There’s a debate among policy wonks about whether a no-tax-hike policy is an effective way of restraining the burden of government spending.
At the risk of over-simplifying, the folks who support the “starve the beast” theory argue that there are political and/or economic limits to government borrowing, so if you don’t let politicians tax more, you indirectly impose a cap on total spending (outlays = tax revenue + borrowing limit). We’ll call this the STB approach, for obvious reasons.
Critics of the theory, by contrast, say that a low-tax policy creates fiscal illusion by making government spending seem artificially cheap. After all, standard microeconomic analysis tells us that people will demand more of something when the perceived price is low (get a $1 of spending for 80 cents of tax = recipe for higher outlays). We’ll call this the “pay for government” approach, or PFG.
There’s almost surely some truth to both arguments, but the real issue if whether one effect is dominant – particularly in the long run. In other words, should supporters of small government fight tax increases? Or welcome them?
Hussman's Open Letter to the Fed; The Problem with Bubbles; Textbook Pre-Crash Bubble; Reflections on Not Chasing Bubbles; Integrity vs. Respect | Mike Shedlock