April 2012 Volume 32, Number 4

How Uncle Sam Spends Your Tax Dollars

As we celebrate the end of tax season, I will soon be humming “It's the most wonderful time of the year!” But after we put our tax returns in the mailbox, it would be wise to ask ourselves and our elected representatives, “What does the government do with our money?”

Let's follow the money trail and see where those tax dollars go:

The Tax Merry-Go-Round

Working Americans provide the bulk of monies collected by the federal government. Individual income and payroll taxes account for 82% of all revenue coming in. Corporate income tax provides less than 10% of revenue.1 Bottom line is that individual taxpayers—in fact millions of them—are the engine that powers our government, and not “big business.”

In 2011 the federal government collected $2.3 trillion, an amount equal to 15.4% of GDP. During that same year, Uncle Sam spent $3.6 trillion, creating a shortfall of approximately $1.3 trillion.2 (We'll talk more about the debt later…)

Now what may surprise you is that the majority of the government's money is reallocated back to other fellow Americans. In fact, 58% of all government spending goes directly to individuals, such as:3

• Retirees who receive Social Securitypayments
• Veterans who receive pensions
• Those who receive medicare benefits
• Students who get tuition assistance
• Farmers who receive subsidies
• Victims of natural disasters who receive assistance

When you take a look at where the money actually goes, it's easy to see why it's hard to balance the budget. Lobbies for many of these individual groups are immensely powerful. Any attempts to deflect spending are met with intense resistance. And while nearly everyone agrees that belt-tightening is needed, few are willing to cinch in their own waistlines. Last month, Kiplinger Magazine5 took a look at some of the biggest federal expenditures. This is what they found:

Social Security's big bite

Many folks think that Social Security shouldn't be counted in the federal budget at all, because they contribute to the retirement fund with each paycheck. Actually, though, taxes paid in by today's workers aren't socked away for their future retirement, but are used for benefits for today's retirees -- an estimated $779 billion worth of them in fiscal year 2012.

What's more, the so-called trust fund -- where payroll taxes not needed for current payouts are stashed -- consists of $2.7 trillion in IOUs from the U.S. Treasury. The funds have been borrowed over the past two decades to pay for other federal programs.6

Defense takes a piece of the pie

Nearly 18% of President Obama's proposed FY 2013 budget is for defense spending. It includes funds for military operations in Afghanistan, Iraq and South Korea as well as for 760 bases scattered across the U.S. and abroad.

The $716-billion tab also pays for research, construction, family housing and myriad defense-related items. About 25% of the total goes to personnel costs. The figure doesn't include veterans' pensions and health care.7

Medicare and Medicaid: Hungry Twins?

Combined, these two national health care programs rival

defense and Social Security as Uncle Sam's biggest expenses. But it is the longer-term projections for Medicare and Medicaid that have most citizens and lawmakers worried. As the American population ages, they will incur greater health expenses. At the same time, we will also experience a decreasing ratio of workers to enrollees.

Medicare spending is expected to double in the next ten years, and the Congressional Budget Office (CBO) has identified these two programs as the greatest financial threat to our financial future.8 While the White House and Congress talk a lot about cutting these health care costs, lawmakers have avoided taking the extremely unpopular actions needed.

Help for Low-Incomers

In addition to Medicaid, about 9% of the total federal budget is dedicated to assistance for the needy. The total -- about $297 billion for FY 2012 -- includes funds for housing subsidies, food stamps, school lunch and other nutrition programs, aid to families with dependent children (welfare) and other aid, plus the earned income tax credit.

In addition, unemployment insurance will account for a bit less than $82 billion -- and about 2.1% of the budget -- in FY 2012. With the economy improving, that's well down from the $160 billion doled out in 2010. A $58-billion tab is expected in FY 2013.9

Net Interest on the Federal Debt

Next fiscal year, Uncle Sam is expected to shell out a whopping $224 billion in interest to the owners of U.S. Treasuries, here and abroad. For the past few years, low interest rates have helped keep a lid on this category. But interest rates won't remain at historical lows forever. Meanwhile, the debt accumulates.

The White House estimates that debt held by the public will approach $12 trillion at the end of FY 2012. If you include intra-government payments -- by the Treasury to funds such as Social Security, for example -- the nation's total gross debt will approach $16.5 trillion. In coming years, interest payments will gobble up even more.10

Everything Else

The biggest five items in the federal budget -- Social Security, defense, Medicare, Medicaid, and net interest on the debt -- account for about two-thirds of the total.

Everything from transportation (3.3%), education (1.9%), federal employees' and military retirement (3.8%) to science and space (0.9%) and homeland security (1.3%) comes out of what's left. International aid -- frequently mentioned as a potential source of savings -- accounts for just 1.7% of spending, and half of that is for humanitarian assistance. 11

Untouchables in the U.S. Budget

Only about a third of the federal budget actually falls under congressional control on an annual basis, and much of that is for defense spending -- mostly off-limits for political reasons.

About three-fifths of the budget is dedicated to programs such as Social Security, Medicare, Medicaid, food stamps, crop subsidies and other programs for which spending is automatic -- controlled by formulas. Add interest payments to the list of uncontrollables and untouchables, and the share of spending Washington can actually manipulate from year to year is about 16%.

If that entire 16% -- encompassing programs as diverse and as popular as medical and scientific research, space exploration, maintenance of national parks, repairing roads and bridges -- were eliminated, it would reduce the federal deficit only by less than half. Individually, these programs amount to crumbs on Washington's dinner table, where $38 billion is just 1% of the main course.12

Now is the time for serious discourse

Almost everyone agrees that the federal deficit is a ticking bomb. But few can agree on how to defuse it. Ideas run the gamut from raising taxes to the wholesale elimination of scores of government programs.

It is often said that all sides must come together to address our national debt –citizens, legislators, health-care professionals, business leaders, economists, etc. And yet the group who most needs representation is our grandchildren. They have no voice at the table, no powerful lobbyists in Washington, no opportunity to give congressional testimony.

The question is whether, as adults, are all willing to make shared sacrifices across the table, sparing no one and no programs, but all working together. I like to believe we are up to this challenge, especially when I consider these powerful words:

“The earth belongs to each of these generations during its course, fully and in its own right. The second generation receives it clear of the debts and incumbrances of the first, the third of the second, and so on. For if the first could charge it with a debt, then the earth would belong to the dead and not to the living generation. Then, no generation can contract debts greater than may be paid during the course of its own existence.” --Thomas Jefferson 13

1,4,10 http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm
2,8,12 Center on Budget and Policy Priorities-The Right Target: Stabilize the Federal Debt
3,5,6,9 Kiplinger's Personal Finance, March 21, 2012.
7,11 www.whitehouse.gov/omb/budget/Historicals
13 University of Virginia, Thomas Jefferson to James Madison, 1789. ME 7:455, Papers 15:393.