How Big Is the Federal Government?

The federal government is larger than conventional budget measures suggest. Many tax preferences are effectively spending programs. Adding these spending-like tax 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 not only as a tax increase but also as a spending increase because it would boost the value of many tax preferences. Cutting tax preferences can thus reduce the size of government, while raising tax rates would increase it. Treating user fees as government receipts rather than negative spending, finally, leads to similar changes in measures of government size. The views in this paper are those of the authors alone and do not represent the views of the Urban Institute, its board, or its funders. The paper was presented at the National Tax Association Meetings, New Orleans, Louisiana, November 17, 2011. An edited version of the paper will appear in an upcoming edition of the conference proceedings.