Tax Policy Center: 'Hidden Spending' Makes Government Bigger

Monday, 02 Apr 2012 12:37 PM

By Michael Kling

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The federal government is even larger than thought because many tax breaks that are really government expenditures aren't counted as spending, argues a new study from the Tax Policy Center.

If these "tax preferences" are counted as spending, the federal government would take up another 4 percent of GDP, according to a new report, written by Donald Marron, Tax Policy Center director, and co-director Eric Toder.

The government often uses tax breaks as a tool to reach its social or economic goals, the report notes.

Editor's Note:The IRS’ Worst Nightmare — How to Pay Zero Taxes

For instance, Congress lets homeowners deduct mortgage interest to encourage homeownership and gives tax credits to companies making ethanol and biodiesel to promote alternative fuels, notes CNNMoney.

The size of the government and its spending is frequently debated, but measuring its size is not easy, the report notes. People use the ratio of spending to GDP or the ratio of tax revenues to GDP, but those numbers don't take into account tax deductions, credits and other tax preferences.

By official accounts, the government spent 19.6 percent of gross national product in 2007, the report says. But if spending masquerading as tax cuts was counted, its spending would amount to 23.7 percent.

Plus, fees such as Medicare premiums are used to reduce government spending, but they're really government income. If they were counted as income, government spending would consume over a fourth of GDP.

"Traditional budget measures understate both the amount that the government effectively collects in revenue and the amount that it effectively spends in pursuit of social and economic goals," the report states.

"These breaks may be labeled differently, but they serve the same function as government spending," argues an editorial in The New York Times that says the country has too many tax breaks.

"If we eliminated them all and replaced them with regular spending on the same set of objectives, the budget would look very different," the editorial says. "It would become apparent that initiatives are much more costly than we think."

Editor's Note:The IRS’ Worst Nightmare — How to Pay Zero Taxes



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