If Tax Cuts Make the Government Bigger, How Can We Starve the Beast?

I mentioned Daniel Shaviro’s contention that tax cuts actually make the government bigger. , Jonathan Baron and Edward J. McCaffery make the case for “starving the beast:”

Abstract: Many opponents of big government favor a strategy of “starving the beast,” cutting taxes today with the expectation that spending cuts will follow tomorrow. Why might such a strategy work? Various heuristics and biases help to explain how it can. In two experiments conducted on the World Wide Web, subjects chose general levels of taxation and public spending from various hypothetical starting points. Subjects wanted to reduce both taxes and spending, preferring balanced budgets and even surpluses to deficits. When asked about specific spending cuts, however, subjects showed a marked reluctance to make cuts, leading to deficits. Subjects also showed an anchor and underadjustment bias, changing their responses in light of various baselines, and failing to completely close existing deficits. The “starving the beast” phenomenon, by pairing specific tax cuts with the general, abstract idea of spending cuts, can thus succeed in a population preferring fiscal balance. Once the deficit is created, it will likely persist, influencing future policy preferences.

From In the flea market’s rise, an economic saga by Patrik Jonsson, Christian Science Monitor :

Once a quaint way to spend Saturday afternoon, flea-marketing has found its place in an emerging “social economy” that is supporting those on the lower rungs of the American economy, say experts. These days, 1 in 7 Americans relies on this informal economy… ¶ The growth of that “informal economy” has increased the amount of cash in circulation per American from $1,105 in to $2,455 in  — and untaxed goods account for some 10 percent of the gross national product…