The Federal Government Spends Lots More than You Think

By :: March 26th, 2012

When we talk about the federal budget, we usually rely on the government’s official definition of “spending” which is to say the amount of money that’s run through federal agencies.

But, in reality, the federal government spends a lot more than that. Using a broader definition of spending, which includes hundreds of billions in dollars of tax subsidies, my Tax Policy Center colleagues Donald Marron and Eric Toder have concluded that government spends 30 percent more than it admits.

Just take a look at this chart:

It shows three measures of spending in 2007 (Donald and Eric picked 2007 so they wouldn't get tangled in the stimulus, financial market and auto bailouts, and all of the other temporary outlays that government made in response to the 2008-2009 financial meltdown).

The column on the left shows how much spending shows up on government’s official books.  The one in the middle includes what Donald and Eric call Spending-like Tax Preferences (SLTP): Tax subsidies that substitute for spending. Often, Congress dropped these initiatives into the tax code solely to hide the fact that they are spending.

Take the mortgage interest deduction. Instead of giving homeowners a tax subsidy, Congress could just as easily have had the Federal Housing Administration or some other agency write every homeowner a check to lower their monthly mortgage payments. Now, it may be more efficient to run this subsidy through the tax code. But a tax deduction is no less a subsidy than that check.

This is policy that fails what the lawyers like to call the duck test:  If it looks like spending and quacks like spending, it is spending-- even it resides in the Internal Revenue Code.

The last column adds another $230 billion in user fees and premiums (which government bean-counters like to call negative spending or offsetting receipts). By adding them back, the study shows the gross cost of programs such as Medicare, not just the part that is unfunded by those fees and premiums.

Add it all up and, in 2007, the government didn’t spend $2.7 trillion--the number that appears in the federal budget—it really spent the equivalent of $3.5 trillion.

Keep in mind that Eric and Donald didn’t include all tax expenditures in their calculations. They left out  provisions such as low tax rates on capital gains, the step-up in basis for gains at death, 401(k)s, and accelerated depreciation of plant and equipment, none of which are quite equivalent to spending.  That made their calculation of spending smaller than it might have been.

But they included many other well-known tax preferences, such as the exclusion for employer-sponsored health insurance, and deductions for mortgage interest, most state and local taxes, and most charitable gifts, as well as the Earned Income Tax Credit (the government already does treat the refundable portion of such credits as spending).

This study is important for two reasons:

First, it provides a much more transparent look at how big government actually is.

Second, it creates an interesting perspective when you look at plans to cut tax rates while scaling back these tax preferences. Looked at through Donald and Eric’s prism, trimming many of those subsidies is not raising taxes at all, but cutting spending.  And maybe, just maybe, framing them that way may make those cuts possible.


  1. The Federal Government Spends Lots More than You Think | Tax Information  ::  1:54 pm on March 26th, 2012:

    […] The Federal Government Spends Lots More than You Think Posted in News Tags: budget, congress, donald-marron, federal-housing, government, […]

  2. Michael Bindner  ::  3:33 pm on March 26th, 2012:

    Tax expenditures can be very good things, especially if they are aimed at the poor. The real question on such tax spending is whether we can do it more efficiently by channelling such benefits through employer based consumption taxes or an offset to payroll taxes and paid either through wages or a smart card. The current method of paying them at the end of the year through tax preparation services, often using high interest refund anticipation loans, is not acceptable.

  3. AMTbuff  ::  3:33 pm on March 26th, 2012:

    Not to mention the health insurance mandate, which was an attempt to achieve a result similar to nationalized health care while keeping most of the expenditure off-budget. That’s one of the lines of argument in the Supreme Court case: When the direct tax and spend approach has insufficient public support, can the elected branches evade accountability to the public by pretending that these expenditures are purely private? Must the elected branches be honest about the size of government, or are they permitted to mandate expenditures on everyone in the interest of evading political accountability for expansion of government?

  4. Michael Bindner  ::  4:32 pm on March 26th, 2012:

    the health insurance exclusion is a tax benefit included in the analysis.

  5. AMTbuff  ::  5:58 pm on March 26th, 2012:

    Yes, Michael, but if the government orders you to spend $12000 per year on health insurance that’s a $12000 increase is the size of government. If you were already counting $3000 (the approximate tax difference between excluding $12000 and not excluding it from taxable income) as the tax expenditure, then the increase in the size of government due to the mandate is only $9000. This forced expense should be counted as a government spending program, and it’s much larger than the tax expenditure.

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