The Black Hole of Government: Where Does Your Tax Money Go?
Here’s an exercise: Imagine you are married with two children, and in 2013 you earned an income of $80,000. Assume, for the sake of the example, that you contributed 5% of that income to a traditional 401(k) or IRA (a good habit if you can afford it). Not itemizing for deductions and claiming the Child Tax Credit, you would have paid about $10,461 in total payroll and income taxes that year.
This is the fee charged by Uncle Sam for his services as social and economic coordinator and regulator, and many people don’t have a very good idea of what they are paying for. In fact, a huge number of people are extremely misinformed about where their tax dollars are going.
Whether the government is overcharging for its services is a fair question, and one that warrants thorough vetting. But the issue we want to unpack here is figuring out exactly what we are paying for, not how much we are paying for it. Participation in the tax mechanism is, broadly, involuntary (most of us can’t afford to export cash to the Caymans), but it is still fair to think about taxes as a payment for goods and services. The government, in a sense, is a business — it is just in the awkward business of providing for the common defense and promoting the general welfare of the nation.
Last year, The White House provided taxpayers with a receipt for their 2013 payment to Uncle Sam. Using total federal spending as a starting point, the executive office broke down where it spent money that year and how much it spent there. In our hypothetical, nearly half of the average individual tax bill, $4,960, was pulled due to the Social Security tax, and another $1,160 was pulled for Medicare. Combined, these two programs account for about 58.5% of the total tax receipt.
Social Security and Medicare
The first big observation here is that a majority of your tax money goes to Social Security and Medicare. This isn’t exactly surprising, but it is important to understand. Social Security is “the nation’s largest insurance program,” as Acting SSA Commissioner Carolyn Colvin has described it. Nearly 65 million Americans — about 20% of the population — receive monthly Social Security benefits. In fiscal year 2015, the Old-Age and Survivors Insurance (OASI) program alone is expected to pay out $744 billion to to 49 million people, a demographic that includes 89% of the population age 65 and older.
Although Social Security is the government’s best (biggest, at least) deliverable in the “promoting the general welfare” department, it is bloated with operational inefficiencies and handicapped by bureaucratic friction. Political snipers often use this as ammunition and take pot shots at the generally liberal-leaning policymakers who advocate for a robust, rather than lean, social welfare system. The criticism is often justifiable. For all the good it’s done, America’s Social Security program has become a massive source of waste — one of the many financial black holes of government.
Providing for the common defense
Obviously, there’s more to fiscal policy than Social Security. The second-largest piece of the pie goes directly to defense spending, which encompassed nearly a quarter of all federal spending during for 2013. This isn’t really a surprise, as it has been widely publicized that the United States spends more on defense than the next ten highest countries combined. According to NBC News, the U.S. spent $682 billion on defense in 2012. That’s more than China, Russia, the U.K., and Japan — all put together.
As for 2013, and the tax receipt we’re currently analyzing, America actually saw a decline in military spending to $640 billion. But the question is, where does that all go? According to The White House, it mainly gets divided up for salaries, ongoing operations, research and development, atomic energy defense, and national security defense operations. Out of all those categories, ongoing operations — read that as current wartime activities — and personnel expenses together eat up about 16% of the overall federal budget. Throw in research and development, and that number skyrockets to nearly 24%.
Jobs and family security
The third-largest hunk of federal spending goes toward jobs and family security. While that is a bit of an ambiguous category, almost everyone is effected in one way or another through the programs it includes. Under the umbrella of jobs and family security, things like unemployment insurance, food and housing assistance, federal employee retirement funding, and even assistance for child care are all included. This is one are of spending that comes under constant attack by politicians, although when you compare the amount spent in temporary assistance for needy families to military research and development, there is a significant rift.
Assistance programs like these are necessary for a number of reasons, and we’ve witnessed why first hand over the past several years. The financial crisis and recession hit the entire country hard — but no one more so than the lower and middle classes. These programs are often referred to collectively as the ‘social safety net‘, and for huge amounts of people, they are the only thing keeping them off the streets, or helping put food on the table. Though it’s fair to say that these programs likely don’t spend your tax dollars in the most efficient way, there’s no doubt as to the importance of the spending that goes towards jobs and family security.
With these three large areas taking up the most significant portions of the tax dollar pool (68.75%) the federal government must pay for everything else using what’s left. Unfortunately, that means that budgeting becomes even more difficult with roughly only one third of available funds remaining. This, as we have come to realize, is how the federal government easily ends up borrowing money to keep operating, and the national debt ends up growing.
It is also from this pool that the government finds the money necessary to service its enormous debt. As of early January 2015, total debt held by the public in the U.S. was just under $13 trillion, with another $5 trillion tied up in intra-governmental holdings, and the government spends 8.6% of income tax payments servicing it. That’s an item that adds up to more than $375.00 on the hypothetical taxpayer’s receipt, and shows how the buck gets passed on to you, the taxpayer.