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Policy Brief 09-1

Did Reagan Rule In Vain? A Closer Look at True Expenditure Levels in the United States and Europe

by Jacob Funk Kirkegaard, Peterson Institute for International Economics

January 2009

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Conventional wisdom holds that the United States is a country of low taxes and small government, while the European countries have much larger governments with a higher tax burden. Fully measuring the role of government in a society, however, requires more than a comparison of tax burdens or the gross size of government spending in GDP terms. A proper accounting of the total share of national economic output allocated to governmental tasks and social expenditures in the United States and Europe calls this supposed transatlantic difference into question.

European countries do have a much higher tax burden than the United States. However, healthcare and educational services, including tertiary education, are overwhelmingly provided by the government in Europe, while in the United States these services are much more often provided through the private sector. When private-sector spending on education and healthcare are combined with total government spending, the share of GDP allocated to these typically governmental functions in the United States is nearly identical to that in most European countries. Likewise, European countries have much higher levels of public social expenditures than the United States, but when the tax treatment of social benefits and tax breaks targeted to social purposes are considered, total public and private-sector social expenditures in the United States and Europe are quite similar. Thus there is very little difference between the United States and Europe in the share of resources allocated to governmental tasks and social expenditures, with the exception of much higher US private-sector healthcare expenditures. There is, however, little empirical evidence that higher private-sector US healthcare spending produces noticably better healthcare outcomes.

Equal existing total levels of expenditures suggests that reform of US social and economic institutions does not require greater total resources, but instead an adjustment of how and to what purposes these resources are allocated. The more extensive provision of frequently tax-benefitted governmental and social services indirectly through the private sector in the United States further shields recipient groups from the public scrutiny usually given to direct government transfers. Similarly, tax-benefitted indirect services provision may explain why Americans are more hostile to higher taxes than Europeans, who generally receive these services as a direct quid pro quo from their governments and are thus likely more disposed to paying taxes.


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