Ben Franklin once said that nothing in life is certain, but death and taxes. Most Americans say they dislike (or even hate) doing their taxes, but a third say they like it (or even love it), according to an April 4-7 national survey by the Pew Research Center. But despite the fact that taxes remain a yearly ritual for most Americans, Americans’ political ignorance about our taxes and where our federal tax dollars go is as enduring as it is pervasive. A 2011 CNN/ORC poll, for example, found that Americans estimated on average that foreign aid consumes 10 percent of the federal budget, when it actually takes up less than 1 percent.
For state and federal taxes, the April 15 deadline is just days away. And as policymakers and citizens weigh decisions about revenues and expenditures, it is important to examine what the government does with the money it collects.
In Fiscal Year 2014, the federal government will spend around $3.8 trillion, amounting to around 22 percent of the U.S. economy, as measured by Gross Domestic Product (GDP). The majority of that $3.8 trillion (nearly $3.0 trillion), is financed by federal revenues. These revenues come from three major sources: income taxes paid by individuals (46 percent); payroll taxes paid jointly by workers and employers (34 percent); and corporate income taxes paid by businesses (11 percent). A handful of other types of taxes – like custom duties and excise taxes – make up the remainder of federal revenues.
The remaining government spending that is not financed by federal revenues is financed by borrowing – a deficit that will ultimately be paid for by future taxpayers. According to the Congressional Budget Office, the federal government is expected to borrow $616 billion in fiscal 2014 (down from $845 billion in fiscal 2013 and $1.09 trillion in fiscal 2012).
So, where does all that money go?
The U.S. Treasury divides all federal spending into three groups: mandatory spending; discretionary spending; and interest on debt. Mandatory spending consists largely of earned-benefit or entitlement programs – like Social Security, Medicare, and Medicaid – and the spending for those programs is determined by eligibility rules rather than the appropriations process. Therefore, while Congress can impact the amount spent on mandatory programs by altering eligibility rules to exclude or include more people, mandatory spending is essentially automatic. Discretionary spending, in contrast, refers to the portion of the federal budget which goes through the annual appropriations process each year. Congress directly sets the level of spending on any of those discretionary programs in a given year, which includes funding for the Department of Defense, Health and Human Services, Education, and nearly all other federal agencies. Finally, interest on debt is the interest the federal government pays on its accumulated debt, minus interest income received by the government for assets it owns.
Putting together mandatory spending, discretionary spending, and interest on the debt, you can see how the federal budget is divided into different categories of spending. As the graph above illustrates, mandatory and discretionary spending account for roughly 94 percent of the total federal budget. Of that 94 percent, nearly 77 percent is used to fund four major categories of federal spending:
- Defense and International Security Assistance (19 percent). In fiscal year 2013, the federal government allocated $643 billion fordefense and security-related international activities ($52.3 billion less than the fiscal year 2012). The majority of that spending reflects the Defense Department’s base budget (roughly $500 billion). The total also includes the costs of supporting overseas operations, funding for which totaled $93 billion in 2013.
- Social Security (24 percent). In fiscal year 2013, $814 billion paid for social security. Social Security provides cash benefits to retirees, the disabled, as well as dependents of deceased workers. In 2013, the Social Security program provided monthly retirement benefits averaging $1,294 to 37.9 million retired workers.
- Medicare, Medicaid, and CHIP (22 percent). Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) accounted for $772 billion in 2013. Two thirds of this amount, or $498, went to Medicare, which provides health care to roughly 54 million Americans who are over the age of 65 or have disabilities. The remainder, or $274 billion, went to Medicaid and CHIP, which provide health care or long-term care to roughly 70 million low-income Americans.
- Safety Net Programs (12 percent). $398 billion in fiscal year 2013 supported programs that provide assistance to individuals and families facing economic hardship. Among these programs include SNAP (food stamps), school meals, low-income housing assistance, child care assistance, Supplemental Security Income, and various other programs designed to keep people out of poverty.
The remaining fifth of federal spending goes to everything else. Benefits for federal retirees and veterans accounts for 8 percent; transportation infrastructure accounts for 3 percent; education accounts for 1 percent; science and medical research accounts for 2 percent; non-security international aid accounts for 1 percent; and all other spending accounts for the remaining 3 percent.
Spending on mandatory and discretionary programs involves the U.S. Treasury Department writing a check to pay the program costs. But there is another type of federal spending that is often overlooked (often intentionally) during discussions over the federal budget – namely, spending through the tax code. Lawmakers have written thousands of tax breaks in the federal tax code in order to promote certain activities they deem beneficial to society. These tax breaks are often called “tax expenditures” because, from the perspective of the government, they are no different than spending on any other governmental program. In either case, the U.S. Treasury is choosing to forego tax revenue.
The amount of spending in the tax code is not trivial. In fact, according to the White House, tax breaks, deferments, and loopholes used by individuals and businesses are expected to cost the federal government $1.18 trillion in fiscal year 2014. That is more than all discretionary spending, including military spending, and is the single largest budgetary expense, comprising over 30% of potential revenue. Much of these tax breaks are beneficial to the economy. But consider this: reducing this expense by 66% would completely eliminate the budgetary deficit and place the U.S. on track to pay down the national debt.
Its not necessarily important that you know the different between discretionary vs. mandatory spending, or that you memorize the breakdown in federal spending among the various federal agencies and programs. It is important, however, that you look beyond the (oftentimes misleading) rhetoric of today’s budgetary debate. Critics often decry “government spending” and characterize federal programs as “wasteful,” but the real question is whether the actual public services the government provides are valuable. To the extent that they are, the only way to pay for them is with tax revenue. As stakeholders, it is our responsibility to see that our tax dollars are spent in ways that reflect our priorities. But to do that we need to know where that money is going.