Saturday, April 28, 2012

Measuring the Size of Government

Looking at the federal budget only tells part of the story; the rest is hidden in "spending through the tax code," aka, tax expenditures.   This paper by Donald Marron & Eric Toder [pdf] lays it out:
"The federal government is larger than conventional budget measures suggest. Many tax preferences are effectively spending programs. Adding these preferences to federal outlays and receipts makes the government appear about 4 percent of GDP larger. The 1986 tax reform cut these benefits, but they have since rebounded to a larger share of GDP than before. Using this broader measure of government size, many base-broadening reforms viewed as tax increases would be reclassified as spending cuts. Raising marginal tax rates would be recorded as a tax increase and a spending increase because it would boost the value of many tax preferences."
Ezra Klein has a couple of posts on it, here and here.  I explain tax expenditures to my students only after doing a lengthy bit of work on the nature of income.   I'm not at all sure how a non-tax audience understands tax expenditures.  

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