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As US tax rates drop, government's reach grows

Study: 1 in 2 Americans now receives income from government programs.

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The Congressional Budget Office, in a long-range forecast prepared in 2005, outlined a baseline scenario in which entitlement programs push federal spending to 25.3 percent of GDP by mid-century, up from about 18.4 percent today. That number could go higher still if medical inflation doesn't edge downward.

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Similarly, Shilling predicts that the number of "government beneficiaries," as he defines them, will grow to 60 percent of the US population by 2040 Against this backdrop, many Americans are understandably uneasy about the fiscal path of their politicians.

Some want to scale back the federal budget. Others see new priorities for spending, such as scientific research and global warming.

"It pays to invest in early education programs," says Fran Smith, who works for an education-oriented community organization in Boston.

To afford it, she says, government needs to use money more wisely, more for public goods and less for what she says are the "profit motives" that now pervade Washington.

"For … working class people, the last thing we want is more taxes," Ms. Smith says as she hurries to an afternoon meeting.

One challenge for the nation is to define what is wise spending and what is not. Some government largess is showered more on the well-to-do than the needy. By giving a tax break for the interest homeowners pay on their mortgage, for example, the government is effectively spending money to encourage homeownership. But the deduction is far more valuable to people in higher tax brackets than low ones.

"Arguably the mortgage interest deduction actually reduces the number of homeowners, because it pushes up the price of housing," Len Burman of the Urban Institute said last week in a seminar titled "Stupid Tax Tricks."

But, stupid or not, don't expect that popular deduction to bite the dust anytime soon.

By some other measures – such as taxes or spending as a share of the overall economy –the federal government isn't particularly large now. Even a controversial war in Iraq hasn't changed that.

But as insurance programs embrace an aging population, government is on track to grow.

For his analysis of government beneficiaries in the US, done last year, Shilling looked at data from 1950 through 2004. His tally was conservative on several fronts – including the care he took to avoid double-counting anyone.

He added up the number of federal, state, and local government workers, plus private sector workers who owe their jobs to government. He then tallied the recipients of transfer payments (like pensions) and a few other substantial programs (like food stamps). And he tacked on the dependents of these direct beneficiaries.

He divided his total by the US population to get a "government beneficiary" ratio for each decade. The ratio has risen, he found, from 28.3 percent in 1950 to a peak of 55.0 percent in 1980. It edged down in 1990 and again in 2000, and now has begun climbing again.

Looking at the big picture, especially entitlements for older Americans, some experts worry about a fiscal undertow.

"I fear that we may be on the path to becoming a decrepit, high-unemployment welfare state," says Daniel Mitchell, an economist at the libertarian Cato Institute in Washington. Economists differ regarding whether, or at what level, a high tax burden acts to dampen economic growth. European nations have shown, for example, that advanced economies can maintain generous social-welfare programs.

But Mr. Mitchell says these nations pay a price of more tepid growth. Sweden, he says, has in recent years dropped off the global Top 10 list for per-capita output. Ireland, by contrast, has kept the government burden low and enjoyed rapid economic growth.

[Editor's note: The original version repeated a quote.]