beast and lead to real spending cuts down the road I don’t know what will.

All excise taxes, including the federal gas tax, amount to $87 billion a year, so let’s call that $1 trillion over 10 years and eliminate those too. Gas prices, phone bills, and the like would all see substantial reductions, helping out poorer people still further.

Cancel all Federal Student Loans!

The icing on the top of all this would be terminating all federally-held student loan debt. After all, the effect of canceling student debt is reducing revenues to the federal government, which coupled with the mass movement for terminating student debt is an obvious way for starve-the-beast to appeal to young, poor, highly-educated people, a demographic the Republicans would do well to try to make inroads into.

The federal government collects $70 billion in revenue from student loan payments per year; over the course of ten years eliminating that is a $700 billion tax cut, making forgiving student loan debt an obvious choice for any serious “starve the beast” program, or even any general tax cut program at all. Republicans, you have a left-wing groundswell for cutting federal revenues right under your noses and you balk at giving them the tax cut! What are you people, politically suicidal or something? It’s an easy win!

Pushing at an Open Door in the GOP?

One could go further, but we’re already at a $24 trillion tax cut, so that might do for now. Interestingly, $24 trillion isn’t all that much larger than what many Republican Presidential candidates proposed in 2016; tax cut proposals from them ran around $10 trillion. For perspective, all federal revenue put together amounts to $39 trillion over ten years.

The reason the $10 trillion proposals were whittled down to $1 trillion or so was the narrowness of the Republicans’ Congressional majority; with their natural advantage in the Senate falling into place, the next couple of good cycles for the GOP will see their Senate majority expand to well above 60 seats, with a House majority cresting the high-water mark achieved in 2014. The next Republican President may well have a big enough Congressional majority to get a tax cut amounting to $10 trillion or perhaps even more.

If such a trifecta ever falls into place, they should focus on getting as drastic a tax cut as possible targeted toward the poor and working class who are increasingly trending their way.

Crazy, or Crazy enough to Work?

Is an unfunded $24 trillion tax cut, complete with eliminating payroll taxes for all, eliminating income taxes for the bottom 99%, eliminating all federal excise taxes, and eliminating student loan payments, a crazy plan? Perhaps. Is it totally fiscally irresponsible? Maybe. But given the tantalizing hints that it actually works I’d like to see what “starve the beast” can really do. We might just get the chance in a few election cycles’ time.

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