In a new paper, my Tax Policy Center colleague Eric Toder and I argue that the federal government is larger than conventional budget measures suggest. Why? Because many tax preferences are effectively spending programs. Adding these “spending-like tax preferences” back to federal spending and revenues gives a better picture, we think, of the federal government’s true size.
In 2007, for example, federal spending was officially recorded as 19.6 percent of GDP. If you add in the tax preferences that Eric and I believe are effectively spending (the SLTPs), that figure rises to 23.7 percent. In round terms, the government was one-fifth larger than traditional budget figures indicate:
And that’s not all. We also consider the many user fees and premiums that the government charges for various services, ranging from regulatory activity (e.g., patent fees) to Medicare premiums. Such payments are treated as negative spending in official budget calculations. This is sometimes done as a pure budget gimmick to make the government look smaller. More often, however, it’s done for a good reason: to focus on government activities that are funded collectively. That’s an important thing to measure when budgeting. But it’s not the only one. If you want to know how much economic activity is occurring through government agencies, you should consider the gross size of those activities, not just the net. The third column thus adds back user fees and premiums to get the full size of the federal government: 25.4 percent of GDP in 2007.
Eric and I would be the first to argue that the size of government, by itself, tells you little. Small governments can be dysfunctional, and large ones can be well-run. But government size plays a central role in many political discussions. Given that attention, we think it’s worthwhile to consider whether existing measures fairly capture its true size.
And, as a crucial corollary, whether they fairly capture the implications of potential policy changes. As I will discuss in a subsequent post, our measure of government size has several important implications. For example, some “tax increases” (e.g., closing loopholes and reducing many other tax preferences) actually make the government smaller.
P.S. The figures in our paper are based on information from the administration’s 2012 budget. Some historical figures have changed slightly since then, due to revisions in GDP and budget figures.