Saying that the government’s size is determined by the level of taxes is an approximation. There are different definitions of the size; the number of govermnet employees, the payroll of goverment employees, total government expenditures, total taxation. Of course, all of these are closely related.
There is an equation. On one side are revenues and on the other side expenditures. Revenues are mainly from taxes and levies but there are other sources such as duties, fines, investments, etc. Expenditures include payroll, obtaining services and products, government investment. If the revenues are higher we have a surplus otherwise we have a deficit. The deficit is covered by borrowing and in this way debt accumulates.
In USA there are three government levels, federal, state, local. Local have two tiers, county and municipal. Further jurisdictions are city, town, borough, village. Canada has three levels, federal, provincial, municipal. In Norway there are three levels, kingdom, county, municipal. This three cases are given as examples.
A night watchman state is minimal and protects citizens from aggression, theft, breach of contract and fraud with military, police and courts. Fire departments, prisons and other functions may be included. This is a minarchist’s perception. Minarchism is found on the left and on the right. Left anarchists and anarchocapitalists want no state at all. Most people agree though that a state should at least enforce the non-aggression principle.
For OEDC industrial countries, the percentage of government employees is; education 38,9%, health 18,1%, defense 14,9%, police 7,2%, administrative 4,4%, finance and planning 3 %. Health approximately equals police plus defense (22.1%) and education is double that.
Some people propose private army and private police. Still the taxpayer would have to pay but these would be provided by private companies. Assume that this could be more productive. Such thing might be dangerous. Many issues do not have an economic point of view only. Others claim that even having telecommunications or utilities in the private sector may pose national security dangers.
There is no such thing as private army. There is though private security which is not the same as police but is doing part of police work, protection. In health and education there is a considerable part that is in the private sector. Nevertheless, health and education is a big part of government payroll. What percentage of education and health sector should be public?
Government intervention is not only determined by the size of the government. Other aspects are strictness of laws, ways laws are enforced, respect of privacy. We could have a small government with very strict laws, brutal law enforcement, surveillance cameras everywhere, over-policing, no freedoms (speech, assembly, association, choice, academic, scientific, intellectual). There may not even be economic freedom although the state is small. One school of thought favors a lot of government intervention and another minimal. Who's right? Both are right and both are wrong. It depends on the situation. An analogy will make this better understood.
If you are healthy you do not need any medicine. Sometimes vitamins can be used to improve mental and physical performance. If you have the flu there are some alternatives. The immune system could kill the virus. If the virus is not controlled by the immune system, then some medication is needed. In the first phase herbs and natural medicine can be tried. If this doesn't work, light antibiotics could be the next option. The final step is powerful antibiotics. An experienced doctor may decide to skip some alternatives and go straight to the ones that will work. The type of drug used and the dosage may vary depending on the situation.
Let's use the analogy for the economy. The same applies to other areas of government responsibility. The doctor is the government and the method of treatment, the type and dosage of the drug, is the government intervention. We do not need to use government intervention when the economy is working properly. Intervention with vitamins could be used to increase the performance of the economy. If self-treatment is possible, then this is the preferred route before trying some kind of medication. This means letting the economy make the necessary adjustments to heal itself.
Natural, mild and then strong intervention is the sequence of preferred methods. Natural are the methods which trigger reactions that indirectly help the economy to self-regulate. There are economists and politicians who prescribe drugs for a healthy economy. On the other hand, there are others who do not prescribe drugs for a sick economy. Both are wrong. The optimum approach should be chosen according to the situation; non-intervention, natural intervention, mild intervention, strong intervention. Also, the type and dosage of the intervention may vary depending on the situation.