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To Starve or Not to Starve the Beast?

Author

Listed:
  • Mr. Michael Kumhof
  • Mr. Daniel Leigh
  • Mr. 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

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

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    Cited by:

    1. Peter A. Schmid, 2013. "The destabilizing effect of company income taxation," Society and Economy, Akadémiai Kiadó, Hungary, vol. 35(3), pages 365-388, September.
    2. Vanda Almeida & Gabriela Castro & Ricardo Mourinho Félix & José R. Maria, 2013. "Fiscal Consolidation in a Small Euro-Area Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 1-38, December.
    3. Konov, Joshua Ioji, 2012. "Market Economy under Rapid Globalization and Rising Productivity," MPRA Paper 48750, University Library of Munich, Germany.

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    More about this item

    Keywords

    WP; present discounted value; utility function; Starve-the-beast; tax cuts; spending cuts; budget deficits; government debt; non-Ricardian behavior; welfare analysis; discount factor; government spending cut; contractionary consumption effect; eliminated government spending; share parameter; factor of firm; expenditure adjustment; Real interest rates; Government consumption; Discount rates; Consumption; Global;
    All these keywords.

    JEL classification:

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

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