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Where Do Your Tax Dollars Go?

March 22, 2017

Thomas Jefferson said: “The foundation of democracy rests on the foundation of an educated electorate.” With that in mind, tax season is a great time to review how the federal government spends our tax dollars.

Total spending for the federal government in 2015 was $3.8 trillion. Granted, not all of this spending is funded through personal income taxes as some is funded through employment taxes, corporate taxes, fees, and borrowing. However, the percentage allocated to each spending category can be a good proxy for how our tax dollars are spent.

The largest spending category is Social Security, unemployment, and labor benefits. This accounts for $1.28 trillion, or roughly one-third of federal government spending, the bulk of which is paid out in the form of Social Security retirement and disability benefits.

The second largest spending category is Medicare and health spending. This category accounts for $1.05 trillion or approximately 27% of federal government spending. This category is dominated by Medicare payments and money that the federal government gives to the states to fund Medicaid programs.

Third on the list is military spending. The military receives $609 billion which represents 16% of the federal government’s spending. The vast majority of this is allocated to military personnel which pays the salaries and benefits of soldiers and their families.

The fourth largest spending category is interest on the national debt. In the current low interest rate environment this represents $229 billion, or 6% of spending. While this is somewhat distressing it is important to remember that the majority of the interest paid on the national debt is paid to, or for the benefit of, Americans. For example, it may be credited to an investment or pension account that will be used to fund the retirements of American workers or retirees.

 

Adding the previous four categories shows that 82.5% of federal government spending is allocated to just three spending categories (Social Security, Medicare, and Military) as well as the interest on the national debt. This means that the remainder of federal government spending accounts for just 17.5% of the total, or $613 billion. That amount is allocated to eight additional categories. The breakdown is:

Veterans Benefits = $160 billion (4.2%)

Food and Agriculture = $136 billion (3.5%)

Education = $102 billion (2.7%)

Transportation = $85 billion (2.2%)

Housing and Community = $61 billion (1.6%)

International Affairs = $50 billion (1.3%)

Energy and Environment = $45 billion (1.2%)

Science = $30 billion (0.8%)

Naturally, a major concern is the changing demographics in the US. The two largest spending categories, Social Security and Medicare, are set to increase sharply as the average age of the population continues to increase. In addition, the interest paid on the national debt is also likely to increase as the nation continues to add to the debt year-after-year and interest rates have started to increase. What impact will this have on spending?

One option is the government can borrow more to make up the increased difference between spending and tax receipts. In that case we, as taxpayers, will get more than we are funding and push the bill off onto a future generation. The other option is to cut other spending categories to free up the money needed. However, just a 5% increase in Social Security, Medicare, and interest spending would require a 20% cut in the other categories to balance spending. Finally, the last option is to increase taxes to pay of the spending.

Clearly, none of these options are very desirable. The problem is the longer we wait to address this issue the more painful the required adjustments will be.