Reconceptualizing the size of our government, part 2

Since taking a public finance class at school, I’ve always felt that using federal tax revenue as a percentage of GDP as a proxy for government size is a bit misleading.   (I’ve written about this before here.)

First, America is a pretty decentralized country in comparison to most developed nations, so the total tax a person pays will vary greatly from state to state.  Second, our tax code provides a lot of breaks for specific items, and those breaks should be counted as government expenditure.  For example, deducting mortgage interest from income lowers the amount an individual pays to the government, and that dollar amount is a subsidy to the individual for home ownership.  Foregoing the revenue is equivalent to raising the money in taxes and giving it to the homeowner.  The same goes when someone uses a work vehicle as a personal vehicle and so deducts expenses.

Courtesy of Chris Edwards

Third, donations to charity are deductible.  The amount of tax revenue lost to charitable deductions should be counted towards the size of our government.  This is the same principle as point two: any government policy which allows for tax deductions counts as an expansion of government.

Finally, we spend a lot more than we raise in tax revenue (kinda the whole point of this blog), so the size of our government is actually much bigger than tax receipts suggest.  This is the point made by Chris Edwards at the Cato Institute.  The Cato Institute is much farther right than I am, but Chris’ point is right: government spending as a percentage of GDP is a more accurate measure.  (Here is Matt Yglesias’ take on the situation.)  I would extend this further, however, and say that the more accurate measure is to look at the cost of servicing our debt.  Though the interest on our debt is the lowest in the world, it still means that we’re on the hook for a little more than the current figure of 42% suggests.

One quick critique of Edwards though.  He holds up Australia, Canada, Holland, and New Zealand as examples of countries which have successfully reduced the relative size of their government.  All these countries have universal health care, and Australia’s government is smaller than America’s.  So a large part of our problem is how we spend the money, not not having enough money.