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How Much Does the Federal Government Really Spend?

Thursday, September 29, 2011

Much, much more than you think.

The size of government is of particular interest these days, with many Americans believing that rising government spending is crowding out the ability of individuals and businesses to control their own well-being and improve the economy. Indeed, Gallup reported last week that, on average, Americans think the federal government wastes 50 cents of each dollar it spends.

But how much does the federal government really spend?

On paper, the Congressional Budget Office reports that in 2010, the federal government spent $3.456 trillion, an amount that is equal to 23.8 percent of gross domestic product. That’s one-quarter higher than the historical norm of around 19 percent of GDP.

But direct spending isn’t the only spending Washington does. As Lori Montgomery reports in the Washington Post, last year the federal government spent an additional $1.08 trillion on tax expenditures, which are tax breaks that for all intents and purposes are spending.

The total sway of the federal government over the private sector equals roughly 39 percent of the economy, a larger portion then in prior decades.

From the mortgage interest deduction to employer-provided health coverage to credits for purchasing corporate jets, these tax expenditures reduce individual and corporate taxes only if the individuals and corporations do what the government would like them to do. Rent a house? No tax break. Buy your own health insurance rather than have your employer provide it? Same story. Buy a corporate boat rather than jet? Nope, no tax cut for you.

That $1.08 trillion in tax expenditures is 24 percent of all federal spending, and is all off the books, allowing a much bigger government than official statistics tell—and much bigger than people might be willing to tolerate if they knew.
Tax expenditures, as Senator Daniel Patrick Moynihan said, are “boob bait for the bubbas,” with the bubbas being conservative Republicans who will support anything that calls itself a tax cut even if it walks, talks, and quacks like government spending.

Put it all together and the federal government spends an amount equal to 31.2 percent of GDP—that is, almost one-third of everything produced in the economy.

Moreover, according to the Congressional Research Service, tax expenditures have grown by about 24 percent relative to the size of the economy since 1974, from 5.8 percent of GDP to 7.2 percent. So not only do tax expenditures add to overall government spending, they’re adding more today than they did 37 years ago.

Tax expenditures are ‘boob bait’ for bubbas—conservative Republicans who will support anything that calls itself a tax cut even if it walks, talks, and quacks like government spending.

On top of this you have the cost of government regulations, which also amount to de facto federal spending because they impose costs on businesses which are used to further policy goals. A recent report from the Small Business Administration’s Office of Advocacy finds that the total cost of federal regulations was $1.175 trillion, equal to over $8,000 per employee or 8.1 percent of gross domestic product.

Add regulations to the mix and the total sway of the federal government over the private sector equals roughly 39 percent of the economy, a larger portion than in prior decades. And, as the baby boom generation retires and entitlement costs skyrocket, the federal share of GDP will rise even further.

We can argue regarding the costs and benefits of larger government; but we should not argue that larger government is in fact what we have today.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: Biggs also writes “Means Testing and Its Limits,” “State Pension Hole Is Much Deeper Than Official Estimates,” “Are Taxpayers Getting Their Money's Worth?” “Should the Retirement Age Be Raised?” and “Comparing Federal and Private Sector Compensation.”

Image by Rob Green | Bergman Group

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