Tuesday, November 22, 2011

Starving the Beast

It’s called ‘starving the beast’: the theory that a constant, consistent reduction in taxes will result in smaller government. A government that has a reduced income stream will, out of necessity, reduce its expenditures and inevitably shrink in size.

The starving process can take many forms. Reduction in income tax rates, particularly at the higher income levels. A reduction in the number of income tax rates, i.e., eliminating the progressivity of the tax rates, thus reducing the volume of dollars coming into the government coffers. Tax caps on government, such as the recent 2% cap imposed on local governments in New York State. Creative tax breaks that favor certain segments of the economy, which has the two-fold impact of reducing tax revenues and reducing supposedly ‘onerous’ regulatory burdens on the market.

Each of these methods has been used in the past 30 years, the result of the ‘Reagan revolution’ of conservative government. We can all argue about whether it has really reduced the size of government; most of the numbers demonstrate that it has not, primarily because governments find creative ways around them. 

Such tactics have had disastrous affects at the state and local government level, where government is obligated to balance its budget annually -- unlike the federal government, they can't print money.  California's education system is frequently held up as an example:  once the leader in the nation, that state's education system suffers from poor school performance and failing infrastructure, as the tax investment has dwindled due to 'proposition 2 1/2', which placed a limit on property taxes.  Over the past 30 years, the State has not filled the gap.

A mandated squeeze on taxes forces governments at all levels to make choices, to prioritize where the revenues are spent. And the impact is not always pretty – because the decisions tend to favor those with money and power. Health care, education, food assistance, unemployment programs are targets for cuts, while tax abatement and business investment loan programs are funded.

Meanwhile, those at the top of the income pyramid get to keep an ever-increasing percentage of their money. Reagan and his disciples – the Grover Norquists of the world -- believe that such a system permits the dollars to ‘trickle down’ to those in lower income brackets, as those with money would invest in the market, expanding opportunities for all.

It hasn’t happened.

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