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To Starve or Not to Starve the Beast?

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  • Michael Kumhof
  • Daniel Leigh
  • Douglas Laxton

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/199.

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Length: 36
Date of creation: 01 Sep 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/199

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Keywords: Budget deficits; Economic models; Fiscal analysis; Government expenditures; Tax reductions; government spending; tax cut; capital income; fiscal policy; tax cuts; real interest rate; labor income; spending cuts; private consumption; taxation; expenditure adjustment; marginal propensity to consume; the marginal propensity to consume; tax rates; household welfare; tax revenue; public debt; budget constraint; fiscal policies; government budget; consumption taxes; income effect; government budget constraint; aggregate demand; tax increases; tax policy; consumption per capita; fiscal deficits; general equilibrium; household consumption; discretionary fiscal policy; tax base; expenditure restraint; fiscal expansion; consumer demand; public spending; fiscal policy on consumption; increase in consumption; fiscal impact; consumer spending; fiscal rules; consumption tax; tax authority; aggregate consumption; public finance; fiscal authority; business cycles; household wealth; tax payments; capital accumulation; tax reform; consumption function; consumption goods;

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References

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Starve the beast?
    by Economic Logician in Economic Logic on 2010-11-08 15:06:00

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