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Report: Gov't May Be Bigger Than You Think

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"The time has come for serious reform."

CNN Money asks a simple question: Which costs the federal government more? Cutting a check for $2,100 or giving a tax break worth $2,100?

Apparently, they cost the same, according to CNN Money and the Urban-Brookings Tax Policy Center. Wait a minute. How does that work?

“[Because] in terms of policymaking, many tax breaks are the functional equivalent of cash,” CNN Money reports.

But the tax break isn't counted as spending. In fact, while the check for $2,100 is classified as “federal spending,” the tax break doesn’t even show up on the federal budget. So when you hear a policymaker talk about lowering the deficit or expanding/reducing the size of government, most of them don’t factor in tax breaks.

The CNN report goes on to argue that because tax breaks get the same results as government checks (e.g. giving homeowners deductions on mortgage interest, giving tax credits to "green" energy companies, etc), they're practically interchangeable, right?

Not quite: the government check is directly funded by taxpayers while the tax break comes at a cost to no one.

But this is not to say that tax breaks should be disregarded from the deficit discussion. As taxes generate income, and fixing the deficit is all about balancing revenue with expenditures, then tax breaks should be included.

In fact, some analysts including Donald B. Marron, director of the Tax Policy Center and former director of the Congressional Budget Office, and Eric Toder believe tax breaks should counted as spending in the federal budget.

Let's momentarily put aside the argument that tax breaks are the "functional equivalent of cash" and take Marron's advice by including tax breaks in the federal budgeting -- do you know what this means? It mean the government actually takes up a bigger chunk of the economy than is typically reported because tax breaks (“clear spending substitutes”) haven't been counted as spending, Marron and center co-director Eric Toder conclude in their report.

“In 2007, for example, federal spending was officially recorded as 19.6 percent of GDP. If you add in the tax preferences that Eric [Toder] and I believe are effectively spending (the SLTPs), that figure rises to 23.7 percent,” Marron writes.

“In round terms, the government was one-fifth larger than traditional budget figures indicate,” he adds.

Graph Source: dmarron.com

And it’s not just "tax preferences" that are excluded from budgeting discussions.

“User fees and other ‘offsetting receipts’ that come in to the government, such as Medicare premiums, are simply used to reduce reported government spending,” CNN Money reports, “They're not actually counted as a revenue source, which is effectively what they are.”

So wait, wouldn't this also add to the size of government? According to Marron and CNN Money -- yes.

"...[add back] user fees and premiums to get the full size of the federal government: 25.4 percent of GDP in 2007," Marron writes.

But why should the feds start adding "user fees," "premiums," and "tax preferences" to their budget and deficit discussions?

CNN Money answers:

For one thing, it would help change the conversation about deficit reduction and tax reform. Policymakers could gain a fresh perspective on how much the government spends -- both directly and through the tax code.

And does Marron have to say?

The time has come for serious reform. America needs to fix its broken tax system and find additional revenue to help reduce our persistent budget deficits. The best way to achieve both aims is to take a hatchet to the thicket of spending-like tax preferences. Many preferences should simply be eliminated; those deemed to serve important policy goals should be restructured to be simpler, fairer, and more effective. Lawmakers can then use the resulting revenue to cut tax rates across the board and reduce the deficit.

Such reform is long overdue. It won't be easy, but the enormity of our budget problems may finally be enough to get liberals, moderates, and conservatives to join together to get it done.

Of course, these conclusions and recommendations are wholly contingent upon whether or not one actually believes tax breaks are the "functional equivalent of cash" or whether the government "giving up" revenue it hasn't earned is the same thing as handing out a taxpayer-funded check.

This story has been updated.

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