research paper on government spending

Does Government Spending Cause Investment?: A Panel Data Analysis

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• Nihal Bayraktar 3  

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Government spending has increased recently in almost all countries to ease the severely negative economic impacts of the current health crisis. Similar expansionary fiscal and monetary policies were observed during other economic downturns too. The effectiveness of expansionary policies, especially in terms of their effects on investment, has been discussed widely. Thanks to the possible multiplier effect of higher government expenditures, it is expected that government spending would generate a higher amount of income and therefore consumption in economies. At some point, this higher government spending with glowing economic activities is expected to increase private investment—an important item to promote job creations and improvements in production. Although one of the direct or indirect expected outcome of higher government spending is larger investment, many empirical studies in the literature cannot observe this positive expected effect of government spending on investment. As a result, even the necessity of increased government expenditures during economic crisis has been questioned. In this paper, the causal and correlation relationship between government spending and investment is investigated in a panel data setting to better evaluate the importance of higher government spending during economic downturns. The findings show that country classifications based on income, time periods covered in the analysis, measures of government spending and investment, and the time lag of government policies can make a difference. There are cases where government spending highly significantly causes private investment, and high correlations between two variables are observed. Therefore, accurate evaluations of the impacts of government spending on investment may require detailed data analysis.

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Penn State University—Harrisburg, Middletown, PA, USA

Nihal Bayraktar

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Appendix: List of Countries

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Bayraktar, N. (2021). Does Government Spending Cause Investment?: A Panel Data Analysis. In: Tsounis, N., Vlachvei, A. (eds) Advances in Longitudinal Data Methods in Applied Economic Research. ICOAE 2020. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-63970-9_13

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Estimating the Incidence of Government Spending

This paper analyzes the economic incidence of sustained changes in federal government spending at the local level. We use a new identification strategy to isolate geographical variation in formula-based federal spending and develop three sets of results. First, we find that sustained changes in federal spending have significant effects on migration, income, wages, and rents, as well as on local government revenues and expenditures. Second, we show that the effects of a government spending shock are qualitatively different from those of a local labor demand shock. We develop a spatial equilibrium model to show that when workers value publicly-provided goods, a change in government spending at the local level will affect equilibrium wages through shifts in both the labor demand and supply curves. We test the reduced-form predictions of the model and show that workers value government services as amenities. Finally, we estimate workers’ marginal valuation of government services and find that unskilled workers have a higher valuation of government services than skilled workers. We use these estimates to decompose the demand and supply components of a government spending shock and to evaluate the impacts on welfare that are produced by increasing government spending in a given area. Our estimates conclude that an additional dollar of government spending increases welfare by $1.45 in the median county.

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Regions & Countries

6 facts about americans’ views of government spending and the deficit.

As President Joe Biden and congressional Republicans continue to negotiate on raising the U.S. debt ceiling , the public has nuanced views on related issues such as the preferred size of government, the amount of government assistance to the poor, and the priority of reducing the budget deficit. Here are six facts about Americans’ views of the government, spending and the deficit based on Pew Research Center surveys from this year.

Pew Research Center conducted this analysis to provide insight into the public’s views about the size of government and aspects of government spending and revenue as President Joe Biden and Congress continue negotiations around the debt ceiling. For this analysis, we included data from two surveys in 2023: one with 5,152 U.S. adults conducted Jan. 18-24 and the second with 5,079 U.S. adults conducted March 27-April 2.

Everyone who took part in these surveys is a member of the Center’s American Trends Panel (ATP), an online survey panel that is recruited through national, random sampling of residential addresses. This way nearly all U.S. adults have a chance of selection. The survey is weighted to be representative of the U.S. adult population by gender, race, ethnicity, partisan affiliation, education and other categories. Read more about the ATP’s methodology .

Here is the question from the Jan. 18-24 survey used in this analysis, along with responses, and its methodology . Here are materials for the questions on taxes and government size and role from the March 27-April 2 survey, along with its methodology .

The public remains split on what the government’s size should be. About half of Americans (49%) say they would rather have a bigger government providing more services, while a similar share (48%) would prefer a smaller government providing fewer services, according to a Center survey conducted March 27-April 2. These views have remained relatively stable since 2019. Democrats and Democratic-leaning independents are more than three times as likely as Republicans and Republican leaners to say they would prefer a bigger government (75% vs. 22%).

The public is also divided on the role of government. While 52% say government should be doing more to solve problems, 46% say government is doing too many things that would be better left to businesses and individuals. These attitudes are also deeply divided along partisan lines: While about three-quarters of Democrats (77%) say the government should do more to solve problems, a similar share of Republicans (75%) say the government is doing too many things.

Americans are more likely to want to increase than reduce the size of the U.S. military. About four-in-ten Americans (43%) say that the size of the U.S. military should be increased, compared with 17% who say it should be reduced; 38% say it should be kept about as is. The share of the public saying the military should expand has risen 6 percentage points since July 2021. Currently, military spending makes up about 12% of the overall federal budget but nearly half of so-called discretionary spending, which excludes entitlement programs such as Social Security and Medicare.

Republicans are far more likely than Democrats (62% vs. 27%) to favor increasing the size of the military. There also are age differences: Older adults are more supportive than younger adults when it comes to expanding the size of the military.

More Americans also favor increasing, rather than reducing, government aid to the poor. While 43% favor increasing aid to the poor, 26% say the government should provide less assistance, and 30% say the current level of aid is about right. Democrats are much more likely than Republicans to say the government should provide more assistance to those in need, but Republicans’ views vary by age and income. Younger and lower-income Republicans are more likely than older and higher-income Republicans to say that the government should provide more assistance to those in need.

Majorities favor raising taxes on large companies and high earners. About two-thirds of Americans (65%) say that tax rates on large businesses and corporations should be raised. A somewhat similar share (61%) support raising tax rates on household incomes over $400,000. On both questions, Democrats are much more likely than Republicans to say that tax rates should be increased.

Reducing the budget deficit is a higher priority for the public than it was last year. The share of the public saying that reducing the budget deficit should be a top priority for the president and Congress this year has increased by 12 points since 2022, according to a January 2023 Center survey . Today, 57% say that reducing the budget deficit should be a top priority, compared with 45% in 2022. Both Republicans and Democrats are more likely now than in 2022 to say this should be a top priority, but Republicans are still much more likely to prioritize this than Democrats are (71% vs. 44%).

Note: Here is the question from the Jan. 18-24 survey used in this analysis, along with responses, and its methodology . Here are materials for the questions on taxes and government size and role from the March 27-April 2 survey, along with its methodology .

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Congress has long struggled to pass spending bills on time

What the data says about food stamps in the u.s., inflation, health costs, partisan cooperation among the nation’s top problems, 5 facts about the u.s. national debt, most popular.

About Pew Research Center Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions. It is a subsidiary of The Pew Charitable Trusts .

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The Impact of Government Spending on Economic Growth

Key takeaways.

Most government spending has a negative economic impact.

The deficit is not the critical variable. The key is the size of government, not how it is financed.

There is overwhelming evidence that government spending is too high and that America's economy could grow much faster if the burden of government was reduced.

Select a Section 1 /0

For more on government spending, read Brian Reidl's new paper "Why Government Does Not Stimulate Economic Growth" ------

For more information, see the supplemental appendix to this paper. Policymakers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programs provide valuable "public goods" such as education and infrastructure. They also claim that increases in government spending can bolster economic growth by putting money into people's pockets.

Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies-such as fundamental tax reform and personal retirement accounts- because critics can use the existence of budget deficits as a reason to oppose policies that would strengthen the economy.

Which side is right?

This paper evaluates the impact of government spending on economic performance. It discusses the theoretical arguments, reviews the international evidence, highlights the latest academic research, cites examples of countries that have significantly reduced government spending as a share of national economic output, and analyzes the economic consequences of those reforms. 1 The online supplement to this paper contains a comprehensive list of research and key findings.

This paper concludes that a large and growing government is not conducive to better economic performance. Indeed, reducing the size of government would lead to higher incomes and improve America's competitiveness. There are also philosophical reasons to support smaller government, but this paper does not address that aspect of the debate. Instead, it reports on-and relies upon-economic theory and empirical research. [1]

The Theory: Economics of Government Spending

Economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance. Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth and other circumstances in which higher levels of government spending would be desirable.

If government spending is zero, presumably there will be very little economic growth because enforcing contracts, protecting property, and developing an infrastructure would be very difficult if there were no government at all. In other words, some government spending is necessary for the successful operation of the rule of law. Figure 1 illustrates this point. Economic activity is very low or nonexistent in the absence of government, but it jumps dramatically as core functions of government are financed. This does not mean that government costs nothing, but that the benefits outweigh the costs.

Costs vs. Benefits. Economists will generally agree that government spending becomes a burden at some point, either because government becomes too large or because outlays are misallocated. In such cases, the cost of government exceeds the benefit. The downward sloping portion of the curve in Figure 1 can exist for a number of reasons, including:

• The extraction cost. Government spending requires costly financing choices. The federal government cannot spend money without first taking that money from someone. All of the options used to finance government spending have adverse consequences. Taxes discourage productive behavior, particularly in the current U.S. tax system, which imposes high tax rates on work, saving, investment, and other forms of productive behavior. Borrowing consumes capital that otherwise would be available for private investment and, in extreme cases, may lead to higher interest rates. Inflation debases a nation's currency, causing widespread economic distortion.
• The displacement cost. Government spending displaces private-sector activity. Every dollar that the government spends necessarily means one less dollar in the productive sector of the economy. This dampens growth since economic forces guide the allocation of resources in the private sector, whereas political forces dominate when politicians and bureaucrats decide how money is spent. Some government spending, such as maintaining a well-functioning legal system, can have a high "rate-of-return." In general, however, governments do not use resources efficiently, resulting in less economic output.
• The negative multiplier cost. Government spending finances harmful intervention. Portions of the federal budget are used to finance activities that generate a distinctly negative effect on economic activity. For instance, many regulatory agencies have comparatively small budgets, but they impose large costs on the economy's productive sector. Outlays for international organizations are another good example. The direct expense to taxpayers of membership in organizations such as the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) is often trivial compared to the economic damage resulting from the anti-growth policies advocated by these multinational bureaucracies.
• The behavioral subsidy cost. Government spending encourages destructive choices. Many government programs subsidize economically undesirable decisions. welfare programs encourage people to choose leisure over work. Unemployment insurance programs provide an incentive to remain unemployed. Flood insurance programs encourage construction in flood plains. These are all examples of government programs that reduce economic growth and diminish national output because they promote misallocation or underutilization of resources.
• The behavioral penalty cost. Government spending discourages productive choices. Government programs often discourage economically desirable decisions. Saving is important to help provide capital for new investment, yet the incentive to save has been undermined by government programs that subsidize retirement, housing, and education. Why should a person set aside income if government programs finance these big-ticket expenses? Other government spending programs-Medicaid is a good example-generate a negative economic impact because of eligibility rules that encourage individuals to depress their incomes artificially and misallocate their wealth.
• The market distortion cost. Government spending distorts resource allocation. Buyers and sellers in competitive markets determine prices in a process that ensures the most efficient allocation of resources, but some government programs interfere with competitive markets. In both health care and education, government subsidies to reduce out-of-pocket expenses have created a "third-party payer" problem. When individuals use other people's money, they become less concerned about price. This undermines the critical role of competitive markets, causing significant inefficiency in sectors such as health care and education. Government programs also lead to resource misallocation because individuals, organizations, and companies spend time, energy, and money seeking either to obtain special government favors or to minimize their share of the cost of government.
• The inefficiency cost. Government spending is a less effective way to deliver services. Government directly provides many services and activities such as education, airports, and postal operations. However, there is evidence that the private sector could provide these important services at a higher quality and lower cost. In some cases, such as airports and postal services, the improvement would take place because of privatization. In other cases, such as education, the economic benefits would accrue by shifting to a model based on competition and choice.
• The stagnation cost. Government spending inhibits innovation. Because of competition and the desire to increase income and wealth, individuals and entities in the private sector constantly search for new options and opportunities. Economic growth is greatly enhanced by this discovery process of "creative destruction." Government programs, however, are inherently inflexible, both because of centralization and because of bureaucracy. Reducing government-or devolving federal programs to the state and local levels-can eliminate or mitigate this effect.

Spending on a government program, department, or agency can impose more than one of these costs. For instance, all government spending imposes both extraction costs and displacement costs. This does not necessarily mean that outlays-either in the aggregate or for a specific program-are counterproductive. That calculation requires a cost-benefit analysis.

Do deficits Matter?

The Keynesian Controversy. The Economics of government spending is not limited to cost-benefit analysis. There is also the Keynesian debate. In the 1930s, John Maynard Keynes argued that government spending-particularly increases in government spending-boosted growth by injecting purchasing power into the economy. [2] According to Keynes, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs.

This "pump priming" concept did not necessarily mean that government should be big. Instead, Keynesian theory asserted that government spending-especially deficit spending-could provide short-term stimulus to help end a recession or depression. The Keynesians even argued that policymakers should be prepared to reduce government spending once the economy recovered in order to prevent Inflation, which they believed would result from too much economic growth. They even postulated that there was a tradeoff between Inflation and unemployment (the Phillips Curve) and that government officials should increase or decrease government spending to steer the economy between too much of one or too much of the other.

Keynesian economics was very influential for several decades and dominated public policy from the 1930s-1970s. The theory has since fallen out of favor, but it still influences policy discussions, particularly on whether or not changes in government spending have transitory economic effects. For instance, some lawmakers use Keynesian analysis to argue that higher or lower levels of government spending will stimulate or dampen economic growth.

The "Deficit Hawk" Argument. Another related policy issue is the role of budget deficits. Unlike Keynesians, who argue that budget deficits boost growth by injecting purchasing power into the economy, some economists argue that budget deficits are bad because they allegedly lead to higher interest rates. Since higher interest rates are believed to reduce investment, and because investment is necessary for long-run economic growth, proponents of this view (sometimes called "deficit hawks") assert that avoiding deficits should be the primary goal of fiscal policy.

While deficit hawks and Keynesians have very different views on budget deficits, neither school of thought focuses on the size of government. Keynesians are sometimes associated with bigger government but, as discussed above, have no theoretical objection to small government as long as it can be increased temporarily to jump-start a sluggish economy. By contrast, the deficit hawks are sometimes associated with smaller government but have no theoretical objection to large government as long as it is financed by Taxes rather than borrowing.

The deficit hawk approach to fiscal policy has always played a role in economic policy, but politics sometimes plays a role in its usage. During much of the post-World War II era, Republicans complained about deficits because they disapproved of the spending policies of the Democrats who controlled many of the levers of power. In more recent years, Democrats have complained about deficits because they disapprove of the tax policies of the Republicans who control many of the levers of power. Presumably, many people genuinely care about the impact of deficits, but politicians often use the issue as a proxy when fighting over tax and spending policies in Washington.

The Evidence: Government Spending and Economic Performance

Economic theory is important in providing a framework for understanding how the world works, but evidence helps to determine which economic theory is most accurate. This section reviews global comparisons and academic research to ascertain whether government spending helps or hinders economic performance.

Worldwide Experience. Comparisons between countries help to illustrate the impact of public policy. One of the best indicators is the comparative performance of the United States and Europe. The "old Europe" countries that belong to the European Union tend to have much bigger governments than the United States. While there are a few exceptions, such as Ireland, many European governments have extremely large welfare states.

As Chart 1 illustrates, government spending consumes almost half of Europe's economic output-a full one-third higher than the burden of government in the U.S. Not surprisingly, a large government sector is associated with a higher tax burden and more government debt. Bigger government is also associated with sub-par economic performance. Among the more startling comparisons:

• Per capita economic output in the U.S. in 2003 was $37,600-more than 40 percent higher than the $26,600 average for EU-15 nations. [3]
• Real economic growth in the U.S. over the past 10 years (3.2 percent average annual growth) has been more than 50 percent faster than EU-15 growth during the same period (2.1 percent). [4]
• The U.S. unemployment rate is significantly lower than the EU-15 unemployment rate, and there is a stunning gap in the percentage of unemployed who have been without a job for more than 12 months-11.8 percent in the U.S. versus 41.9 percent in EU-15 nations. [5]
• Living standards in the EU are equivalent to living standards in the poorest American states-roughly equal to Arkansas and Montana and only slightly ahead of West Virginia and Mississippi, the two poorest states. [6]

Blaming excessive spending for all of Europe's economic problems would be wrong. Many other policy variables affect economic performance. For instance, over-regulated labor markets probably contribute to the high unemployment rates in Europe. Anemic growth rates may be a consequence of high tax rates rather than government spending. Yet, even with these caveats, there is a correlation between bigger government and diminished economic performance.

The Academic Research. Even in the United States, there is good reason to believe that government is too large. Scholarly research indicates that America is on the downward sloping portion of the Rahn Curve -- as are most other industrialized nations. In other words, policymakers could enhance economic performance by reducing the size and scope of government. The supplement to this paper includes a comprehensive review of the academic literature and a discussion of some of the methodological issues and challenges. This section provides an excerpt of the literature review and summarizes the findings of some of the major economic studies.

The academic literature certainly does not provide all of the answers. Isolating the precise effects of one type of government policy-such as government spending-on aggregate economic performance is probably impossible. Moreover, the relationship between government spending and economic growth may depend on factors that can change over time.

Other important methodological issues include whether the model assumes a closed economy or allows international flows of capital and labor. Does it measure the aggregate burden of government or the sum of the component parts? These are all critical questions, and the answers help drive the results of various studies.

The effort is further complicated by the challenge of identifying the precise impact of government spending:

• Does spending hinder economic performance because of the Taxes used to finance government?
• Would the economic damage be reduced if government had some magical source of free revenue?
• How do academic researchers measure the adverse economic impact of government consumption spending versus government infrastructure spending?
• Is there a difference between military and domestic spending or between purchases and transfers?

There are no "correct" answers to these questions, but the growing consensus in the academic literature is persuasive. Regardless of the methodology or model, government spending appears to be associated with weaker economic performance. For instance:

• A European Commission report acknowledged: "[B]udgetary consolidation has a positive impact on output in the medium run if it takes place in the form of expenditure retrenchment rather than tax increases." [7]
• The IMF agreed: "This tax induced distortion in economic behavior results in a net efficiency loss to the whole economy, commonly referred to as the 'excess burden of taxation,' even if the government engages in exactly the same activities-and with the same degree of efficiency-as the private sector with the tax revenue so raised." [8]
• An article in the Journal of Monetary Economics found: "[T]here is substantial crowding out of private spending by government spending.…[P]ermanent changes in government spending lead to a negative wealth effect." [9]
• A study from the Federal Reserve Bank of Dallas also noted: "[G]rowth in government stunts general economic growth. Increases in government spending or Taxes lead to persistent decreases in the rate of job growth." [10]
• An article in the European Journal of Political Economy found: "We find a tendency towards a more robust negative growth effect of large public expenditures." [11]
• A study in Public Finance Review reported: "[H]igher total government expenditure, no matter how financed, is associated with a lower growth rate of real per capita gross state product." [12]
• An article in the Quarterly Journal of Economics reported: "[T]he ratio of real government consumption expenditure to real GDP had a negative association with growth and investment," and "Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment." [13]
• A study in the European Economic Review reported: "The estimated effects of GEXP [government expenditure variable] are also somewhat larger, implying that an increase in the expenditure ratio by 10 percent of GDP is associated with an annual growth rate that is 0.7-0.8 percentage points lower." [14]
• A Public Choice study reported: "[A]n increase in GTOT [total government spending] by 10 percentage points would decrease the growth rate of TFP [total factor productivity] by 0.92 percent [per annum]. A commensurate increase of GC [government consumption spending] would lower the TFP growth rate by 1.4 percent [per annum]." [15]
• An article in the Journal of Development Economics on the benefits of international capital flows found that government consumption of economic output was associated with slower growth, with coefficients ranging from 0.0602 to 0.0945 in four different regressions. [16]
• A Journal of Macroeconomics study discovered: "[T]he coefficient of the additive terms of the government-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%." [17]
• A study in Public Choice reported: "[A] one percent increase in government spending as a percent of GDP (from, say, 30 to 31%) would raisethe unemployment rate by approximately .36 of one percent (from, say, 8 to 8.36 percent)." [18]
• A study from the Journal of Monetary Economics stated: "We also find a strong negative effect of the growth of government consumption as a fraction of GDP. The coefficient of -0.32 is highly significant and, taken literally, it implies that a one standard deviation increase in government growth reduces average GDP growth by 0.39 percentage points." [19]
• The Organisation for Economic Co-operation and Development acknowledged: "Taxes and government expenditures affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure-e.g. two-thirds of what was observed over the past decade in the OECD sample- could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent." [20]
• A National Bureau of Economic Research paper stated: "[A] 10 percent balanced budget increase in government spending and taxation is predicted to reduce output growth by 1.4 percentage points per annum, a number comparable in magnitude to results from the one-sector theoretical models in King and Robello." [21]
• Another National Bureau of Economic Research paper stated: "A reduction by one percentage point in the ratio of primary spending over GDP leads to an increase in investment by 0.16 percentage points of GDP on impact, and a cumulative increase by 0.50 after two years and 0.80 percentage points of GDP after five years. The effect is particularly strong when the spending cut falls on government wages: in response to a cut in the public wage bill by 1 percent of GDP, the figures above become 0.51, 1.83 and 2.77 per cent respectively." [22]
• An IMF article confirmed: "Average growth for the preceding 5-year period…was higher in countries with small governments in both periods. The unemployment rate, the share of the shadow economy, and the number of registered patents suggest that small governments exhibit more regulatory efficiency and have less of an inhibiting effect on the functioning of labor markets, participation in the formal economy, and the innovativeness of the private sector." [23]
• Looking at U.S. evidence from 1929-1986, an article in Public Choice estimated: "This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government expenditures represent about 20% of GDP." [24]
• An article in Economic Inquiry reported: "The optimal government size is 23 percent (+/-2 percent) for the average country. This number, however, masks important differences across regions: estimated optimal sizes range from 14 percent (+/-4 percent) for the average OECD country to…16 percent (+/-6 percent) in North America." [25]
• A Federal Reserve Bank of Cleveland study reported: "A simulation in which government expenditures increased permanents from 13.7 to 22.1 percent of GNP (as they did over the past four decades) led to a long-run decline in output of 2.1 percent. This number is a benchmark estimate of the effect on output because of permanently higher government consumption." [26]

Spending Control Success Stories

Both economic theory and empirical evidence suggest that government should be smaller. Yet is it possible to translate good economics into public policy? Even though many policymakers understand that government spending undermines economic performance, some think that special-interest groups are too politically powerful and that reducing the size of government is an impossible task. Since the burden of government has relentlessly increased during the post- World War II era, this is a reasonable assumption.

Moreover, there is a concern that the transition to smaller government may be economically harmful. In other words, the economy may be stronger in the long run if the burden of government is reduced, but the short-run consequences of spending reductions could make such a change untenable. This Keynesian analysis is much less prevalent today than it was 30 years ago, but it is still part of the debate.

There are examples of nations that have successfully reduced the burden of government during peacetime. [27] They show that it is possible to reduce government spending-sometimes by dramatic amounts. In all of these examples, policymakers enjoyed political and economic success. For instance:

• Ronald Reagan dramatically reversed the direction of public policy in the United States. Government-especially domestic spending-was growing rapidly when he took office. Measured as a share of national output, President Reagan reduced domestic discretionary spending by almost 33 percent, down from 4.5 percent of GDP in 1981 to 3.1 percent of GDP in 1989.

Reagan's track record on entitlements was also impressive. When he took office, entitlement spending was on a sharp upward trajectory, peaking at 11.6 percent of GDP in 1983. By the time he left office, entitlement spending consumed 9.8 percent of economic output.

As a result of these dramatic improvements, Reagan was able to reduce the total burden of government spending as a share of economic output during his presidency while still restoring the nation's military strength. [28] Table 1 shows Reagan's impressive performance compared to other Presidents, measured by the real (inflation-adjusted) growth of federal spending.

• Bill Clinton was surprisingly successful in controlling the burden of government, particularly during his first term. His record was greatly inferior to Ronald Reagan's, and some of the credit probably belongs to the Republicans in Congress, but Clinton managed to preside over the second most frugal record of any President in the post-World War II era. Domestic discretionary spending fell from 3.4 percent of GDP to 3.1 percent of GDP, and entitlement spending dropped from 10.8 percent of GDP to 10.5 percent of GDP. [29]

These were modest reductions compared to Ronald Reagan, and many of them evaporated during Clinton's second term once a budget surplus materialized and undermined fiscal discipline. Nonetheless, when combined with reasonable economic growth and the "peace dividend" made possible by President Reagan's victory in the Cold War, the total burden of federal spending fell as low as 18.4 percent of GDP in 2000, the lowest level since 1966. [30]

• Ireland has dramatically changed its fiscal policy in the past 20 years. In the 1980s, government spending consumed more than 50 percent of economic output, and high tax rates penalized productive behavior. This led to economic stagnation, and Ireland became known as the "sick man of Europe." However, the government decided to act. As one economist explained, "After a stagnant 13-year period with less than 2 percent growth, Ireland took a more radical course of slashing expenditures, abolishing agencies and toppling tax rates and regulations." [31]

The reductions in government were especially impressive. A Joint Economic Committee report explained: "This situation was reversed during the 1987-96 period. As a share of GDP, government expenditures declined from the 52.3 percent level of 1986 to 37.7 percent in 1996, a reduction of 14.6 percentage points." [32] As Chart 2 illustrates, Ireland has been able to keep government from creeping back in the wrong direction. Little wonder that a writer for the Financial Post wrote that "Ireland's biggest export was people until the country adopted enlightened trade, tax and education policies. Now it is the Celtic Tiger." [33]

• New Zealand has an equally impressive record of fiscal rejuvenation. Government spending has plunged from more than 50 percent of GDP to less than 40 percent of economic output. One former government minister justifiably bragged:

When we started this process with the Department of Trans-portation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee.… We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees. [34]

It is especially amazing that New Zealand was able to accomplish so much is such a short period of time. In the first half of the 1990s, "Real spending per capita fell by 12 percent." [35] This fiscal reform, combined with other free-market policies, helped New Zealand recover from economic stagnation.

• Slovakia is a more recent success story, but it may prove to be the most dramatic. After suffering from decades of communist oppression and socialist mismanagement, Slovakia is becoming the Hong Kong of Europe. With a 19 percent flat tax and a private social security system, Slovak leaders have charted a bold course that includes significant reductions in the burden of government. As Chart 3 demonstrates, government spending has plummeted in just seven years from 65 percent of GDP to 43 percent of GDP.

Policymakers in the United States should seek to replicate these successes. A smaller government will lead to better economic performance, and it also is the only pro-growth way to deal with the politically sensitive issue of budget deficits.

Even a modest degree of discipline can quickly generate a balanced budget. As Chart 4 illustrates, a spending freeze balances the budget in two to three years, and limiting the growth of spending to the rate of Inflation balances the budget in four to five years. Even if spending is allowed to grow by 4 percent each year, the budget deficit quickly shrinks-even if the Bush tax cuts are made permanent.

Other Economic Policy Choices Matter

The size of government has a major impact on economic performance, but it is just one of many important variables. The Index of Economic Freedom , published annually by The Heritage Foundation and The Wall Street Journal , thoroughly examines the factors that are correlated with prosperity, finding that the following policy choices also have important effects independent of the level of government spending:

• Tax Policy. The tax system has a pronounced impact on economic performance. For instance, the federal tax burden in the U.S. is about 17 percent of GDP, which is less than the aggregate tax burden in Hong Kong. Yet, since Hong Kong has a low-rate flat tax that generally does not penalize saving and investment, it raises revenue in a much less destructive manner. Similarly, the current U.S. tax system raises about the same level of revenue as it did 25 years ago, but the associated economic costs are lower because marginal tax rates have been reduced on work, saving, investment, and entrepreneurship.
• Monetary Policy. The monetary regime will help or hinder a nation's economy. Inflation can quickly destroy economic confidence and cripple investment. By contrast, a stable monetary system provides an environment that is conducive to economic activity.
• Trade Policy. A nation's openness to trade exerts a powerful impact on economic prosperity. Governments that restrict trade with protectionist policies saddle their nations with high costs and economic inefficiencies. Conversely, free trade improves economic efficiency and boosts living standards.
• Regulatory Policy. Bureaucracy and red tape have a considerable effect on a country's economy. Deregulated markets encourage the efficient allocation of resources since decisions are based on economic factors. Excessive regulation, by contrast, can result in needlessly high costs and inefficient behavior.
• Private Property. Independent of the level of government spending, the presence of private property rights plays a crucial role in an economy's performance. If government owns or controls resources, political forces are likely to dominate economic forces in determining how those resources are allocated. Likewise, if private property is not secured by both tradition and law, owners will be less likely to utilize resources efficiently. In other words, for any particular level of government spending, the security of private property rights will have a strong effect on economic performance.

These five factors are certainly not an exhaustive list. Other factors that determine a nation's economic performance include the level of corruption, openness of capital markets, competitiveness of financial system, and flexibility of prices. The 2005 Index of Economic Freedom contains a thorough analysis of the role of all these factors in promoting economic growth. [36]

Government spending should be significantly reduced. It has grown far too quickly in recent years, and most of the new spending is for purposes other than homeland security and national defense. Combined with rising entitlement costs associated with the looming retirement of the baby-boom generation, America is heading in the wrong direction. To avoid becoming an uncompetitive European-style welfare state like France or Germany, the United States must adopt a responsible fiscal policy based on smaller government.

Budgetary restraint should be viewed as an opportunity to make an economic virtue out of fiscal necessity. Simply stated, most government spending has a negative economic impact. To be sure, if government spends money in a productive way that generates a sufficiently high rate of return, the economy will benefit, but this is the exception rather than the rule. If the rate of return is below that of the private sector-as is much more common-then the growth rate will be slower than it otherwise would have been. There is overwhelming evidence that government spending is too high and that America's economy could grow much faster if the burden of government was reduced.

The deficit is not the critical variable. The key is the size of government, not how it is financed. Taxes and deficits are both harmful, but the real problem is that government is taking money from the private sector and spending it in ways that are often counterproductive. The need to reduce spending would still exist-and be just as compelling-if the federal government had a budget surplus. Fiscal policy should focus on reducing the level of government spending, with particular emphasis on those programs that yield the lowest benefits and/or impose the highest costs.

Controlling federal spending is particularly important because of globalization. Today, it is becoming increasingly easy for jobs and capital to migrate from one nation to another. This means that the reward for good policy is greater than ever before, but it also means that the penalty for bad policy is greater than ever before.

This may be cause for optimism. A study published by the IMF, which certainly is not a free-market institution, has stated:

As the international economy becomes more competitive, and as capital and labor become more mobile, countries with big and especially inefficient governments risk falling behind in terms of growth and welfare. When voters and industries realize the long-term benefits of reform in such an environment, they and their representatives may push their governments toward reform. In these circumstances, policymakers find it easier to overcome the resistance of special-interest groups. [37]

For most of America's history, the aggregate burden of government was below 10 percent of GDP. [38] This level of government was consistent with the beliefs of the America's founders. As the IMF has explained, "classical economists and political philosophers generally advocated the minimal state-they saw the government's role as limited to national defense, police, and administration." [39] America's policy of limited government certainly was conducive to economic expansion. In the days before income tax and excessive government, America moved from agricultural poverty to middle-class prosperity.

Reducing government to 10 percent of GDP might be a very optimistic target, but shrinking the size of government should be a major goal for policymakers. The economy certainly would perform better, and this would boost prosperity and make America more competitive.

Daniel J. Mitchell, Ph.D. , is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1] Daniel J. Mitchell, "Academic Evidence: A Growing Consensus Against Big Government," supplement to Daniel J. Mitchell, "The Impact of Government Spending on Economic Growth," Heritage Foundation Backgrounder No. 1831, at www.heritage.org/research/budget/bg1831_suppl.cfm . The supplement is available only on the Web. [2] John Maynard Keynes, The General Theory of Employment, Interest and Money (1936), in The General Theory , Vol. 7 of Col­lected Writings of John Maynard Keynes , ed. Donald Moggridge (London: Macmillan for the Royal Economic Society, 1973), at cepa.newschool.edu/het/essays/keynes/gtcont.htm (February 2, 2005).

[3] Organisation for Economic Co-operation and Development, OECD in Figures , 2004 ed. (Paris: OECD Publications, 2004), at www1.oecd.org/publications/e-book/0104071E.pdf (February 2, 2005). The EU-15 are the 15 member states of the Euro­pean Union prior to enlargement in 2004: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

[6] Fredrik Bergström and Robert Gidehag, "EU Versus USA," Timbro , June 2004, at www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf (February 2, 2005).

[7] European Commission, Directorate-General for Economic and Financial Affairs, "Public Finances in EMU, 2003," Euro­pean Economy , No. 3, 2003, at e uropa.eu.int/comm/economy_finance/publications/european_economy/2003/ ee303en.pdf (Febru­ary 2, 2005).

[8] Vito Tanzi and Howell H. Zee, "Fiscal Policy and Long-Run Growth," International Monetary Fund Staff Papers , Vol. 44, No. 2 (June 1997), p. 5.

[9] Shaghil Ahmed, "Temporary and Permanent Government Spending in an Open Economy," Journal of Monetary Economics , Vol. 17, No. 2 (March 1986), pp. 197-224.

[10] Dong Fu, Lori L. Taylor, and Mine K. Yücel, "Fiscal Policy and Growth," Federal Reserve Bank of Dallas Working Paper 0301, January 2003, p. 10.

[11] Stefan Fölster and Magnus Henrekson, "Growth and the Public Sector: A Critique of the Critics," European Journal of Politi­cal Economy , Vol. 15, No. 2 (June 1999), pp. 337-358.

[12] S. M. Miller and F. S. Russek, "Fiscal Structures and Economic Growth at the State and Local Level," Public Finance Review , Vol. 25, No. 2 (March 1997).

[13] Robert J. Barro, "Economic Growth in a Cross Section of Countries," Quarterly Journal of Economics , Vol. 106, No. 2 (May, 1991), p. 407.

[14] Stefan Fölster and Magnus Henrekson, "Growth Effects of Government Expenditure and Taxation in Rich Countries," European Economic Review , Vol. 45, No. 8 (August 2001), pp. 1501-1520.

[15] P. Hansson and M. Henrekson, "A New Framework for Testing the Effect of Government Spending on Growth and Produc­tivity," Public Choice , Vol.81 (1994), pp. 381-401.

[16] Jong-Wha Lee, "Capital Goods Imports and Long-Run Growth," Journal of Development Economics , Vol. 48, No. 1 (October 1995), pp. 91-110.

[17] James S. Guseh, "Government Size and Economic Growth in Developing Countries: A Political-Economy Framework," Journal of Macroeconomics , Vol. 19, No. 1 (Winter 1997), pp. 175-192.

[18] Burton Abrams, "The Effect of Government Size on the Unemployment Rate," Public Choice , Vol. 99 (June 1999), pp. 3-4.

[19] Kevin B. Grier and Gordon Tullock, "An Empirical Analysis of Cross-National Economic Growth, 1951-80," Journal of Monetary Economics , Vol. 24, No. 2 (September 1989), pp. 259-276.

[20] Andrea Bassanini and Stefano Scarpetta, "The Driving Forces of Economic Growth: Panel Data Evidence for the OECD Countries," Organisation for Economic Co-operation and Development Economic Studies No. 33, February 2002, at www.oecd.org/dataoecd/26/2/18450995.pdf (February 2, 2005).

[21] Eric M. Engen and Jonathan Skinner, "Fiscal Policy and Economic Growth," National Bureau of Economic Research Work­ing Paper No. 4223, 1992, p. 4.

[22] Alberto Alesina, Silvia Ardagna, Roberto Perotti, and Fabio Schiantarelli, "Fiscal Policy, Profits, and Investment," National Bureau of Economic Research Working Paper No. 7207, July 1999, p. 4.

[23] Vito Tanzi and Ludger Shuknecht, "Reforming Government in Industrial Countries," International Monetary Fund Finance & Development , September 1996, at www.imf.org/external/pubs/ft/fandd/1996/09/pdf/tanzi.pdf (February 2, 2005).

[24] E. A. Peden , "Productivity in the United States and Its Relationship to Government Activity: An Analysis of 57 Years, 1929-1986," Public Choice , Vol. 69 (1991), pp. 153-173.

[25] Georgios Karras, "The Optimal Government Size: Further International Evidence on the Productivity of Government Ser­vices," Economic Inquiry , Vol. 34, (April 1996), p. 2.

[26] Charles T. Carlstrom and Jagadeesh Gokhale, "Government Consumption, Taxation, and Economic Activity," Federal Reserve Bank of Cleveland Economic Review , 3rd Quarter, 1991, p. 28.

[27] Spending reductions following a war are quite common but tend not to be very instructive since government is almost always bigger after a war than it was before hostilities began.

[28] Office of Management and Budget, Budget of the United States Government, Fiscal Year 2005: Historical Tables (Washington, D.C.: U.S. Government Printing Office, 2004), p. 128, Table 8.4, at www.gpoaccess.gov/usbudget/fy05/pdf/hist.pdf (February 2, 2005).

[30] Ibid. , p. 23, Table 1.2.

[31] Benjamin Powell, "Markets Created a Pot of Gold in Ireland," Cato Institute Daily Commentary , April 21, 2003, at www.cato.org/dailys/04-21-03.html (February 2, 2005). This article was previously published by Fox News on April 15, 2003.

[32] James Gwartney, Robert Lawson, and Randall Holcombe, The Size and Functions of Government and Economic Growth , Joint Economic Committee, U.S. Congress, April 1998, p. 20, at www.house.gov/jec/growth/function/function.pdf (February 2, 2005).

[33] Diane Francis, "Ireland Shows Its Stripes," Financial Post , October 9, 2003.

[34] Maurice McTigue, "Rolling Back Government: Lessons from New Zealand," Imprimis , April 2004, at www.hillsdale.edu/newimprimis/2004/april/default.htm (February 2, 2005).

[35] Bryce Wilkinson, "Restraining Leviathan: A Review of the Fiscal Responsibility Act of 1994," New Zealand Business Roundtable, November 2004, a www.nzbr.org.nz/documents/publications/publications-2004/restraining_leviathan.pdf (Febru­ary 2, 2005).

[36] Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2005 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2005).

[37] Tanzi and Shuknecht, "Reforming Government in Industrial Countries."

[38] See U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, D.C.: U.S. Government Printing Office, 1975).

[39] Tanzi and Shuknecht, "Reforming Government in Industrial Countries."

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• v.112(2); 2021 Apr

Language: English | French

With great inequality comes great responsibility: the role of government spending on population health in the presence of changing income distributions

Department of Community Health & Epidemiology, Dalhousie University, 100 Tucker Park Road, Saint John, NB E2K 5E2 Canada

Daniel J. Dutton

To determine the association between provincial government health and social spending and population health outcomes in Canada, separately for men and women, and account for the potential role of income inequality in modifying the association.

We used data for nine Canadian provinces, 1981 to 2017. Health outcomes and demographic data are from Statistics Canada; provincial spending data are from provincial public accounts. We model the ratio of social-to-health spending (“the ratio”) on potentially avoidable mortality (PAM), life expectancy (LE), potential years of life lost (PYLL), infant mortality, and low birth weight baby incidence. We interact the ratio with the Gini coefficient to allow for income inequality modification.

When the Gini coefficient is equal to its average (0.294), the ratio is associated with desirable health outcomes for adult men and women. For example, among women, a 1% increase in the ratio is associated with a 0.04% decrease in PAM, a 0.05% decrease in PYLL, and a 0.002% increase in LE. When the Gini coefficient is 0.02 higher than average, the relationship between the ratio and outcomes is twice as strong as when the Gini is at its average, other than for PAM for women. Infant-related outcomes do not have a statistically significant association with the ratio.

Overall, outcomes for men and women have similar associations with the ratio. Inequality increases the return to social spending, implying that those who benefit the most from social spending reap higher benefits during periods of higher inequality.

Résumé

Déterminer l’association entre les dépenses sociales et de santé du gouvernement provincial et les conditions de santé de la population du Canada, séparément pour hommes et femmes, et expliquer le role que l’inégalité salariale pourrait jouer dans la modification de cette association.

Méthodes

Nous avons utilisé les données pour neuf provinces canadiennes, de 1981 à 2017. Les conditions de santé et les données démographiques parviennent de Statistiques Canada, les données sur les dépenses provinciales parviennent de comptes publiques provinciaux. Nous avons modélisé le rapport de dépenses social-à-santé (« le rapport ») sur la mortalité potentiellement évitable (MPE), l’espérance de vie (EV), les années de vie potentielles perdues (AVPP), la mortalité d’enfant et l’incidence d’un poids à la naissance faible. Nous interagissons le rapport avec le coefficient de Gini pour permettre la modification d’inégalité salariale.

Résultats

Quand le coefficient de Gini est égal à sa moyenne (0,294), le rapport est associé avec des conditions de santé désirables pour hommes et femmes adultes. Par example, en femmes, une augmentation de 1 % dans le rapport est associé avec une réduction de 0,04 % en MPE, une réduction de 0,05 % en AVPP, et une augmentation de 0,002 % en EV. Quand le coefficient de Gini est 0,02 plus haut que la moyenne, la relation entre le rapport et les résultats est deux fois plus fort que quand le Gini est à sa moyenne, à part la MPE en femmes. Les résultats liés aux nouveau-nés n’ont pas une association statistique significative avec le rapport.

Globalement, les résultats pour hommes et femmes ont des associations semblables avec le rapport. L’inégalité augmente le retour aux dépenses sociales, insinuant que ceux et celles qui profitent le plus de dépenses sociales récoltent plus de bénéfices pendant des périodes de plus grande inégalité.

Introduction

International comparisons of the performance of health care systems have shown that Canada is average in terms of health care system efficiency and health outcomes (Schneider et al. 2017 ; Tchouaket et al. 2012 ). The link between spending and outcomes is sometimes underlined to emphasize a gradient of efficiency across health care systems (Evans et al. 2001 ). The argument that spending on health care in some countries returns more value in terms of health outcomes, and those outcomes are attributable to some form of effective system management, is seemingly intuitive (Cylus et al. 2016 ). There is also a large and overwhelming body of evidence showing the importance of the social determinants of health (generally understood as the circumstances within which people lead their lives) (Lucyk and McLaren 2017 ), and that a potentially large, important, and malleable set of population health determinants are outside of the health care system (Bambra et al. 2010 ). Thus, government spending that achieves population health improvement could come from multiple sources, and attributing all gains in health to health care spending is committing an error known as “the wrong pocket problem” (McCullough 2019 ; Taylor et al. 2016 ).

Canadian and international research have shown that social spending has a higher return to population health outcomes than health spending (i.e., spending on the health care system) when considered jointly (Bradley et al. 2011 , 2016 ; Dutton et al. 2018 ; Rubin et al. 2016 ). These publications operationalize the relative returns to health and social spending as the social-to-health spending ratio (“the ratio”), showing higher levels of the ratio are associated with better measures of mortality (e.g., life expectancy, infant mortality in the United States, cause-specific mortality) and morbidity (e.g., prevalence of obesity, asthma, self-reported activity limitation) across and within countries. Insights like this are used as justification for a Health in All Policies (HiaP) approach to policymaking, intended to circumvent the wrong pockets problem by explicitly valuing the contribution of social spending. HiaP approaches are considered critical by Canadian public health organizations and authorities (Canadian Public Health Association 2017 ; Canadian Public Health Association 2019 ; Government of Canada 2013 ). Research indicates that despite greater emphasis on HiaP, in Canada, social spending has not kept pace with growth in health spending (Dutton et al. 2018 ).

Additionally, there are potentially important distributional considerations as spending benefits are not shared evenly across the population. An analysis of the trends in Canadian social and health spending over different age groups indicates older Canadians have disproportionately benefitted from both types of spending, such that each Canadian under age 45 would need an additional $947 in social spending (in 2016) to equalize the ratio across age groups (Kershaw 2020 ). Thus, important equity differences might be concealed if the ratio is treated as homogeneous across groups.

Gender is one important axis that could play a role in the relationship between population health and public spending. For example, in the event of family dissolution, children are more likely to live with their mother, meaning health outcomes for women might have a stronger association with spending that benefits families with children (Sinha 2014 ). The people who would benefit most from increased social spending are those at the lowest end of the income distribution; they are the ones who use services that provinces in Canada denote as social spending, and it is not clear whether men or women benefit differentially.

Finally, the environment within which the spending occurs is likely important when determining what scenarios would call for additional spending on social services. One factor widely considered important for population health is income inequality; there have been hundreds of studies cataloging the relationship between measures of health and income inequality, complete with debate over mechanisms and relevant policy targets (Chung and Muntaner 2006 ; Kondo 2012 ; Lynch et al. 2004 ; Lynch et al. 2000 ). Generally accepted in this vast literature is that increases in income inequality are at least associated with poorer population health, such that income inequality is potentially a marker of mechanisms at play that imperil health (Coburn 2000 , 2004 ) if not the causal agent responsible for poor health by acting on psycho-social health pathways (Wilkinson 1999 ). In Canada, income inequality has been increasing nationally since at least the 1990s and that has come with an expansion of the share of people working in the lowest-earning jobs (Beach 2016 ). Social spending is designed to mitigate the bad outcomes associated with a poor distribution of the social determinants of health, so it stands to reason that social spending’s return on investment in terms of health outcomes might be higher in the presence of relatively higher income inequality.

Our study explores the issue of gender-stratified health outcomes and their relationship with government spending, and how that relationship changes in the presence of different levels of income inequality. Our objective was to build on previous scholarship on this topic in Canada with a longer time period and gender-disaggregated models and to determine the role of income inequality in potentially modifying the relationship between public spending and health outcomes.

The data for nine Canadian provinces are available for most variables below from 1981 to 2017 (a 37-year time period). Prince Edward Island and the northern territories were excluded because of insufficient data. Our data come from two main sources. Health and demographic data are from Statistics Canada; provincial spending data are from a routinely updated dataset maintained at the University of Calgary’s School of Public Policy that gathers expenditure data from provincial government public accounts (Kneebone and Wilkins 2016 ).

Dependent variables—health outcomes

In this study, we used five dependent variables as health outcomes. These are potentially avoidable mortality (age-standardized rate per 100,000), potential years of life lost (age-standardized rate per 100,000), life expectancy at birth (in years), infant mortality (per 1000 live births), and proportion of low birth weight babies. Potentially avoidable mortality (PAM) refers to premature deaths that could potentially have been avoided through prevention or treatment; potential years of life lost (PYLL) is the difference in the number of years between age at death and expected life expectancy, defined for this indicator as age 75; life expectancy (LE) is the average number of expected years of life at birth; infant mortality (IM) corresponds to the death of a child under 1 year of age; low birth weight (LBW) babies include all births with birth weight less than 2500 g. No data on LBW babies are available for 1981 to 1990 in Newfoundland and Labrador, so we drop Newfoundland and Labrador from our LBW analysis. All of these dependent variables are reported separately for males and females.

Independent variables

The independent variable of interest is the social-to-health spending ratio. The ratio is provincial government spending on social services divided by spending on health care, as reported in the public accounts, in 2017 dollars. Our demographic controls include the percentage of people over 65 years old, the percentage of people living in a rural area, and the total population of each province. Economic controls included the unemployment rate, the median after-tax income (natural log), the after-tax Gini coefficient (an income distribution summary statistic that indicates earning inequality, the coefficient ranges from 0 to 1, with 0 representing perfect equality and 1 representing perfect inequality), and total real provincial expenditure (in billions of dollars). These variables are in line with previous research on the topic (Dutton et al. 2018 ). After-tax income was chosen to represent the median level of resources individuals can use to improve health. After-tax Gini coefficients were chosen to represent the distribution of post-tax income. After-tax Gini coefficients capture the distribution of income after transfers like disability and social assistance payments. Thus, after-tax Gini coefficients are related to the level of social spending, along with labour market forces and incomes earned.

A complete list of data sources for each variable is available in Table ​ Table1 1 .

Data sources for each variable, including Statistics Canada table number where appropriate

Statistical analysis

Our units of analysis are nine provinces over 37 years, 333 total observations. We built a linear regression model for every outcome variable, stratified by men and women, to measure the relationship between the ratio and our health outcomes after controlling the demographic and economic factors. We used a two-way fixed-effect model which includes controls for both (1) time-invariant province-specific factors, accounting for different norms in reporting between provinces, and (2) indicators for province-invariant time-effects, adjusting for secular trends in health. Thus, the covariance between health outcomes and spending which we report has had the impact of time and the impact of province-specific factors partialed out. These models are a standard expansion of the “fixed-effect” or “time-demeaned” models common in panel data analysis.

We are interested in the role income inequality plays in the association between the ratio and health outcomes. To allow for this relationship, we include an interaction term of the Gini coefficient and the ratio in each model to determine if the association between the ratio and health outcomes is modified by economy-wide income inequality. We center the Gini coefficient on its overall average value over our sample (approximately 0.294). In some models, the interaction term was statistically insignificant, in which case we exclude it from the final adjusted model as no effect measure modification was present. In the presence of a statistically significant interaction term, the association between the ratio and the health outcome is given as:

The value β Ratio indicates the relationship between the ratio and the outcome when the Gini coefficient is equal to the average. Since our Gini coefficient variable is multiplied by 100 and is centered on the mean, a value of 1 in the equation above is indicative of a Gini coefficient 0.01 units above the mean.

We report our results for both adjusted and unadjusted models. For all statistical analyses, we used Stata, version 15.

Table ​ Table2 2 displays summary statistics for variables of interest. Health spending exhibits much wider variation than social spending over time with a higher mean value. At no point is social spending (range 0.49 to 1.67 thousand dollars per capita) higher than health spending (range 1.72 to 6.07 thousand dollars per capita), meaning the ratio is always below 1. Figure ​ Figure1’s 1 ’s first panel shows health spending has consistently increased while social spending has remained relatively flat over time, despite provincial variation. Figure ​ Figure1’s 1 ’s second panel shows the ratio trending down overall with more substantial variation than either health or social spending as denoted by coefficients of variation.

Summary statistics for all variables: mean, standard deviation, and range, including relevant units

Health outcomes stratified for men and women

Health spending, social spending, and the ratio of social-to-health spending trends in Canada (and by province) over time. Left panel: health (gold lines) and social (blue lines) spending per capita in thousands of 2017 dollars for each province over time, national average in bold. Right panel: the ratio of social-to-health spending for each province over time, national average in bold

For each health outcome, men have a less desirable mean and greater variation than women, with the sole exception being the proportion of LBW babies. Men have higher PAM than women (387 versus 208 age-standardized rate per 100,000), higher PYLL (6331 versus 3401 age-standardized rate per 100,000), and lower LE (75.9 versus 81.5 years at birth). IM is higher for baby boys (6.9 versus 5.6 per 1000 live births) but LBW baby boys are less prevalent (5.35% versus 6.09%).

Figure ​ Figure2’s 2 ’s left panel displays the Gini coefficient over time for all provinces. The Gini coefficient was lower at the beginning of our analytical period, with most provinces crossing or above the overall average Gini coefficient (0.294) by the year 2000. After 2003, the Gini coefficients for the provinces diverge from their previously common trend, leading to the S-shaped median spline curve. Some provinces (like New Brunswick and Quebec) returned to earlier levels. Other provinces, like Ontario, Alberta, and British Columbia, maintained their high levels until recently when we observe a general trend back down. Using these data as a guide, we interpret a high Gini coefficient as approximately 0.32, or the 80th percentile of the Gini coefficient after the year 2005. We interpret a low Gini coefficient as 0.28, or the 20th percentile of the Gini coefficient before the year 1999.

The Gini coefficient over time for each province and its relationship to the social-to-health spending ratio. Left panel: the Gini coefficient by province over time, line of best fit is a median spline. Right panel: the social-to-health spending ratio over the Gini coefficient, line of best fit is a simple regression line

The right panel shows a scatter plot of the ratio versus the Gini coefficient. There is a wide variation around the line of best fit, but there is a general downwards trend in the ratio as the Gini coefficient rises in most provinces. New Brunswick and Quebec, provinces that between them exhibit a single observation of the Gini coefficient greater than 0.30, have positive correlations between the ratio and Gini coefficient.

Tables  3 and ​ and4 4 display our main regression results. We take the natural log of the ratio and our outcome variables, so our coefficients are interpretable as percent changes in the outcome variable given a 1% change in the ratio.

Linear regression results (unadjusted and adjusted) for two−way fixed effect (province and year) models of women’s health outcomes

Note: * indicates p value < 0.05. 95% confidence intervals in parentheses

PAM potentially avoidable mortality, LE life expectancy, PYLL potential years of life lost, IM infant mortality, LBW low birth weight, S/H social-to-health

Linear regression results (unadjusted and adjusted) for two-way fixed-effect (province and year) models of men’s health outcomes

A higher ratio is associated with more desirable outcomes for all three of our non-infant outcomes, and the association between the ratio and outcome becomes stronger at higher levels of inequality. A higher ratio is associated with lower PAM (approximately 0.04% lower for men and women). For women, if the Gini coefficient is 0.01 units higher than average, the ratio is associated with an additional 0.017% decrease in PAM; for men, that additional decrease is 0.033%. Similarly, the ratio is positively associated with LE for both men and women, with that relationship increasing with the Gini coefficient substantially versus the average in both cases. A 1% increase in the ratio has a small association with LE for both men and women (0.006% and 0.002%), but these estimates increase by approximately 50% each with an additional 0.01 unit increase in the Gini coefficient. PYLL decreases with increasing levels of the ratio for both genders, but that relationship is only evident for men with higher than average levels of the Gini. For each 0.01 increase in the Gini coefficient, the ratio is associated with an additional decrease in PYLL of approximately 0.03% for men and women. Figure ​ Figure3 3 plots the marginal effect of the relationship between the ratio and these three outcome variables changes for men and women in the presence of previously defined high and low Gini coefficients. As shown by the regression coefficients, the relationship between health outcomes and the ratio is stronger (a steeper slope on the graphs) with a higher Gini coefficient.

The relationship between health outcomes and the social-to-health spending ratio (S/H ratio) in high versus low inequality settings. The blue lines are for men; the red lines are for women. The solid lines are low Gini coefficient settings (0.28); the dashed lines are high Gini coefficients settings (0.32)

The ratio is not associated with infant-related outcomes, either IM or LBW, for baby boys or girls.

Overall, the ratio is relevant to changes in our non-infant health outcome variables. Population health outcomes are better when provinces have higher levels of the ratio; mortality outcomes improve further in the presence of higher than average income inequality as measured by the Gini coefficient. The irrelevance of the ratio with respect to infant-specific outcomes is also shown in a previous Canadian study (Dutton et al. 2018 ). Some evidence suggests that outcomes like infant mortality are more related to the health care system than to social spending (Chung and Muntaner 2006 ). This implies our results are driven by mortality outcomes experienced by adults.

Men, on average, exhibit stronger associations between health and the ratio in the face of increasing income inequality (Fig.  3 ). This implies that, historically, the average man has been more at risk of health outcomes that could be mitigated by social spending. One example of how this gendered difference is realized could be in risk of homelessness. Men make up the majority of people who use emergency shelters (Segaert et al. 2017 ); it is possible that prevailing societal norms which result in these individuals having little social support to maintain housing in emergency situations can be mitigated by government action (e.g., higher social assistance payments).

The ratio has decreased over time in most provinces, driven by steady increases in health spending. At the same time, Gini coefficients have trended upwards in most provinces. There is a large literature on the weak evidence supporting income inequality itself as the main causal mechanism for health outcome variation (Deaton 2013 ; Lynch et al. 2004 ). The issue of cause is relevant to mention here, since if income inequality itself were a health risk, the government could address that directly through taxes as a redistribution mechanism. Some research on the rise of income inequality in Canada suggests that in a knowledge-based economy wages will become more unequal through a myriad of pathways, including corporate lobbying (Beach 2016 ), implying tax-based interventions need to become more radical to reduce Gini coefficients, which could be politically infeasible.

Targeting expenditures on social services is appealing in this scenario. After-tax Gini coefficients reflect the net result of tax-based solutions for inequality and continue to increase over time. The government can address the social determinants of health by directly spending on services that mitigate the impact of environments within which those with low income live their lives. Those with low income face low or no real growth in social spending or wages; if social spending improves health, it is intuitive we would observe larger returns to social spending with higher after-tax inequality. In other words, while income inequality is driven by many forces, weakening its association with population health outcomes might be possible through social spending.

Our results suggest that, as income inequality increases, provincial governments should direct resources to social spending. Provincial governments have done the opposite during the period we observe. Our models include overall government spending, implying that redistribution is adequate to achieve the modeled results. There have been calls for researchers and policymakers to move beyond measures of income inequality as an indicator of the macroeconomic environment since it is rooted in political dimensions (de Maio 2012 ), but inequality itself is routinely measured and acts as any other macro-level indicator that might correlate with an outcome we care about (Dutton and Jadidzadeh 2019 ). Furthermore, the gains to those at the high end of the income distribution accumulate over time (Bor et al. 2017 ); those left behind gain from resources directed specifically to services they use, implying that governments can account for future population health trends by redirecting spending now.

The dataset we use identifies social and health spending by function, rather than by ministry; there is no standard for what should be included as social spending categories across province or time (Kneebone and Wilkins 2016 ). Broadly, social services in these data are largely comprised of social assistance payments, disability payments and programs, homelessness programs, and programs supporting families, women, or children (safety and support programs). In some cases, spending by ministry includes health spending programs for low-income benefits recipients included with social spending (e.g., drug coverage for low-income groups). These programs tend to make up a small portion (< 10%) of social spending by the ministry, and their inclusion in spending by function depends on provincial classification. Our models compare within-province trends of social-to-health spending ratios and health outcomes; differences in the definition of spending variables across provinces are adjusted by our fixed-effect term. In other words, some provinces might have higher ratios than other provinces due to how they classify social spending, but our models compare fluctuations in those ratios to fluctuations in health outcomes within provinces.

Our study has limitations. One is that we use the Gini coefficient as a measure of income inequality when other measures exist. Some research shows that the Gini coefficient between developed countries is merely indicative of welfare state or political factors (like how much is spent on social security) (Chung and Muntaner 2006 ). We propose that the provinces of Canada are similar in terms of political philosophy and services delivered when contrasted to differences at the country level among developed countries; thus, comparing the Gini across provinces is comparing a meaningful indicator of income inequality. Furthermore, the Gini coefficient performs similarly to other income inequality measures in the USA with similar two-way fixed-effect models to ours (Hill and Jorgenson 2018 ).

Our study suggests that men and women have similar associations between health and social spending, characterized as a ratio, and population health outcomes. Income inequality increases the return to social spending which is consistent with the idea that income inequality results in worse environments for those who benefit from the services funded through social spending. Marginal changes in social spending would be a first step to bring the ratio back to levels last seen in the early 1990s, which might benefit population health in the current high Gini coefficient environment.

Acknowledgements

We appreciate the efforts of Ronald D. Kneebone and Margarita Wilkins for maintaining the database of government public accounts spending at the University of Calgary’s School of Public Policy website.

Authors’ contributions

All authors contributed to the study conception and design. Data collection was completed by Tong Liu; analysis was conducted by Tong Liu and Daniel Dutton. The manuscript was written by Daniel Dutton and all authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.

Compliance with ethical standards

The authors declare that they have no conflict of interest.

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

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NOTE CONTENTS

Perceptions of taxing and spending: a survey experiment.

abstract . This Note presents the results of an original survey experiment on whether the public prefers “tax expenditures” to “direct outlays”—that is, whether members of the public are more likely to support government spending that takes the form of a tax credit rather than a check or cash. Using a survey that spans a wide variety of policy areas—and with important variations in wording and information—we show that the public strongly prefers tax expenditures even when the economic substance of the proposed policies is identical. We also show that the public views tax expenditures as less costly than equivalent direct outlays. These results support a longstanding but largely unstudied hypothesis that tax expenditures hide the costs of government spending, and have implications for why tax expenditures have continued to grow in size and complexity.

author. Conor Clarke: Yale Law School, J.D. expected 2015 ; London School of Economics, M.Res . 2011; University of Birmingham, M.Sc. 2010; Amherst College, B.A. 2008. Edward Fox: Yale Law School, J.D. expected 2015; University of Michigan, Ph.D. Candidate in Economics; Columbia University, B.A. 2007. We gratefully acknowledge the support of the Oscar M. Ruebhausen Fund at Yale Law School, which made this research possible. We are also indebted to Chris Milione for his careful and conscientious editing, as well as to Devon Porter, Meng Jia Yang, Rachel Bayefsky , and the many patient editors of the Yale Law Journal . For helpful com ments and conversations we thank Anne Alstott , Ian Ayres, Fred Goldberg, Jacob Goldin , Jacob Hacker, Henry Hansmann , Zach Liscow , Yair Listokin , Ben Lockwood, Daniel Markovits , Kyle Rozema , Tom Tyler, Edward Zelinsky , and session participants at the National Tax Association’s annual conference. We contributed equally to this paper, and any errors are our own.

Introduction

A stubborn question in tax law and policy is why some spending programs are organized through the tax code rather than as direct outlays. Both methods are common. For example, Social Security payments are issued directly into the recipients’ accounts. 1 In contrast, the Earned Income Tax Credit (EITC), as its name suggests, takes the form of a credit against the recipient’s income tax: eligible beneficiaries simply owe less or are entitled to a refund when they file their taxes. 2 Social Security payments are made by the Social Security Administration . 3 The EITC, like all federal tax expenditures, is handled centrally at the IRS. 4

For some tax experts, the widespread use of “tax expenditures”—policy spending through the tax code that departs from taxing “accepted concepts of net income” 5 —is concerning. The great tax scholar Stanley Surrey argued famously that one of several problems with tax expenditures is that they are a disguised form of spending, spending that is poorly managed by Congress and almost completely overlooked by the American people. Most tax expenditures, wrote Surrey, “seem almost to live a life of their own, undisturbed and unexamined,” and with “[ n]o agency [that] really studies or controls them.” 6 Surrey concluded unhappily that this “is no way to run a tax system.” 7

In the decades since Surrey’s writing on the subject, questions about the role and value of tax expenditures have become only more relevant. While the Tax Reform Act of 1986 eliminated many tax expenditures in the Internal Revenue Code, total tax expenditures have since grown and are now more than eight percent of GDP—$1.4 trillion in 2014. 8 In the aggregate, individual income tax expenditures are now larger than either defense spending or Medicare spending. 9 Yet despite the fact that academic studies of tax salience and behavioral taxation have become increasingly popular, basic questions about the public perception of tax expenditures remain largely unanswered. In particular, many of Surrey’s original concerns have avoided rigorous testing: is the true cost of a tax expenditure really hidden or diminished by virtue of being part of the tax code? Is it true that the public sees spending through the tax code as different?

These questions are urgent for an additional reason. In some ways, Surrey got his wish. Tax expenditures are subject to more oversight than ever. “Tax expenditure budgeting,” an annual process by which the federal and state governments account for their spending through the tax code, has become the American norm. Federal law requires the United States Treasury to produce an annual tax expenditure budget, 10 and most states have adopted similar processes. 11 These procedures would no doubt please Surrey, but the continued growth of tax expenditures would not. Indeed, that growth presents a paradox: spending through the tax code has continued to rise faster than government spending has as a whole, despite repeated efforts to publicize and rein in the costs of tax expenditures.

Our Note helps to explain this apparent paradox. We offer evidence on how the American public thinks about tax expenditures as opposed to spending programs organized outside the tax code. We obtain this evidence through a survey experiment that tests how support for (and perceptions of) public spending policies vary not based on the substance or expense of a policy, but simply on whether a policy is described as a tax expenditure or direct outlay. We use Google Consumer Surveys (GCS) to ask panels (which aim to be demographically representative of the United States Internet-using population) for their views on a variety of policy options, including hypothetical subsidies for the housing market and the disabled. 12 We keep the substance and total cost of the policies functionally identical. We then ask one group for its views on a policy that is described as a direct expenditure, and the other for its views on a policy that is described as a tax break.

By asking similar panels for their views on such questions, we are able to study the way in which a policy’s framing affects public support and public perceptions, and we are able to isolate this framing effect in an empirically rigorous manner. In particular, this method allows us to test the hypothesis that citizens are more likely to support “hidden” spending that occurs through the tax code, rather than “direct” spending that occurs through another policy mechanism, such as payment via cash or check. And this method allows us to test whether tax expenditures simply appear less expensive than direct outlays.

Our results are strongly consistent with both hypotheses. Americans are more likely to support policies when they are described as tax expenditures, and they are more likely to view tax expenditures as cheaper than direct outlays. In our baseline comparisons, respondents were ten percentage points more likely to support our hypothetical, economically equivalent policies when we framed them as tax breaks rather than as direct outlays. These results held true across a variety of policy areas, and they held true when we varied the amount of information that we offered about how tax expenditures work. Respondents were also more likely to say that a program added “a lot” to the deficit if it was described as a direct outlay instead of a tax expenditure, even though the programs were listed with the same explicit cost.

These results make several contributions to the existing literature. First, we apply a better methodology to a wider range of contexts than did past studies to help answer significant outstanding questions in the political science, economics, and tax-law literatures. Second, we test the robustness of the idea that “spending through the tax code” produces a framing effect by varying the amount of information we provide to our survey respondents; this question speaks to the issue of why citizens are so inclined to favor tax expenditures. Finally, we connect our results to key debates in the economics and political science literatures, and we discuss the implications for economic welfare, modern tax law, and democratic decision making about public spending.

The rest of this Note is divided into five Parts. 13 Part I positions our contribution in the relevant literature on tax expenditures and the behavioral-economics approach to taxation. Part II describes our methodology in more detail. Part III offers a fuller description of our results. Part IV discusses limitations and implications. Part V concludes.

I. tax expenditures and public perceptions in context

A. the existing tax literature.

In the tax-law literature, the general distinction between spending inside and outside the tax code is typically associated with the work of Stanley Surrey, who reportedly coined the term “tax expenditure.” 14 Surrey is well-known for emphasizing that “[ t]he federal income tax system consists really of two parts,” one which “comprises the structural provisions necessary to implement the income tax,” and another that “comprises a system of tax expenditures under which Governmental financial assistance programs are carried out through special tax provisions rather than through direct Government expenditures.” 15

Surrey had many criticisms of the tax-expenditure system: he thought it confused Congress, 16 muddled the administration of social programs, 17 and made the tax code more complicated. 18 But a particularly notable theme of Surrey’s work is that tax expenditures are “hidden.” 19 Despite the fact that tax expenditures are now identified and budgeted like other expenditures—a longtime goal of Surrey’s 20 —the hidden nature of tax expenditures is a theme that still runs through contemporary literature on taxation and public policy. In his book The Hidden Welfare State , for example, the political scientist Christopher Howard writes that “tax expenditures with social welfare objectives are largely invisible to citizens, policy makers, and academics who study U.S. social policy.” 21

The premise that tax expenditures are or would be treated differently from direct outlays is, in some sense, counterintuitive from the perspective of public finance. Most scholars of public finance would consider tax expenditures to be “conceptually equivalent” to direct outlays. 22 Indeed, tax expenditures can always be described in a manner that makes them seem identical to direct spending—one in which (as Howard puts it) “taxpayers write a check to the government for their full tax liability, and the government issues them a check to cover those activities exempted from taxation.” 23 As consumers of government benefits, taxpayers should value a dollar of cash just as much as a dollar of tax relief. As taxpayers who fund government programs and vote for elected officials, they should view a dollar of government spending as equivalent to a dollar of forgone tax revenue. 24 Considered at this level of abstraction, public support for a spending program should not depend on whether that spending goes through the tax code.

But do real-life taxpayers actually treat a dollar of direct spending as equivalent to a dollar of tax expenditure? In our opinion, the tax-expenditure literature generally answers this question in the negative—but it has received surprisingly little empirical attention. One of the few tax-law papers to study this subject directly is a 2005 article by Edward Zelinsky , which used a student survey to assess how different types of financial support for firefighters affected how respondents perceived their “volunteer” status. 25 Zelinsky’s subject matter was drawn from a real policy dilemma: increasingly stringent requirements for training firefighters make it difficult for communities to recruit volunteers, but many communities are nonetheless reluctant to pay firefighters directly. As a result, some communities apparently offer tax breaks to their volunteer firefighters, such as property tax reductions. 26 The idea is that the tax breaks offer a financial inducement to become a volunteer firefighter—but not an inducement that is so explicit as to threaten the volunteer status of the position.

To see how the different forms of compensation affected public perceptions of these “volunteers,” Zelinsky distributed questionnaires to several groups of law students at the Benjamin N. Cardozo School of Law. 27 Half were asked whether a direct payment affected the volunteer standing of firefighters, while the other half were asked whether a tax exemption did the same thing. 28 Zelinsky finds strong evidence that respondents are more likely to view recipients of a tax break (rather than a direct payment) as volunteers in good standing. 29

An older attempt to study such questions empirically is a book chapter by Steven Sheffrin . 30 Sheffrin looks primarily at how the public conceives of a fair sharing of the tax burden, but he also briefly considers the question of how public views diverge from views commonly held by professional economists. 31 To see if the public shares economists’ view that tax expenditures and direct outlays are equivalent, Sheffrin asked 150 students in an economics class about their opinions of an investment subsidy plan for firms. 32 He described the plan in one instance as a $1 million tax break and in the second as a $1 million payment. 33 In the baseline scenario, the students had a similar view of the favorability of the tax break and direct subsidy programs. 34

However, when asked a follow-up question in which tax credits reduced the companies’ tax liability to zero, the students had a substantially more favorable view of the direct subsidy program. 35 In other words, they preferred the program under which the firms “paid” some taxes, even if this payment was exactly offset by a check from the government. Sheffrin attributes this result to respondents’ belief that “[ e] ntities should pay taxes” and the fact that they were not looking solely at the company’s net position. 36

While the tax literature has recognized the importance of tax expenditures, therefore, relatively little empirical work has been done on whether the public actually thinks of them as different from direct outlays.

B. Recent Political Science Literature

Outside of legal scholarship on taxation, two recent political science papers have used survey evidence to study the public’s perception of spending programs. Christopher Faricy and Christopher Ellis asked university students about their opinions of three social spending programs: the mortgage interest deduction, the deduction for retirement savings, and food stamps. 37 They presented the programs to some students as tax expenditures and to others as the equivalent direct outlays, 38 and they found weak evidence that respondents preferred identical programs couched as tax expenditures. 39 For each program, the tax expenditure equivalent was more popular than the direct outlay, but this difference was small and only statistically significant for one of the three programs. 40 The authors also found that the effect is bigger for Republican students than for Democratic students. 41

Jake Haselswerdt and Brandon Bartels take a similar approach in an unpublished working paper. 42 Unlike the other papers mentioned above and below, Haselswerdt and Bartels do not use a student sample. Instead, like us, they use a survey that attempts to reach a representative sample of the U.S. population. 43 They asked about three programs: the mortgage interest deduction, job training, and paid parental leave. 44 Among other things, they describe the programs as either a tax expenditure or an equivalent direct outlay. 45 They find that each program is significantly more popular when described as a tax expenditure. 46

C. Research in Behavioral Economics and Political Framing

The studies above follow a method that is widely employed in behavioral research: asking two demographically similar groups of respondents a question in which the substance is identical but the framing is different. 47 This research agenda seeks to isolate what is now called the framing effect . 48 Amos Tversky and Daniel Kahneman popularized this approach in a classic series of behavioral experiments, 49 finding, for example, that identical life-saving policies are more popular when the outcomes are framed in terms of lives saved rather than lives lost. 50 As applied to tax expenditures, Zelinsky derives a similar result, finding that “policies unacceptable when framed as direct expenditures become supportable when labeled as tax subsidies, even though the economic substance of the policies is the same.” 51

Political scientists have also considered the relationship between public spending and framing. They have studied, among other things, how different political parties frame their approaches to spending; 52 how political framing differs from political persuasion; 53 and how framing interacts with political competition and the formation of citizen preferences. 54

In continuing to study how tax expenditures are viewed in comparison to direct outlays, we also join a growing literature on behavioral-economic approaches to tax policy. 55 This field is increasingly interested in how general principles of behavioral economics can be applied to tax policy, and in developing original experiments that might inform tax-law design. 56 Many of these studies find that individuals react to taxes in ways not predicted by standard economic theory. 57

D. Our Contribution to the Existing Literature

Our approach complements and builds on existing work in several ways.

1. The Representativeness of Our Sample

We believe our sample is a substantial improvement over existing work. First, we reach a diverse, non-expert sample that is close to representative of the electorate. All of the other papers that compare tax expenditures and direct outlays, except Haselswerdt and Bartels’s working paper, 58 use student samples. Such samples can be problematic. For example, Sheffrin’s study is designed to illustrate that the public’s views diverge from the views of conventional economics, but the students he surveys were in an economics class. 59

That is a specific example of a general phenomenon. Student samples often differ from the general population in systematic ways that matter. One survey paper found that student responses “differed substantially” from those of the population at large in 48% of social science studies where they could be compared. 60 For our purposes, students are likely to differ substantially from the average population on at least two important dimensions: their level of education and their experience paying taxes.

Highly educated people, particularly those trained in quantitative fields, may be less susceptible to framing. 61 Zelinsky hypothesizes that this explains differences in the framing effect among his students, 62 and this may be one explanation for why Sheffrin does not initially find a framing effect.

Moreover, students are less experienced with tax expenditures than the population as a whole, and this might make them poor proxies. For example, like Faricy and Ellis, and Haselswerdt and Bartels, we ask about the mortgage interest deduction. There are some differences in wording, but all three studies asked about support for the deduction in light of its $100 billion annual cost. Our study and that of Haselswerdt and Bartels—studies aimed at the population at large—found that support was roughly 55%. 63 However, when shown the costs, only 21% of Faricy and Ellis’s students supported the deduction. 64 Faricy and Ellis’s students were likewise not affected by the frame, whereas both our paper and that of Haselswerdt and Bartels found a difference in support of 25 to 35 percentage points. 65 As a result, we believe that our results are a more reliable measure of the framing effect than those derived from student samples.

2. Distinguishing Our Questions and Implications

In addition to studying a more representative sample, our approach differs from previous work in several ways. First, we explore the framing effect in a range of contexts, including support for housing programs, aid to the disabled, and the question of whether people prefer to receive cash or equivalent tax credits and whether they perceive tax expenditures to be less expensive. Taken together, this variation across policy areas helps show that the framing effect is wide-ranging and sheds light on the source of that effect. 66

Second, we show that the public’s preference for tax expenditures persists even when we describe the mechanics of a tax expenditure in some detail. This helps ensure that the source of the framing effect is not confusion over how the tax programs work or who gets the benefit. In their surveys, Haselswerdt and Bartels, as well as Faricy and Ellis, do not clarify the mechanics of their programs in the same way. For example, while Faricy and Ellis express concern that citizens do not understand tax expenditures, they do not illustrate the insight empirically. 67 Instead, the questions in their study and in that of Haselswerdt and Bartels are somewhat unclear. For example, Haselswerdt and Bartels ask respondents whether they support making those who take a job retraining class “eligible for a tax break, that is, a reduction in the income tax they owe to help cover the cost of the class,” and similarly describe the direct expenditure as simply “a cash payment to help cover the cost of the class.” 68 Respondents may simply assume that the payments will be larger or smaller depending on which vehicle is used for payments. Even in other questions in which the researchers specify the total cost, the programs are not necessarily equivalent in terms of how much each person receives, particularly since often the tax expenditures are phrased as deductions, but the direct outlays appear more similar to credits. 69

Third, we avoid using existing programs—except the mortgage interest deduction—to measure the framing effect. All of the programs in the Faricy and Ellis study are currently implemented in the United States, 70 as are two-thirds of those in the Haselswerdt and Bartels study. 71

Asking about these “status quo” programs is potentially problematic for a number of reasons. Rational respondents might prefer not to change only the mechanism by which an existing program is delivered, since switching the mechanism is presumably costly and the substance of the program will remain the same. In addition, respondents might simply be confused as to why an existing program is being framed as a hypothetical choice. They may pick the status quo when a choice is too complex; they may pick it in protest. 72 Or respondents may simply be affected by the well-known status quo bias, which has been extensively studied in behavioral economics. 73 The notable point is that, in each of these scenarios, something other than a question’s framing—as either a tax expenditure or direct outlay—may partially influence the response.

Such status quo issues are well understood to be a problem in survey design. 74 Indeed, the difference between new and status quo options can be enormous, even when the real payoff is the same. One well-known study of individual biases toward risk, for example, found that only 27% of survey respondents were willing to pay $700 for a safety measure that guaranteed a 0.5% reduction in the risk of an injury in a given year; that number jumped to 60% when the safety feature in question was described as an industry standard. 75 In at least one influential study of stated-preference survey design, these problems were considered worrying enough that respondents who always selected a status quo were categorized along with respondents who selected “I don’t know.” 76 Haselswerdt and Bartels are aware of this issue, and in fact one of their goals is to measure whether the status quo “ communicat [ es ] to the public how different problems should be viewed and solved.” 77 But we are not sure that they can separate this effect from the other status quo issues discussed above.

Fourth, and perhaps most important, we consider the implications of these findings in ways that differ greatly from previous work. We explore the likely underlying causes of the framing effect, as well as the relationship between framing effects and welfare economics. We then highlight the implications of citizens’ preference for tax expenditures for the way in which the Internal Revenue Code is written. We use our results to suggest a new and counterintuitive explanation for why tax expenditures have grown: because the public is actually paying more attention to government budgets. We also suggest that the public’s fondness for tax expenditures should be added to the traditional list of factors that drive the increasing complexity of the tax code and is perhaps one of the best explanations for why ordinary taxpayers find the tax system so maddeningly complex. Finally, we make a new connection between tax expenditures and other areas of the law in which increasing transparency has potentially serious drawbacks.

II. empirical strategy

A. using google consumer surveys.

We developed a survey instrument using Google Consumer Surveys (GCS), a popular and relatively inexpensive online survey tool designed for use by both companies and researchers. 78 GCS is a relatively new service—the product was launched in March 2012 79 —but it has already been used to produce peer-reviewed papers in a variety of fields, including political science, 80 psychology, 81 and business. 82

We discuss in detail below the extent to which our panel is likely to be representative of the U.S. population. We conclude that there are some reasons to believe that our panel is not fully representative—but, in the end, it is likely to be close, and it offers substantial advantages over the classroom surveys utilized in existing publications.

Unlike several other online survey tools—which hire a representative panel of respondents 83 or otherwise manage a marketplace for survey questions 84 —GCS presents survey questions to general Internet users in the form of a “wall” preventing access to premium Internet content. Just as a visitor to a website might be required to watch an advertisement or pay a fee before accessing premium content (typically known as a “ paywall ”), GCS lets Internet users answer a survey question. 85 This “ surveywall ” is intended to be relatively brief and painless. Google’s theory is that, “[ b]y reducing the burden [of responding to a survey] to just one or two clicks, we increase the response rate of the survey.” 86 According to Google, this produces an average response rate of 16.75%. 87 Google argues that this response rate compares favorably to other commonly used Internet or traditional phone survey tools. 88

Unlike many other survey tools, Google does not ask respondents to report their age, gender, location, income, or other demographic information. Instead, Google reports that “Consumer Surveys infers approximate demographic and location information using the respondent’s IP address and DoubleClick cookie,” which Google uses to “ensure each survey receives a representative sample and to enable survey researchers to see how sub-populations answered questions.” 89 Not asking for this information improves response rates and allows questions to be asked free of any survey “priming.” 90 We discuss the accuracy of Google’s methods below and include further details in a short Appendix.

The representativeness and reliability of the GCS survey population have been tested and discussed favorably in two studies—one from the Pew Foundation 91 and one from Google itself. 92 Google’s study compared GCS surveys to “gold standard” national telephone surveys—one private and one conducted by the Centers for Disease Control—by using questions identical to those in the “gold standard” surveys. 93 Google also hired two well-respected Internet survey firms to ask the same questions. 94 The search giant concluded that its own survey tool outperforms other Internet survey providers on several benchmarks. 95

The Pew Research Center, meanwhile, performed “a series of tests covering a wide range of topics and question types to compare results from Pew Research telephone surveys to those obtained using the Google Consumer Surveys method.” 96 GCS performed relatively well overall. Across forty-eight questions, the median difference between GCS and the Pew surveys was 3%. 97 Of particular interest for our survey, Pew concluded that “the Google Consumer Surveys sample appears to conform closely to the demographic composition of the overall internet population.” 98 In terms of political views, GCS respondents were “broadly similar [to the U.S. population], though some larger differences were observed.” 99 Nor was there a consistently conservative or liberal bent to these differences. 100 In fact, Nate Silver concluded that GCS was the second most accurate 2012 presidential poll, beating out CNN, Quinnipiac, Gallup, and YouGov , among others. 101

Nonetheless, there are good reasons to believe that GCS panels are not perfectly representative of the entire U.S. population. First, Google surveys only the U.S. Internet-using population, and 15% of the U.S. population does not use the Internet. 102 These individuals are disproportionately older and less educated, and this likely biases any survey of Internet users. 103 Similarly GCS’s model does not guarantee that each panel is a random sample of all Internet users. Nevertheless, the research discussed above suggests it is quite likely that GCS is close to representative—and certainly a large improvement over the classroom panels used in prior research. It is also likely to be much more representative than Mechanical Turk, where survey respondents are paid for each survey that they complete, raising a number of problems—including self-selection and potential misrepresentation. 104 In spite of these problems, Mechanical Turk studies have found generally receptive audiences. 105

GCS does have some important drawbacks. First, we can ask only short questions. Google imposes a 175-character limit on questions, which forced us to think hard about how we worded our questions, and made it a challenge to ask several questions about technical tax policy. 106 Second, because GCS questions pop up instantaneously, respondents see the question before committing to answer—an issue that affects most Internet surveys but is arguably more problematic in our case. Third, the fact that individual respondents will see only one question makes it impossible to study an individual respondent’s answers across questions.

On the other hand, GCS also offers some practical benefits. Consumer Surveys are inexpensive—which allowed us to gather many thousands of fairly representative observations at low cost—and have a relatively high response rate. In our surveys, an average of 18% to 24% of Internet users who saw each question responded. In addition, the fact that Google infers demographic data means that we did not need to rely on respondents’ self-reporting to obtain a representative panel. We also did not have to rely on respondents’ self-reporting about sensitive matters like age and income. And, unlike Mechanical Turk, GCS respondents do not answer questions for money.

B. Our Survey Questions

The central goal of our survey was to ask two demographically equivalent groups of respondents whether they supported economically equivalent policy proposals—one described in the form of a tax expenditure, the other in the form of a direct outlay. Our central hypothesis, consistent with the notion that spending through the tax code disguises the true cost, was that respondents would be more likely to support policies that take the form of tax expenditures.

We also tested several secondary questions by varying the details of our questions. One secondary question was whether the hypothesis above works because respondents view tax expenditures as “cheaper.” We tested this by asking respondents how they perceived the costs of equivalent tax expenditures and direct outlays, and whether they would prefer to receive a tax credit or a check. Another secondary question was whether taxpayers’ preference for tax expenditures would hold true across a range of policy types; we tested this question by asking about hypothetical policies that support the housing market and hypothetical subsidies for the disabled. A third secondary question was whether respondents’ views vary depending on whether the policy in question is a new, hypothetical policy, or an existing and salient policy; we probed this distinction by asking about the home mortgage interest deduction.

A fourth secondary question was whether respondents’ views change depending on how much information we provide about the policy proposals in question. Because tax policy is relatively technical, in our view it is important to try to distinguish between the framing effect and simple ambiguities in (or misunderstandings of) how the policies in question operate. For example, it might be apparent to those steeped in tax law or public finance that a dollar of “refundable tax credit” is the conceptual equivalent of a dollar in cash—but perhaps not to the average citizen. To get a sense of how this affects our results, we varied our descriptions of the tax expenditure. In some questions, we spelled out in detail how refundable tax credits operate; in others we did not. We also tested to see whether using the term “tax expenditure” itself affects the results.

Finally, we asked several questions designed to rule out common alternative explanations that might indicate a bias toward spending through the tax code, and to see whether policy preferences diverged from individual consumption preferences.

In our first wave, we asked the following nine questions 107 :

Q1. Would you support the government offering annual $1000 cash payments to each family, to help cover rent?

Q2. Would you support reducing each family’s taxes by $1000 to help cover rent? If a family owes less than $1000, they get the rest in cash.

Q3. Would you support the government offering a $1000 refundable tax credit for each family, to help cover rent?

Q4. Do you support the government letting homeowners deduct their mortgage interest payments?

Q5. Would you support the government replacing existing tax aid for homeowners by matching 25% of their mortgage interest with cash?

Q6. Tax aid for homeowners costs $100 billion a year. At the same cost, would you instead support matching 25% of their mortgage interest with cash?

Q7. Tax aid for homeowners costs $100 billion a year. Do you support the government continuing to let them deduct their mortgage interest payments?

Q8. Would you support an annual $1000 government cash payment to each disabled person?

Q9. Would you support a tax credit reducing each disabled person’s taxes by $1000? If a person owes less than $1000, he or she gets the rest in cash.

We released these questions in November 2013, spread over a weekend and three weekdays.

The demographics of respondents and responses we received did not vary by day of the week, indicating that the pool of potential respondents was similar during weekdays and weekends. 108 We received a little over 1,000 responses to each question. However, as can be seen in Table 1 below, not all of these responses were usable since some respondents chose to opt out and others lacked full demographic data. 109 There is some evidence that more respondents opted out of the more complex questions. 110 But we remain confident that this skew is relatively minor. Even if, for the sake of argument, each additional person who opted out of the more complex questions reduces the significance of our results, our results still show that tax expenditures are substantially preferred and the results are still statistically significant. 111

In February 2014 we conducted a relatively small second survey designed to ascertain whether applying the label “tax expenditure” to spending through the tax code made any difference. In April 2014 we asked a larger sample about their preferences for personally receiving direct-payment subsidies or tax credits. Finally, in September 2014, we asked a large sample about how they perceived the costs of direct outlays and tax expenditures.

Our results are summarized in the following tables.

III. results

survey of preferences for using direct subsidies or tax credits

survey of preferences for receiving direct subsidies relative to tax credits

survey of respondents’ perception of policy costs

comparisons of survey answers

Our results strongly confirm the central hypothesis that individuals prefer spending through the tax code to direct expenditures. In our baseline comparisons, respondents were about 10 percentage points more likely to support policy proposals when they were described as tax expenditures rather than as direct outlays. This held true across policy types: respondents were 10.5 percentage points more likely to support a subsidy for the disabled when it was phrased as a tax expenditure and 9.8 percentage points more likely to support a subsidy for the rental market when described in similar terms. Respondents also very strongly preferred the existing mortgage-interest deduction to an alternative policy in which the government directly matched a portion of homeowner mortgage payments. All of these results are statistically significant at the 1% level.

We had hypothesized that more information about how tax expenditures work would push some respondents to think about the underlying similarities between spending through the tax code and direct spending. For example, noting that “[ i ]f a family owes less than $1000, they get the rest in cash” probably underscores these similarities more than explaining that each family gets “a $1000 refundable tax credit.” But surprisingly and notably, respondents were only slightly more likely to support a tax expenditure when we offered less information about it, and the difference was not statistically significant. The additional information on the mechanics of the tax expenditure did not appear to alert respondents to the functional equivalence of tax expenditures and direct outlays, at least not to a statistically significant extent.

Similarly, in our later survey, when we asked people whether they preferred a $1000 check or an equivalent tax credit, more information did not reduce the impact of the frame: when given more information, people were a bit more likely to conclude that the two options were equally good, but that difference was not statistically significant. On balance, we found these results surprising and believe that they have important implications for tax policy (discussed below). We do not find that using the term “tax expenditure” has any effect relative to simply describing the tax reduction.

We also found that respondents have a strong personal preference for receiving a check (rather than a tax reduction) from the government: that is, while individuals would prefer to see tax expenditures enacted as policy, they would prefer to receive direct outlays. This would be consistent with the hypothesis that tax expenditures seem cheaper: the other side of the coin is that they might seem less valuable.

Finally, and also consistent with the hypothesis that tax expenditures seem cheaper, we found that respondents were less likely to think that tax expenditures contributed substantially to the deficit. Specifically, 37% of respondents said that a $6 billion dollar direct spending program added “a lot” to the deficit, while only 32% of respondents said equivalent spending through the tax code would add as much.

IV. discussion

The results presented in the previous Part support the idea that individuals prefer spending through the tax code to direct expenditures, and these results are consistent with the framing effect. The results also suggest that the framing effect holds true in a sample of survey respondents that are representative of the national Internet-using population, across a range of policy types, and when more information on tax expenditures is provided. Our evidence also suggests that the framing effect is at least partly driven by a perception that tax expenditures are cheaper from the point of view of the fisc . Likewise, individual respondents are less likely to view a tax break as equally valuable as a direct subsidy of the same size.

In this Part, we discuss our results more fully. In Part IV.A, we discuss some limitations and hypotheses that we hope will provide a basis for future research on why taxpayers prefer spending through the tax code. In Part IV.B, we discuss the implications of our results for tax law and policy.

A. Open Questions and Directions for Future Research

Our results are limited in a few respects. Some of these are general problems of single-question Internet surveys: for example, our respondents did not spend hours thinking about these questions. The average response time was about twenty seconds. 112 While this response time in some ways limits inferences about respondents’ “true preferences,” as discussed below, it also perhaps captures how some voters actually perceive and evaluate these questions in the political marketplace. In the context of political advertisements and platforms, voters do not necessarily spend long periods of time puzzling over the details. 113

Nonetheless, a few remaining issues strike us as especially interesting and relevant for further discussion and research. In this section, we focus on two possible explanations for why respondents seem to have a stubborn preference for tax expenditures. First, we discuss the well-known framing effect and why it might exist here. Second, we discuss possible reasons for why a “rational citizen” or “rational voter” might prefer to channel spending programs through the tax code. While we are ultimately skeptical about these latter explanations, we think they are important to discuss alongside our results.

1. Why Would a Framing Effect Exist?

As described above, 114 there is a large literature in psychology, economics, and political science attempting to clarify how the framing of a decision affects responses. If one takes the view that a dollar spent inside the tax code is functionally equivalent to a dollar spent outside of it, then our results support the existence of a framing effect in this context.

Our results suggest that taxpayers prefer tax expenditures in part because they perceive them to be less expensive for the public fisc . Our respondents felt that direct spending programs increased the deficit more substantially than equivalent tax expenditures, even though the explicit cost was the same. The other side of this coin is that our respondents were more likely to prefer receiving a dollar of cash over a dollar of tax relief because they perceive a dollar of cash to be more valuable , even when we subtly emphasized that they are the same (for example, in Question 13).

This fits our intuitions—and the scholarly literature—about how citizens view the tax code. Providing a dollar of tax relief might be viewed as letting a person keep something she already possesses; some citizens might not even realize that they are in fact receiving a benefit from a government policy. 115 This taps into an intuitive and common—though, in many ways problematic—assumption about the nature of taxation and government, in which one’s “pre-tax income” represents a natural state of justice that precedes government intervention. We think this view is somewhat misguided: after all, one’s pre-tax income depends crucially on a system of public order that could not exist without government intervention (and, hence, taxation). But the view of pre-tax income as naturally just is commonly held. 116

This theory has a subtle connection to the first studies of the framing effect, in which respondents preferred a triage policy that emphasized the lives saved rather than lives lost, even if the totals were the same. 117 Likewise, we find it plausible that respondents prefer policies that let citizens keep their own hard-earned money to those that give citizens benefits from an amorphous government larder.

We think that this view likely explains much of the framing effect we witness here. We also think that teasing apart these explanations more directly would be a valuable direction for future research.

2. Can Rational Voters Prefer Tax Expenditures?

An assumption of our paper is that tax expenditures and direct outlays of equivalent size are, in fact, equivalent. But we do not (and cannot) eliminate every possible reason why a “rational” voter might prefer tax expenditures to direct outlays.

That said , we do attempt to rule out some of these alternative explanations. For example, it could be that voters view tax expenditures as more politically stable or permanent. Zelinsky , for example, raises this prospect when he notes that a tax expenditure, “if embedded in a permanent tax code, may be more secure politically than a cash payment, which must be appropriated annually.” 118 While we think this is plausible, we are unconvinced that political stability explains a large proportion of the apparent framing effect. The results from our later waves of survey questions—which included a question emphasizing that both the tax expenditure and the direct outlay are “one-time” only—still display a robust framing effect.

Alternatively, it could be the case that voters and policymakers view spending through the tax system as less amenable to “regulatory capture” than a program administered by a specialist agency that interacts repeatedly with a specific part of the economy. 119 While we have not tested this hypothesis, we think it unlikely that aversion to regulatory capture explains a large proportion of the apparent framing effect. Details of tax and spending administration are not particularly salient to the public, 120 and we think it improbable that most taxpayers respond on the basis of a difference in program administration—much less a difference in the likelihood of capture based on the administrative scheme.

Finally, spending through the tax code might be preferred based on how voters evaluate a tradeoff between specialization and coordination. If voters think that certain spending activities are most efficiently clustered together in the tax system, then they will prefer tax expenditures over direct outlays. 121 However, given the simplicity of the programs that we proposed in our experiment, we find it unlikely that this last explanation plays a role in explaining our responses. 122

We should note one element of our results that we think can be explained by rational behavior: the questions about mortgage interest showed the widest gap between the proposed direct spending program and existing spending routed through the Code, and there are many plausible explanations for these results. We felt it important to ask these questions because they deal with one of the best-known tax expenditures. Because the mortgage deduction is an existing program, the public’s preference for keeping this policy might simply reflect a quite rational preference for the status quo—as opposed to switching to a new and very similar system and incurring related costs. 123 That said, the status quo bias cannot explain the entire preference for spending through the Code, since the framing effect is seen in responses to questions that propose hypothetical programs unrelated to the status quo.

B. Implications

Our findings have several implications for tax law and the debate over tax expenditures, and we discuss these implications here.

1. Economic and Welfare Implications

One set of implications concerns public welfare. Indeed, the framing effect raises a question that appears frequently in behavioral economics: how can we evaluate the welfare consequences of seemingly irrational public preferences?

If the arguments in Part IV.A.2 are correct, then taxpayers are not rational in the manner predicted by classical economics: they should not prefer a dollar of tax spending to a dollar of direct spending. Public support and public welfare should be the same in both cases—but we show that this does not hold true.

Might public welfare remain the same, even if public preferences are susceptible to the framing effect? Some argue that this might be the case. Weisbach and Nussim , for example, suggest that outcome equivalence implies welfare equivalence. 124 In other words, the welfare effect—that is, the effect on utility—of a $1000 check should be the same as the welfare effect of a $1000 tax credit, even if the public says it prefers one over the other. 125 But our results suggest that welfare equivalence does not necessarily hold true: people may react differently if they receive the same $1000 in a different manner (having their taxes reduced as opposed to paying the higher tax and receiving a $1000 check).

These results showing the framing effect are nonetheless hard to interpret. Indeed, some scholars have concluded that this kind of “equivalency framing,” in which two identical options receive different levels of support depending on how they are described, renders preferences “ uninterpretable .” 126 Nonetheless, in studying the potential divergence between public welfare and public preferences, we contribute to the growing interest in interpreting the welfare implications of behavioral economics. 127

2. Implications for Trends in Tax Law

Perhaps more centrally, our results also have implications for a longstanding debate in tax law and policy: why have tax expenditures continued to increase, despite repeated efforts to expose and restrain their cost? Since Surrey’s original writings on the subject, there has been a concerted effort at both the federal and state levels to make tax expenditures a more public part of the budgeting process—in other words, to make sure that policymakers are forced to publicly account for their spending through the tax code. 128 According to some recent critics, however, these efforts have failed to slow the growth of tax expenditures. 129

There have been several prominent efforts to address this apparent paradox. 130 One line of analysis emphasizes that, but for the budgeting requirements, the growth rate of tax expenditures would have been “even more robust.” 131 Another argues that efforts to publicize tax expenditures have so far been meek and ineffective. Edward Kleinbard , for example, has argued that the current federal tax expenditure budgeting scheme “is expressly designed to avoid leaving any visible imprint on the budget, and the programs so favored have not been forced to compete with other spending programs for scarce Government resources in other committees or among the members as a whole.” 132 A third line of analysis, favored by Edward Zelinsky , argues that tax expenditure budgeting “legitimates tax expenditures and encourages a scramble [among interest groups] for parity in the form of comparable tax benefits.” 133

Our results have implications for the debate over why tax expenditures have continued to grow. In particular, we show that there is likely to be more demand for spending through the tax code even if more transparent “budgeting” or “disclosure” takes place. A major constraint on a legislator’s willingness to enact new spending measures is the way in which new policies will be viewed by constituents—and, naturally, politicians running for elected office have incentives to propose policies and frame policies in a manner that appeals to the median voter. Our results suggest that constituents may view tax expenditures more positively than general outlays, and this in turn suggests that the scales might always be tilted in favor of spending measures that flow through the tax code. 134

Spending through the tax code is what Chong and Druckman refer to as a “strong frame”: a frame that “emerge[s] from public discussion as the best rationale[ ] for contending positions on the issue.” 135 Since the “typical political strategy is to connect a proposal to a positive idea or value that is widely available in the population,” 136 we believe that the basic and stable public bias in favor of spending through the tax code helps to explain the enormous rise of tax expenditures.

3. The Perverse Effects of Existing Tax Expenditure Budgets

A powerful tradition of legal thought suggests that transparency is normally good (or, in Justice Brandeis’s memorable phrase, that sunlight is the best disinfectant 137 ). Likewise, t he emphasis of the conversation on tax expenditures has been about making them more transparent through a process of tax expenditure budgeting. 138 The thought is simple: “[ I]f policymakers, the media, and the general public lack information about tax expenditures, they cannot fully participate in decisions about how to allocate state resources.” 139

The question of when and how to give the public information about tax expenditures is very much alive. Tax transparency is a perennial subject of the policy debate, 140 and the tax expenditure budgets are becoming increasingly common. The federal government is required to produce an annual tax expenditure report, as are most states. 141 While tax expenditures still typically receive less scrutiny than direct spending, 142 the trend continues to favor more disclosure about tax expenditures. In some states, like Connecticut 143 and Minnesota, 144 the reporting requirements and publications are extensive. Furthermore, as of 2011, only four states did not require some form of tax expenditure report, falling from nine in 2009. 145

This trend toward tax expenditure budgeting and related transparency is usually viewed as beneficial. As the Joint Committee on Taxation recently put it, “[ t]ax expenditure analysis can help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation.” 146 Yet despite the enthusiasm for tax expenditure disclosure, the growth of tax spending has eclipsed the growth of government spending as a whole. 147

Our results suggest that recent efforts to expose the true costs of tax expenditures can be ineffective and perhaps even counterproductive. In broad strokes, existing efforts to disclose tax expenditures might have two effects. First, they might make the public more aware of the general equivalence between taxing and spending programs, and perhaps as intended, educate the public on the true costs of tax expenditures. Second, however, efforts to disclose tax expenditures might make the public think more about how the budget is organized and thereby normalize the broad range of policies that are organized through the tax code. This normalization in turn may make it seem perfectly appropriate to use tax expenditures to implement a new social benefit scheme in the future, whereas, without the additional information, tax expenditures seemed unusual and only appropriate in specific areas. 148

If such normalization occurs, we should expect it to increase both the relative spending on tax expenditures and total spending. Relative spending increases because legislatures, responding to public preferences, substitute spending through the tax code for direct spending. Absolute spending increases because the public thinks spending through the tax code is spending on the cheap. 149 Therefore, if the public consistently prefers spending through the tax code—even if the public has more information about the equivalence between that spending and direct outlays—providing more information about the size and prevalence of tax expenditures might actually make tax expenditures more popular.

Our results do suggest that the framing effect is relatively robust to additional information—that is, in our survey the framing effect persisted even when we provided additional information. People’s opinions did not change when they were given clear information about the mechanics of the tax expenditure. Even when respondents were given explicit information about the cost of the program—exactly the type of information that they would see in a tax expenditure budget—they continued to think that tax expenditures should be classified as less expensive. 150

More information might help. People who spend a lot of time thinking about the equivalence of tax expenditures and direct outlays—like tax professors and other well-informed tax mavens—are probably less likely to care about the frame. But what our results do show is that the type of information typically disclosed in tax expenditure budgets does not have much effect on the public’s preference for tax expenditures. This isn’t necessarily a bad thing; it might simply mean that the public is getting more of what it wants and that people are happier as a result. But the public’s stubborn preference for tax breaks does suggest that if the modern-day Surreys want to press their campaign against tax expenditures, they might want to consider a different approach.

In some ways, the notion that tax expenditure budgets might normalize tax expenditures should not be surprising: it connects to a growing literature that is skeptical of whether mandatory disclosure will always help. 151 Disclosing CEO salaries, for example—a step intended to shame companies away from excessive compensation packages and curb agency problems—might actually increase the overall level of CEO pay, since it makes price competition for CEOs all the more explicit, and CEOs likely want to be paid more than average. 152 Likewise, informing employees of their coworkers’ salaries might reduce job satisfaction, since no one wants to get paid less than the median employee. 153 The transparency of medical prices could, in some instances, increase medical costs, since no one wants to pay for a cheaper than average surgeon. 154 Likewise, publicly documenting the popularity of tax expenditures might have the effect of making tax expenditures more popular.

4. Implications for Tax Complexity

The public’s stubborn preference for tax expenditures may also help explain another much-derided feature of tax policy that has frustrated many scholars: tax complexity. A public bias in favor of spending through the tax code is an overlooked explanation for why the tax code has become so complex. Typical explanations for tax complexity focus on interest group pressure, tax fairness, and tax fraud reduction. 155 But a robust public predisposition for spending through the tax code—combined with an electoral system in which politicians are motivated to pursue policies and framing that appeal to the median voter—also adds to the confusion of the tax system.

When ordinary taxpayers confront their taxes, the most complex items they deal with are generally tax expenditures. For salaried or wage employees, calculating gross income is relatively easy: enter your W-2 and, if you have any investments, take the income figures from the 1099 provided by your broker or financial institution. On the other hand, calculating deductions and credits is much trickier. A few relevant deductions are expenses related to earning taxable income. 156 But the rest are tax expenditures: the mortgage interest deduction, deduction for state and local taxes, mortgage insurance deduction, the EITC, the adoption credit, the child tax credit, the “astonishingly complex credits designed to offset the cost of college tuition,” 157 the charitable donation deduction, retirement accounts—the list goes on. The IRS estimates that the average individual spends eight hours on their taxes each year, between record keeping and actually filing. 158 We think it is likely that the vast majority of this time is spent dealing with eligibility for tax expenditures. 159 Taxpayers’ preference for spending through the tax code is thus part of what drives 84% of Americans to call the federal tax system complex. 160

Tax expenditures are an important part of government spending. As noted above, the CBO estimates that federal tax expenditures will be $1.4 trillion in the 2014 fiscal year. 161 If total spending is higher because (all else being equal) citizens have a persistent and systematic bias in favor of spending through the tax code, then billions of dollars are at stake. For example, if tax expenditures are a mere 2% higher because of greater public support for spending through the Code, then this $28 billion would be as much money as the President’s proposed energy budget (including clean energy initiatives—$28.4 billion) 162 or the entire budget of the DOJ (including federal prisons and the FBI—$27 billion). 163

Are citizens competent to make these important decisions of tax policy and public spending? A relatively uncontroversial feature of democratic theory is that the government should be responsive to citizen preferences. But this suggests an analogous conclusion, discussed at some length in the political science literature: in order for government to be responsive to citizen preferences, citizens must be capable of forming preferences. 164

What does it mean for citizens to be capable of forming competent preferences? Some political scientists argue that competent preferences “should not be based on arbitrary aspects of how an issue or problem is described” 165 —a criterion that resembles the well-known “independence of irrelevant alternatives” condition in the social choice literature. 166 But when framing effects cause the public to respond differently to equivalent proposals, the democratic competence of the citizenry may be thrown into doubt. 167

This problem is different from one that is often raised in analyses of the public’s relationship to the tax system. Often, the emphasis is on public ignorance of the mechanics of tax administration. 168 But the framing effect creates a different worry. It suggests that even if the public were much more fully aware of how the tax system works, public preferences would still be susceptible to “arbitrary” changes in wording and frames.

Frames are, of course, an inevitable feature of life. But they are an underappreciated part of the ways in which tax law and policy have been shaped over the last several decades. Much of academic and policy focus has been on publicizing the details and cost of our tax policy choices. But our analysis here suggests this emphasis is incomplete. However worthy those efforts may be, they run up against the stable and enduring public bias in favor of pursuing policies through the tax code.

As discussed in the body of the Note, Google Consumer Survey (GCS) is a “survey wall” that pops up when users want to access premium content, much like a paywall . GCS is used by “130 publishers in the U.S.” including “[ t] hree of the top 10 newspapers, seven of the top 15 . . . sites like the New York Daily News, Christian Science Monitor, and . . . the LA Times.” 169 The network also includes small news sites like Lima, Ohio News and the Texas Tribune as well as Pandora and YouTube, and various other arts and entertainment sites. 170

Visitors to these sites cannot opt into the surveys. Instead, they are solicited using a model that is designed to ensure a representative sample. The algorithm over-samples groups that are currently underrepresented in the sample. That is, if, say, women aged 18-24 from the South were underrepresented in the sample relative to the portion of the underlying Internet-using population they make up (as measured by the Census’ Current Population Survey), then that group would receive proportionally more survey requests. 171 This is known as stratified sampling, but GCS’s ability to receive responses in real time makes it different from traditional stratified methods where the stratification (that is, the issue of which groups are over sampled) is set before the survey begins.

The screenshot below, displaying Question 10, shows how one of our questions would show up. The order in which the answers are displayed is randomized (that is, the “Yes” option will show up after “No” as often as before “No”).

Taking Question 10 as an example, the image below shows the distribution of how long participants took to respond to the question.

On average, participants took thirty-six seconds. Excluding participants who took more than two minutes to respond, the average response time was twenty seconds. There does not appear to be any binding upper time limit.

One respondent took fifty-four minutes to respond (though we doubt that he was lost in thought about tax expenditures the whole time).

Announcing the YLJ Academic Summer Grants Program

Announcing the editors of volume 134, announcing the first-year editors of volume 133.

See Social Security Direct Deposit , Soc. Security Admin ., http://www.ssa.gov/deposit [http://perma.cc/BT48-8UXR].

See EITC, Earned Income Tax Credit, Questions and Answers , IRS , http://www.irs.gov/Individuals/EITC ,- Earned-Income-Tax-Credit,-Questions-and-Answers [http://perma.cc/442P-UGXT].

See S ocial Security Direct Deposit , supra note 1 .

For the EITC, see EITC Home Page , IRS, http://www.irs.gov/Individuals/EITC-Home-Page--It%E2%80%99s-easier-than-ever-to-find-out-if-you-qualify-for-EITC [http://perma.cc/W5R4-NT4R]; for a list of others, see Credits & Deductions , IRS, http://www.irs.gov/Credits-&-Deductions [http://perma.cc/4P7P-TQV6].

Stanley S. Surrey & William F. Hellmuth , The Tax Expenditure Budget–Response to Professor Bittker , 22 Nat’l Tax J. 528, 528 (1969).

Stanley S Surrey, Pathways to Tax Reform: The Concept of Tax Expenditures 7 (1973).

Id. At the margins, defining what should and should not count as a tax expenditure is a difficult task. Boris Bittker argued that such labeling is not possible in a comprehensive way, since there is no neutral baseline of “income” that can be used to identify tax expenditures. For example, should reducing the tax bills of the disabled or unemployed count as a subsidy for the affected classes, or simply as recognition of a reduced capacity to earn income? See Boris I. Bittker , A “Comprehensive Tax Base” as a Goal of Income Tax Reform , 80 Harv . L. Rev. 925 (1967). Nevertheless, we consider the concept useful and believe that our questions target policies that deviate from the usual treatment under the Code. Even taking Bittker’s position, our results are still highly relevant. Bittker argued that tax policies should be considered “provision by provision” to see if they are desirable, without reference to whether the policy departs from taxing Haig-Simons income (that is, consumption plus savings). Id. at 925. We show that the framing of the policy matters for this “provision by provision” review since that framing affects how people view the policy.

The Budget and Economic Outlook: 2014-2024 , Cong. Budget Off. 90 (Feb. 2014), http://www.cbo.gov/sites/default/files/cbofiles/attachments/45010-Outlook2014_Feb.pdf [http://perma.cc/LZQ6-EEQD].

2 U.S.C. § 622(3) (2012) (defining tax expenditures and the tax expenditure budget); 2 U.S.C. § 632(e)(2)(E) (2012) (requiring that this budget be produced); 31 U.S.C. § 1105(a)(16) (2012) (same).

These points and others are discussed in helpful detail in Edward A. Zelinsky , The Counterproductive Nature of Tax Expenditure Budgets , 137 Tax Notes 1, 2 & n.2 (2012). As of 2010, only Alabama, Nevada, South Dakota, Wyoming, and the District of Columbia did not have some form of tax expenditure budget. Michael Leachman , Dylan Grundman & Nicholas Johnson , Promoting State Budget Accountability Through Tax Expenditure Reporting , Center on Budget & Pol’y Priorities 38-43 (May 2011), http://www.cbpp.org/files/5-11 -11sfp.pdf [http://perma.cc/K9J7-RVGM].

Google’s methodology has some drawbacks, including the fact that it permits only short questions and induces quick responses from recipients. Nonetheless, it has performed in ways comparable to more traditional telephone surveys. These methodological issues are taken up in detail in Part II.

We also include a short methodological appendix. See infra Appendix.

See Stanley S. Surrey, Assistant Sec’y , U.S. Treasury, The U.S. Income Tax System—The Need for a Full Accounting, Address Before the Money Marketers (Nov. 15, 1967).

Surrey , supra note 6, at 6

Stanley S. Surrey, Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures , 83 Harv . L. Rev. 705, 728 (1970).

Id. at 729.

Id. at 731-32.

Id. at 731 (“[ C] omparisons of tax expenditures and direct expenditures must be comparisons of hidden programs with open ones.”).

See Stanley S. Surrey & Paul R. McDaniel, The Tax Expenditure Concept and the Budget Reform Act of 1974 , 5 B.C. L. Rev. 679, 725 (1976) (describing initial budgeting efforts as “a major advance both for those concerned with budget efficiency and for those concerned with tax equity”).

Christopher Howard, The Hidden Welfare State: Tax Expenditures and Social Policy in the United States 3 (1997)

Id. Nearly all traditional economic models are “outcome equivalent” in that when there is no uncertainty, actors consider only the final results, not how the results are achieved. This view is incompatible with different preferences for tax expenditures and direct outlays that provide identical results. See, e.g. , Claudia R. Sahm , Matthew D. Shapiro & Joel Slemrod , Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered ? , 4 Am. Econ. J.: Econ. Pol’y 216, 216 (2012) (noting that whether a subsidy is delivered by check or through the tax code is “immaterial in a standard economic model with rational and unconstrained consumers,” but finding that consumers likely do spend differently when money is received through a different mechanism).

Howard , supra note 21, at 3-4

There might be some circumstances under which this is not true. As discussed in more detail below, there may be organizational efficiencies in administering a policy either through the tax code (for example, if the IRS must already collect all the information necessary to determine program eligibility) or by direct spending (for example, if non-IRS agency expertise is needed to administer it). See David A. Weisbach & Jacob Nussim , The Integration of Tax and Spending Programs , 113 Yale L.J. 955 (2004). But, for reasons we discuss below, we think these efficiencies are very unlikely to explain our results. See infra Part IV.A.2.

See Edward A. Zelinsky , Do Tax Expenditures Create Framing Effects? Volunteer Firefighters, Property Tax Exemptions, and the Paradox of Tax Expenditure Analysis , 24 Va. Tax Rev. 797 (2005).

Id. at 811.

Id. at 816.

Id. at 800.

Steven M. Sheffrin , Perceptions of Fairness in the Crucible of Tax Policy , in Tax Progressivity and Income Inequality 309, 324-31 (Joel Slemrod ed., 1994).

Id. at 325.

Id. at 326.

Id. at 326-27.

Id. at 327.

See Christopher Faricy & Christopher Ellis, Public Attitudes Toward Social Spending in the United States: The Differences Between Direct Spending and Tax Expenditures , 36 Pol. Behav . 53, 60-61 (2014).

Id. at 67-68.

Jake Haselswerdt & Brandon L. Bartels, Public Opinion, Policy Tools, and Policy Feedbacks: Evidence from a Survey Experiment (Sept. 16, 2014) (unpublished manuscript) (on file with authors). We thank the authors for their permission to cite this work.

See id. ( manuscript at 10).

Id. (manuscript at 10-11).

Id. (manuscript at 11-12).

Id. (manuscript at 14).

See, e.g. , Irwin P. Levin, Associative Effects of Information Framing , 25 Bull. Psychonomic Soc’y 85, 85-86 (1987) (describing and utilizing information framing).

For one recent overview (with an emphasis on the underlying biology) see Benedetto De Martino et al., Frames, Biases, and Rational Decision-Making in the Human Brain , 313 Science 684 (2006).

See Zelinsky , supra note 25, at 807 (“A seminal demonstration of framing effects was a now-classic and much emulated experiment in which Professors Tversky and Kahneman asked two comparable but separate groups to decide between two alternative policies in the face of an impending epidemic.”).

Amos Tversky & Daniel Kahneman , Rational Choice and the Framing of Decisions , 59 J. Bus . 251, 254-55 (1986).

Zelinsky , supra note 25, at 799.

See William G. Jacoby, Issue Framing and Public Opinion on Government Spending , 44 Am. J. Pol. Sci. 750 (2000).

Thomas E. Nelson et al., Toward a Psychology of Framing Effects , 19 Pol. Behav . 221 (1997).

Dennis Chong & James N. Druckman , Framing Theory , 10 Ann. Rev. Pol. Sci. 103 (2007); James N. Druckman , The Implications of Framing Effects for Citizen Competence , 23 Pol. Behav . 225 (2001).

There is growing empirical literature on “tax salience.” See, e.g. , Raj Chetty et al., Salience and Taxation: Theory and Evidence , 99 Am . Econ. Rev. 1145 (2009) (performing an experiment at stores and finding consumers do not fully account for taxes that are charged at the counter rather than posted in their purchase decisions (for example, most sales taxes)); Amy Finkelstein, E- ZTax : Tax Salience and Tax Rates , 124 Q.J. Econ. 969 (2009) (finding that electronic billing makes consumers less aware of tolls and leads to increased use of tolls where such systems are in place); Jacob Goldin & Tatiana Homonoff , Smoke Gets in Your Eyes: Cigarette Tax Salience and Regressivity , 5 Am. Econ. J . 302 (2013) (finding that only low-income consumers are responsive to cigarette taxes applied at the counter). For more general studies, see Edward J. McCaffery & Jonathan Baron, Thinking About Tax , 12 Psychol. Pub. Pol’y & L. 106, 106 (2006) (reporting “the findings of several experiments about perceptions of various aspects of tax-law design”); and William Congdon , Jeffrey R. Kling & Sendhil Mullainathan , Behavioral Economics and Tax Policy (Nat’l Bureau of Econ. Research, Working Paper No. 15328, 2009), http://www.nber.org/papers/w15328.pdf [ http://perma.cc/8H9A-RA7T ] (reviewing the implications of recent developments in behavioral economics for tax policy).

See, e.g. , Chetty et al., supra note 55 (performing one such experiment).

For an overview of these studies, see generally McCaffery & Baron , supra note 55 .

The Haselswerdt and Bartels survey is tacked onto a larger survey on political opinions. See Haselswerdt & Bartels, supra note 42 (manuscript at 10). Seeing the other questions in that survey may “prime” people, changing their answers from what they would have said if they were asked about tax expenditures only. Similarly, each person answered three tax expenditure questions. Id. Earlier questions may also prime respondents with regards to later questions, although the authors try to minimize this effect by randomizing the order of the questions. Id.

See Sheffrin , supra note 30, at 325.

Robert A. Peterson, On the Use of College Students in Social Science Research: Insights from a Second-Order Meta-Analysis , 28 J. Consumer Res. 450, 458 (2001) (analyzing studies drawn from a “social science database”).

See Ellen Peters et al., Numeracy and Decision Making , 17 Psychol. Sci. 407 (2006). Peters’s study found that individuals with higher education, and in particular higher numeracy were less susceptible to the frame. However, the general applicability of this study is unclear because the frame in that case was entirely mathematical (two ways of presenting the same number).

See Zelinsky , supra note 25, at 818. Zelinsky found that men’s opinions differed less depending on the frame than women’s, and speculated that this was because men were more likely to be trained in economics, math, or business. See id .

Haselswerdt & Bartels, supra note 42 (manuscript at 22).

Faricy & Ellis, supra note 37, at 66.

See Haselswerdt & Bartels, supra note 42 (manuscript at 29).

Zelinsky’s work on the perception of volunteer status is somewhat limited by the narrow focus of the study. People have unique ideas about what, if any, personal benefits can be obtained while still being considered a volunteer, which likely interact with their perceptions of tax expenditures relative to direct outlays. See Ram A. Cnaan et al., Defining Who Is a Volunteer: Conceptual and Empirical Considerations , 25 Nonprofit & Voluntary Sector Q. 364 (1996) (describing the wide dispersion in definitions and empirically held beliefs about what constitutes a “volunteer”).

See Faricy and Ellis, supra note 37, at 58. While we find that increasing the amount of information about the mechanics of the tax expenditure does not have a big impact, we think it is important to know that the framing effect does not stem from uncertainty or misunderstanding about how the program works. See infra Part III.

See Haselswerdt & Bartels, supra note 42 (manuscript app. at 34-35). Their mortgage interest question has a similar structure. See id. at 34.

See Faricy & Ellis, supra note 37, at 62, 74-75; Haselswerdt & Bartels, supra note 42 (manuscript at 35-36). The value of deductions is greater for higher income tax payers, who pay higher marginal taxes, while (refundable) credits are equally valuable to all taxpayers. Our direct spending equivalent to the mortgage interest deduction also suffers a bit from this issue because, for simplicity, the value of the subsidy does not depend on income. See infra note 106. Note also that this criticism does not apply to Haselswerdt and Bartels’s final question on paid parental leave where the payments are specified to be 100% of lost income. Haselswerdt & Bartels, supra note 42, app. at 36.

See Faricy & Ellis, supra note 37, at 61 (“[ A] ll three programs mirror existing federal programs in cost, intent, and actual redistributive effects.”).

See Haselswerdt & Bartels, supra note 42 (manuscript app. at 35-36).

See Wiktor Adamowicz et al., Stated Preference Approaches for Measuring Passive Use Values: Choice Experiments and Contingent Valuation , 80 Am. J. Agric. Econ. 64, 73 (1998) (“It could be that individuals chose the status quo response when the task of selecting options was too complex or when they were uncertain about the trade-offs they would be willing to make. Choosing the status quo could also be a form of protest response.”).

See Daniel Kahneman et al., Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias , 5 J. Econ. Persps . 193 (1991); see also William Samuelson & Richard Zeckhauser , Status Quo Bias in Decision Making , 1 J. Risk & Uncertainty 7 (1988) (identifying the modern status quo bias for the first time).

See David Dreyer Lassen, The Effect of Information on Voter Turnout: Evidence from a Natural Experiment , 49 Am . J. Pol. Sci. 103, 105 (2005) (“Uncertainty about [an] issue could take the form of a status quo bias, documented in a variety of settings, leading uncertain voters to vote for the status quo where abstaining, according to the reasoning in the models, would be optimal.”).

See W Kip Viscusi et al., Asymmetric Assessments in Valuing Pharmaceutical Risks , 34 Med. Care DS34, DS41-42 (Supp. 1996) (citing Jack L. Knetsch , The Endowment Effect and Evidence of Nonreversible Indifference Curves , 79 Am. Econ. Rev. 1277 (1989)) (describing the implications of the Knetsch study in terms of the status quo bias).

See Adamowicz et al., supra note 72, at 68 n.3 (“We are assuming that individuals who always chose the status quo regardless of the attribute levels were essentially not responding to the CE task. Thus these responses were treated the same as an ‘I don’t know’ response in a CVM question.”).

See Haselswerdt & Bartels supra note 42 (manuscript at 7).

Paul McDonald et al., Comparing Google Consumer Surveys to Existing Probability and Non-Probability Based Internet Surveys , Google Consumer Survs . 3 (2012) , http://www.google.com/insights/consumersurveys/static/consumer_surveys_whitepaper.pdf [http://perma.cc/5MCM-TK6S].

Paul McDonald, A New Way to Access Quality Content Online , Google News: Blog (Mar. 29, 2012, 10:21 AM), http://googlenewsblog.blogspot.co.uk/2012/03/new-way-to-access-quality-content.html [http://perma.cc/YS45-CGUW].

See, e.g. , Jessica Lavariega Monforti et al., ¿ Por Quién Votará ? Experimental Evidence About Language, Ethnicity and Vote Choice (Among Republicans) , 1 Pol., Groups, & Identities 475, 481 (2013) (“By asking different single questions of multiple samples [using GCS], researchers can conduct a survey experiment . . . . The tool is ideal for survey experiments . . . because randomized assignment to different questions holds unobserved variables constant.” ( citation omitted)). This paper uses GCS to consider how voters respond to identical candidates who are or are not bilingual.

See, e.g. , Andrew K. Przybylski , Who Believes Electronic Games Cause Real World Aggression ? , 17 Cyberpsychology , Behav . & Soc. Networking 228, 229 (2014) (“GCS produces highly accurate results in line with other probability-based panel survey approaches. Importantly, GCS demonstrates substantially higher response rates (15–20%) compared to sampling rates observed industry wide (0.1–2%) across a range of polling topics.”). This paper uses GCS to study national beliefs about the relationship between violent video games and real-life violence.

See, e.g. , Shane Frederick et al., The Limits of Attraction , 51 J. Marketing Res. 487, 491 (2014) (“Although our prior results—and, more to the point, our repeated non results—led us to predict no attraction effect when quality was represented visually, we were curious whether the marginally significant repulsion effect we obtained would replicate, so we reran the study using Google Surveys, which enabled us to obtain very large samples quickly.”). This paper uses a variety of survey tools—including GCS and Mechanical Turk—to study the prevalence of the “attraction effect,” wherein the addition of an irrelevant third consumption option changes consumer perceptions of the two preexisting options.

See, e.g. , Panel Methodology , YouGov , http://research.yougov.co.uk/services/panel-methodology [http://perma.cc/3BVB-2K9R]; see also Siona Robin Listokin et al., Americans’ Preferences for Tax Increases and Spending Cuts , 139 Tax Notes 188 (2013) (using YouGov to examine how Americans would alter spending and taxes to close the budget deficit).

See Mechanical Turk , https://www.mturk.com/mturk [http://perma.cc/445U-QXMT]; see also Ilyana Kuziemko et al., How Elastic Are Preference for Redistribution? Evidence from Randomized Survey Experiments (Nat’l Bureau of Econ. Research, Working Paper No. 18865, 2013), http://www.nber.org/papers/w18865.pdf [http://perma.cc/LF6D-NHKB] (using Mechanical Turk to gather data on attitudes toward tax policy).

See How It Works , Google Consumer Survs . , http://www.google.com/insights/consumersurveys/how [http://perma.cc/TRK-7Q42].

McDonald et al., supra note 78, at 3.

Id. (citations omitted).

Id. (“Inferring this demographic data enables Consumer Surveys researchers to ask fewer questions in a survey which in turn increases response rates.”).

Scott Keeter & Leah Christian, A Comparison of Results from Surveys by the Pew Research Center and Google Consumer Surveys , Pew Res. Center (Nov. 7, 2012), http://www.people-press.org/files/legacy-pdf/11-7-12%20Google%20Methodology%20paper.pdf [http://perma.cc/BY5Z-4CJP].

McDonald et al., supra note 78.

See id. at 5.

Id. at 6-9. For example, Google reports that the “average absolute error for the non-Google samples was 5.29% across all benchmarks, while the Google samples averaged 3.76%.” Id. at 7. GCS attempts to target the Internet-using population, while the benchmark surveys were aimed at the whole population, and therefore we should not be surprised to see some differences.

Keeter & Christian, supra note 91, at 1.

Id. at 2. The mean was 6%, driven by a few questions in which the differences were relatively large. Id. There may be innocent explanations for these differences, as in some cases the Pew questions and potential answers did not entirely match what GCS put out. Id.

Nate Silver, Which Polls Fared Best (and Worst) in the 2012 Presidential Race , N.Y. Times: FiveThirtyEight ( Nov. 10, 2012, 8:38 PM), http://fivethirtyeight.blogs.nytimes.com/2012/11/10/which-polls-fared-best-and-worst-in-the-2012-presidential-race [http://perma.cc/SL29-KKGL].

See Kathryn Zickuhr , Who’s Not Online and Why , Pew Res. Center. 2 (2013) , http://www.pewinternet.org/files/old-media//Files/Reports/2013/PIP_Offline%20adults_092513_PDF.pdf [http://perma.cc/9389-HET4].

Id. at 5. We think it very likely that our sample skews toward more educated respondents, which means that we actually underestimate the framing effect.

See, e.g ., Dan Kahan , Fooled Twice, Shame on Who ? Problems with Mechanical Turk Study Samples, Part 2 , Cultural Cognition Project (July 10, 2013, 9:30 AM), http://www.culturalcognition.net/blog/2013/7/10/fooled-twice-shame-on-who-problems-with-mechanical-turk-stud.html [http://perma.cc/3KGU-MFUM] (noting a variety of problems with Mechanical Turk panels, including selection issues with voluntary Mechanical Turk workers, problems of repeated exposure to research studies, and misrepresentation among survey participants); Kuziemko et al., supra note 84, at 7 (discussing how the authors confronted issues with Mechanical Turk, including foreign professional survey takers and how survey release times had to be altered to minimize the impact of these professionals).

See, for example, articles published in prominent economics and political science journals, including Justin Grimmer et al., How Words and Money Cultivate a Personal Vote: The Effect of Legislator Credit Claiming on Constituent Credit Allocation , 106 Am. Pol. Sci. Rev. 703 (2012) (using Mechanical Turk to gather information about how people react to political officials who claim credit for government spending); Douglas L. Kriner & Francis X. Shen , How Citizens Respond to Combat Casualties: The Differential Impact of Local Casualties on Support for the War in Afghanistan , 76 Pub. Opinion Q. 761 (2012) (detailing a Mechanical Turk experiment designed to explore whether support for wars varied when respondents read a mock-account of a casualty from their state or from elsewhere) ; and Emily Oster et al., Optimal Expectations and Limited Medical Testing: Evidence from Huntington Disease , 103 Am. Econ. Rev. 804 (2013) (relying in part on Mechanical Turk data for information on how and why Americans save for retirement).

In particular, our direct spending equivalent to the mortgage interest deduction had to be modified. We did not have space to create an exactly equivalent program in which the percentage reimbursement increases with the taxpayer’s income (as with the actual mortgage interest deduction). For the other questions, without GCS’s character limits, we might have added more detail about why the policy might be a good idea and who would be eligible. Generally, however, we felt that we were able to communicate all the information we wanted to communicate despite the limits.

Each question also included information required for informed consent telling respondents that “this is an academic study” and that their participation was “voluntary and anonymous,” which we have removed for convenience here.

The response rate did vary to some degree. For example, it was higher during weekends, but given the similarity of responses, we are not concerned that this variation will bias the results, particularly since the relative proportion of weekday and weekend responders is the same across questions.

If people opted out at random, then our survey would still be representative of the U.S. Internet-using population—as a rough intuition: if you remove random individuals from a random sample, you’ll still have a random sample. Some of the opting-out, however, appears to be non-random since it is slightly correlated with people’s demographic characteristics. In particular, younger respondents opted out more often than older ones. Generally, the differences are not very substantial: roughly 20% of our sample should have been 18-24, but only 15% were (differences in the other age groups were smaller). Likewise, slightly more women opted out than did men. There was no evidence that people with different incomes opted out at different rates.

If this opt-out behavior was random within demographic groups, it still will not present a problem because we can fix the issue using probability weighting. For example, imagine that there should be twenty people in each of five age groups. If a random set of ten people opt out of answering a question in the first age group, but everyone else answers in the rest of the groups, we can get the “right” result by doubling the weight accorded to responses from the first age group.

In the end, while we think it is unlikely that opt-out behavior within groups is entirely random, we have no reason to believe that some non-random behavior should substantially bias the results. In particular, we do not see any opting out based on income, which we think is the variable most likely to be correlated with unobserved characteristics (for example, education) that affect people’s reactions to the frame. Likewise, we do not see any evidence of opt-out behavior varying across different questions by age, sex, or income group, which might otherwise threaten to bias our comparisons across questions.

We believe the questions describing the mechanics of tax expenditures and cost of the programs are more complex as they required respondents to grapple with more information than did questions laying out a simple government payment.

An example may be illustrative: twenty-nine fewer respondents with full demographic information answered Question 9 (aid to disabled persons as a tax expenditure) compared to Question 8 (the direct subsidy version). Respondents favored the credit over the direct subsidy by roughly ten percentage points. This remains true even if we treat the additional twenty-nine opt-outs for Question 9 as not supporting the policy. Doing so reduces the gap to eight percentage points, which remains economically and statistically significant. This is true for all paired questions.

However, we believe this treatment may overstate the true differences in beliefs among selective opt-outs. It is likely that people who avoid more complex questions are more susceptible to the frame, since they seem to be less willing to use slow, logical thinking. (In the Kahneman sense, this is System-Two thinking. See Daniel Kahneman , Thinking Fast and Slow (2011).) Thus, any selective opting out on this basis probably causes an under- rather than over-statement of the true framing effect presented below.

See infra Appendix for more details.

For a pessimistic discussion of how voters think, see Christopher H. Achen & Larry M. Bartels, It Feels Like We’re Thinking: The Rationalizing Voter and Electoral Democracy, Presentation at the Annual Meeting of the American Political Science Association (Aug. 28, 2006), http://www.princeton.edu/csdp/events/AchenBartels011107/AchenBartels011107.pdf [http://perma.cc/3QLE-SCWU]. One might worry that the immediate reward that survey-takers get from finishing the survey (access to desired Internet content) may skew responses even compared to actual voters who make decisions under the hectic constraints of real life. However, this skew is probably not too severe given that GCS performed comparably to traditional surveys that lack this instant gratification feature.

See supra notes 47-54.

See Suzanne Mettler , Reconstituting the Submerged State: The Challenges of Social Policy Reform in the Obama Era , 8 Persp . on Pol . 803, 809 (2010) (finding that many recipients of tax expenditures do not even realize that they are benefiting from a government program).

See generally Liam Murphy & Thomas Nagel, The Myth of Ownership: Taxes and Justice 15 (2002) (describing and disputing this “everyday libertarianism” view); Lawrence Zelenak , The Myth of Pretax Income , 101 Mich. L. Rev. 2261 (2003) (reviewing Murphy & Nagel, supra ).

See Tversky & Kahneman , supra note 50 .

Zelinsky , supra note 25, at 814.

See generally Edward A. Zelinsky , James Madison and Public Choice at Gucci Gulch: A Procedural Defense of Tax Expenditures and Tax Institutions , 102 Yale L.J. 1165 (1993) (arguing that there are valid procedural reasons related to interest group capture for promoting public spending through the tax code).

See Howard , supra note 21, at 3 (“[ T]ax expenditures . . . are largely invisible to citizens, policy makers, and academics . . . .”).

For more on these questions, see Weisbach & Nussim , supra note 24, at 961. Weisbach and Nussim argue that routing spending programs through the tax code makes sense when there is significant overlap between the information the IRS will need anyway and the information needed to administer the program in question—like, for example, the earned income tax credit. Id. at 1001. On the other hand, for other programs, like food stamps, there is little overlap in required information, and there might be other problems with IRS administration (for example, if payments need to be made more than once a year). Id. at 1006-07. Therefore, the program should be directly administered by an agency.

Indeed, Weisbach and Nussim argue that their theory of tax expenditures is novel and that Americans have likely not begun to consider broadly the specialization-versus-coordination tradeoff when considering spending through the Code. See id. at 957.

See the discussion of potential status quo bias supra Part I.D.2.

Weisbach & Nussim , supra note 24, at 958 (“Welfare is the same regardless of whether the program is formally part of the tax system or is located somewhere else in the government.”).

For a rich discussion of this point, see Druckman , supra note 54, at 234 (“The implication is that equivalency framing effects render peoples’ preferences uninterpretable . For example, when people prefer an economic program described as resulting in 95% employment but then oppose the same program when told that it will result in 5% unemployment, it is impossible to determine if they support or oppose the program (i.e., the preferences are irreconcilable).”).

See B. Douglas Bernheim & Antonio Rangel, Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics , 124 Q.J. Econ. 51 (2009) ; see also Jacob Goldin & Daniel Reck , Preference Identification Under Inconsistent Choice: A Reduced-Form Approach (Working Paper), http://ssrn.com/abstract=2417709 [http://perma.cc/RA9F-F2YW].

See Zelinsky , supra note 11, at 3-4.

See generally Zelinsky , supra note 11 . Of course, it might be the case that the growth in tax expenditures would, but for tax expenditure budgets, be much worse. But it is difficult to imagine a kind of randomized experiment that could test this proposition.

The contours of this debate are outlined in Zelinsky , supra note 11.

J. Clifton Fleming Jr. & Robert J. Peroni , Reinvigorating Tax Expenditure Analysis and Its International Dimension , 27 Va. Tax Rev. 437, 524 (2008).

See Edward D. Kleinbard , The Congress Within the Congress: How Tax Expenditures Distort Our Budget and Our Political Processes , 36 Ohio N.U. L. Rev. 1, 29 (2010).

Zelinsky , supra note 11, at 5.

This does not mean that we should expect that all direct spending will be routed through the tax code. For the reasons that Weisbach and Nussim outline, it may be impractical or very costly to route some programs, such as food stamps, through the tax code. Therefore, these programs are not administered as tax expenditures, even if they would be more popular if they were. See Weisbach & Nussim , supra note 24, at 997-1027 (explaining why the Earned Income Tax Credit, unlike food stamps, is best administered as a tax expenditure).

Chong & Druckman , supra note 54, at 116.

Louis D Brandeis, What Publicity Can Do , in Other People’s Money and How the Bankers Use It 92 (1914) (“Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”).

See, e.g. , Jon Craig & William Allan, Fiscal Transparency, Tax Expenditures, and Budget Processes: An International Perspective , 94 Proc. Ann. Conf. on Tax’n & Minutes Ann. Meeting Nat’l Tax Ass’n 258 (2001); see also Tax Expenditures—Shedding Light on Government Spending Through the Tax System ( Hana Polackova Brixi et al. eds ., 2004) (describing lessons from developed and transition countries for the transparent use of tax expenditures).

Jason Levitis et al, Ctr. on Budget & Policy Priorities, Promoting State Budget Accountability Through Tax Expenditure Reporting 1 (2009).

See, e.g. , Kenneth W. Gideon, A ssessing the Income Tax: Transparency, Simplicity, Fairness , 25 Ohio N.U. L. Rev. 101, 104 (1999) (“The efforts to date are not encouraging from the standpoint of transparency.”).

See supra notes 10–11 and accompanying text.

See Levitis et al. , supra note 139, at 1 (“States typically require extensive documentation of how much direct spending they do each year, and their budget processes entail evaluation of each item. Tax expenditures usually receive far less scrutiny.”).

See Conn. Gen. Stat. Ann. § 12-7b(e) (West 2014); see also Office of Fiscal Analysis ,, Connecticut Tax Expenditure Report , Conn. Gen. Assembly (2012), http://www.cga.ct.gov/ofa/Documents/year/TER/2012TER-20120410_Tax%20Expenditure%20Report%20FY%2012%20Revised.pdf [http://perma.cc/C5VL-CJDH].

See Minn. Stat. Ann. § 270C.11 (West 2014); see also Tax Research Div. , , State of Minnesota Tax Expenditure Budget: Fiscal Years 2012-2015 , Minn. Dep’t Revenue (2012), http://www.revenue.state.mn.us/research_stats/research_reports/2012/2012_tax_expenditure_links.pdf [http://perma.cc/45VX-EMAZ].

See Leachman , Grundman & Johnson , supra note 11 , at 38-44 For the 2009 data, see Michael Leachman , Nicholas Johnson & Jeremy Koulish , Promoting State Budget Accountability Through Tax Expenditure Reporting , Ctr. on Budget & Policy Priorities 3 (Apr. 2009), http://www.cbpp.org/files/4-9-09sfp.pdf [http://perma.cc/5NU9-GPN8].

Staff of the J Comm. on Taxation, 113th Cong., Estimates of Fed. Tax Expenditures for Fiscal Years 2012-2017, at 1 (Comm. Print 2013).

See generally The Budget and Economic Outlook: 2014-2024 , supra note 8 (discussing the growth rate of both tax expenditures and total government expenditures).

This idea is similar to Zelinsky’s point that tax expenditure budgeting might counterproductively “ encourage[ ] a scramble [among interest groups] for parity in the form of comparable tax benefits” Zelinsky , supra note 11, at 5. But instead of emphasizing the desires of special interests, we suggest that budgeting might also affect the public directly by making citizens aware of the many forms that tax expenditures can take. Likewise, while Haselswerdt and Bartels do not talk about tax expenditure budgeting, this idea also reflects their belief that when people are more familiar with government support coming through tax expenditures in a given policy area, they are more likely to support future use of tax expenditures in that area. Haselswerdt & Bartels, supra note 42 (manuscript at 6-7).

This idea follows the well-known income and substitution effects in microeconomic theory. For a discussion of these effects, see Robert E. Hall & Marc Lieberman, Microeconomics: Principles and Applications 161-65 (6th ed. 2013).

In addition, we also find evidence that, despite widespread tax-expenditure budgeting, the term has little meaning to the public.

See , e.g. , Justin Fox, Government Transparency and Policymaking , 131 Pub. Choice 23 (2007).

Charles M. Elson & Craig K. Ferrere , Executive Superstars, Peer Groups, and Overcompensation: Cause, Effect, and Solution , 38 J. Corp. L. 487 (2013); see also James Surowiecki , Open Season , New Yorker , Oct. 21, 2013, http://www.newyorker.com/talk/financial/2013/10/21/131021ta_talk_surowiecki [http://perma.cc/8WK2-GMFQ] (“[ T]he drive for transparency has actually helped fuel the spiraling salaries [of executives].”).

See David Card et al., Inequality at Work: The Effect of Peer Salaries on Job Satisfaction , 102 Am . Econ. Rev. 2981 (2012).

Peter Ubel , How Price Transparency Could End Up Increasing Health-Care Costs , Atlantic (Apr. 9, 2013, 7:55 AM), http://www.theatlantic.com/health/archive/2013/04/how-price-transparency-could-end-up-increasing-health-care-costs/274534 [http://perma.cc/Y979-BXKE].

See , e.g. , Deborah L. Paul, The Sources of Tax Complexity: How Much Simplicity Can Fundamental Tax Reform Achieve ? , 76 N.C. L. Rev . 151 (1997).

For example, expenses incurred while moving to a new job.

Michael J Graetz & Deborah H. Schenk, Federal Income Taxation: Principles and Policies 429 (6th ed. 2008).

See Notices , IRS , http://www.irs.gov/instructions/i1040/ar03.html [http://perma.cc/3KKG-REF5].

The standard deduction is designed to insulate many taxpayers from the hassles of dealing with these issues, but even non-itemizers must deal with credits of various kinds and the rules surrounding retirement accounts if they have one.

See Topline Results for Tax Foundation’s 2009 Survey of U.S. Attitudes on Taxes, Government Spending and Wealth Distribution , Tax Found. (Apr. 8, 2009) , http://taxfoundation.org/article/topline-results-tax-foundations-2009-survey-us-attitudes-taxes -government-spending-and-wealth [http://perma.cc/BZ5U-CTQ7]. Of course, even if the tax expenditures were instead direct outlays, a different government agency would need to determine eligibility and administer them, perhaps leading to equal aggravation for citizens.

The Budget and Economic Outlook: 2014-2024 , supra note 8, at 90

Exec Office of the President , Budget of the U.S. Government, Fiscal Year 2014 , Off. Mgmt. & Budget 85 (2013), http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/budget.pdf [ http://perma.cc/62SC-VX68 ].

Id. at 119.

See Druckman supra note 54, at 232-33.

Id. at 232.

See Kenneth J. Arrow, Social Choice and Individual Values 26 (2d ed. 1970).

See Chong & Druckman , supra note 54, at 121-22.

Sheffrin , for instance, writes that the “tax system is one of our most complex social contrivances and, realistically, one can only expect there to be limited knowledge about it.” Sheffrin , supra note 30, at 311.

Steve Cooper, Q&A with Paul McDonald: Co-Creator of Google Consumer Surveys , Forbes, Mar. 29, 2013, http://www.forbes.com/sites/stevecooper/2013/03/29/qa-with-paul-mcdonald-co-creator-of-google-consumer-surveys [http://perma.cc/485U-BNWD].

Keeter & Christian , supra note 91, at 3.

See id . ; McDonald et al., supra note 78, at 3-4.