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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.

Suggested Citation

  • Michael Kumhof & Daniel Leigh & Douglas Laxton, 2010. "To Starve or Not to Starve the Beast?," IMF Working Papers 10/199, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/199
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    References listed on IDEAS

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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 21:06:00

    More about this item

    Keywords

    Cross country analysis; Budget deficits; Fiscal analysis; Economic models; Government debt; Government expenditures; Fiscal policy; Tax policy; United States; Tax reductions; Starve-the-beast; tax cuts; spending cuts; non-Ricardian behavior; welfare analysis; government spending; tax cut; capital income; National Deficit Surplus;

    JEL classification:

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

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