Many people like to complain about taxes, but how are your tax dollars spent?
You’ll hear too much is spent on defense. Or, you’ll hear too much is spent on social safety net programs.
Social Security is going bankrupt.
We need to reduce our debt. We pay too much in interest.
Eventually, you’ll start to hear, “We should do…” followed by how our tax system should work. Everybody has an opinion of how to collect and spend trillions of dollars. But, how many know how it works today?
How many people actually know how their tax dollars are spent?
I haven’t done a deep dive on taxes in a few years. Let’s look together at how much is collected and how it is spent.
You should walk away with a better understanding of how our tax system functions, see interactive data visualizations of what would happen if we changed certain policies, and articulate your beliefs better using data.
What are the Categories of the Budget?
Before we look at actual numbers, let’s understand how the government divides the budget. The budget has the following categories:
- Mandatory Spending
- Discretionary Spending
- Net Interest
- Revenues
Mandatory spending is the spending that has to take place based on laws that were already passed. The laws set eligibility and benefit rules; then, money needs to be spent according to those rules. There is no specific amount outlined. If mandatory spending needs to be adjusted, the eligibility and benefit rules would need to be changed.
Examples of mandatory spending include Social Security, Medicare, and Medicaid.
Discretionary spending is set by lawmakers annually.
Discretionary spending is split into two main categories: defense and non-defense. Non-defense is comprised of health, transportation, education, veterans’ benefits, and housing assistance.
Net Interest is the amount of interest the government pays on debt held by the public offset by interest income the government receives.
As our total debt goes up or interest rates go up, the net interest will likely increase.
Revenues are funds collected from the public.
Examples of revenues include individual income taxes, payroll taxes, corporate taxes, corporate income taxes, customs duties, excise taxes, unemployment insurance, and estate and gift taxes.
How Are Your Tax Dollars Spent?
I know taxes can be boring, and I want to keep your attention. Because of that, here is a cool tool that allows you to add or subtract ships, aircraft, and other components of the military to see how that changes federal expenses.
For example, if you wanted to remove one aircraft carrier from the fleet of 11, the total costs would go down an estimated $1.5 billion and 7,000 fewer military personnel would be needed. Interestingly, the tool says it would be tough to make more than one aircraft carrier in the next decade.
The tool also gives an informative description of what each unit type is and what it does if you wanted to learn more. For example, you could learn more about RQ-4 “Global Hawk” UAS Squadron if you didn’t know what they are. Or, you could see how much Space Force costs.
So, how are your tax dollars actually spent?
Mostly, they are spent on defense, Social Security, and major health programs.
In 2019, here was the breakdown for the larger categories:
- Social Security: $1 trillion
- Medicare, Medicaid, Children’s Health Insurance Program, and marketplace subsidies: $1.1 trillion
- Medicare accounted for about $651 billion
- Defense: $697 billion
- Safety net programs (SNAP, earned income tax credit, school meals, Supplemental Security income for elderly or disabled poor, and unemployment insurnace): $361 billion
- Interest on debt: $375 billion
As a percentage of the 2019 budget, it breaks down as the following:
- Medicare, Medicaid, CHIP, and marketplace subsidies: 25%
- Social Security: 23%
- Defense and international security assistance: 16%
- Safety net programs: 8%
- Interest on debt: 8%
- Benefits for federal retirees and veterans: 8%
- Transportation infrastructure: 2%
- Education: 2%
- Science and medical research: 2%
- Non-security international: 1%
- All other: 4%
How do you feel about that breakdown?
What’s striking to me is how much is spent on Medicare and related health costs. For a country that claims to not like universal health insurance, we spend a great deal on it. It’s about a quarter of the budget and about 61 million people benefit from it.
I also find it fascinating that safety net programs tend to get the largest criticisms in the media and personal conversations, but one CPPB analysis showed that safety net programs kept 37 million people out of poverty in 2018. Plus, it’s estimated the poverty rate would have been about 24% in 2018 instead of the 12.8% actual rate if not for the safety net programs and Social Security. None of these numbers include the people that were not brought above the poverty line, but saw a reduction in the depth of their poverty.
Social Security also tends to get a substantial amount of air time and fear of people not getting benefits when in reality, it’s actually simple to fix. The problem lies in politicians actually having the courage to adjust the program and voters seeing that small changes early can lead to great impact later. The CBO even has a calculator that can show how certain changes that have been proposed would affect the funding of the program.
When people talk about Social Security going “bankrupt”, they are talking about the Social Security Trust Fund, which pays about a quarter of the benefits. People working and paying Social Security taxes today account for about three-quarters of the benefits paid out today.
What this means is if the Social Security Trust Fund runs out of money, current benefits would have to be reduced by about 25%. People still working and paying taxes would cover about 75% of the benefits for people receiving them today.
Sadly, the most striking numbers are the education and transportation infrastructure. Each makes up only 2% of the budget for a total of 4%.
I wish we invested more money in better education and transportation infrastructure. They are good investments for the future – in people and in our economy.
Something else that stands out to me is how much of the budget goes towards mandatory spending. In other words, it’s not approved each year. It’s been decided based on past laws that set eligibility and benefit rules. Historically, it’s been about 60% of the budget.
What are your thoughts about the spending breakdown?
2021 Spending – An Outlier
Although people thought stimulus payments during the Financial Crisis in 2008 and 2009 were large, the payments received in 2020 and 2021 made them look small in size.
You can see how Income Security skyrocketed over the past few years in this chart.
I like that chart because it shows you how spending tends to stay fairly consistent over time, except in times of distress. Income security rose from $551 billion in 2019 to $1.65 trillion in 2021. That is about three times larger!
No other category saw much of an increase, and certainly nothing close to three times the normal amount!
Deficit vs. Debt
No conversation about taxes would be complete without a discussion of the deficit and debt.
A budget deficit is when spending exceeds revenue.
A budget surplus, which you don’t hear about much because the last time it happened was in 2001, is when revenue exceeds spending.
A budget deficit isn’t necessarily bad. Many people like to equate the budget deficit as an individual who can’t control spending and continues to take on debt by spending more than they make, but that’s not an accurate comparison.
A person has a finite life and can’t issue debt indefinitely. The government has an infinite life (as long as it continues to function) and can issue debt as long as people will continue buying it.
Treasury bonds, which the government issues to raise funds, are seen as some of the safest bonds in the world. Plus, although interest rates are low, they are higher than many European bonds, making them more attractive to some investors. This means investors will likely continue buying US government debt for the foreseeable future.
To pay for a budget deficit, the government normally issues debt, which is how the total debt grows over time.
You can see how it has grown over time in the chart below.
You’ll notice a huge increase where the increase is nearly vertical around 2020. That line represents the amount of stimulus pumped into the economy during the COVID pandemic. You can see how it dwarfs the spending during the Financial Crisis in 2008 and 2009.
If interest rates rise, we may see the interest on debt increase to a larger percentage of the total federal budget.
This has been a concern of many for a long time, even dating back to before the Financial Crisis in 2008 and 2009.
It remains to be seen whether this will be an issue long-term.
Some people believe when debt as a percent of total GDP rises above 100%, it can spell trouble for the economy. As you can see in the chart below, it’s been above 100% for the last few years, and we have been okay. Other countries, like Japan, have been above 200% for the last few years, and they have been okay.
Some economists have said it is harmful to the economy, but other people are unsure.
For the time being, the government does not bring in enough tax revenue each year to offset the total amount being spent.
Only time will tell if continually running a budget deficit and adding to the total debt causes long-term economic problems.
Summary – Final Thoughts
People like to complain about taxes. It doesn’t matter how your tax dollars are spent, someone will be unhappy with the amount in each category.
If you are unhappy, vote. Talk to your representatives. Be informed.
With much of the government spending already decided through prior laws, you may need to prod your representative to change the structure of certain federal programs. Social Security is an excellent example.
Small changes today could mean a much greater impact later without drastically reducing benefits or increasing taxes.
I’m particularly interested in seeing how the government responds to future economic recessions. The spending during the COVID pandemic seemed to be largely successful. Even if you disagree with it, we had the shortest recession ever. It lasted only about two months.
We’ll see how our total debt evolves over time and whether debt as a percent of GDP being over 100% does actually pose future economic problems. I’m not personally concerned about it because, for years, economists thought as total debt rises, interest rates should also go up. But, it’s been the exact opposite relationship. Interest rates have gone down as total debt has gone up.
All that is to say that economists don’t fully know what will happen. It’s an educated guessing game where many people end up wrong but sound smart in the process.
When tax time rolls around or you look at your next paycheck, at least you now know where that money is going.