Michael Dubrow - Contributor to MoneyTips.com
The hardest thing in the world to understand is the income tax.
– Albert Einstein
Albert Einstein spent his last 22 years in America, most as a US citizen. If the great mathematician — who helped unravel the mysteries of time and space — failed to understand our complex tax system, how can ordinary Americans ever hope to?
The answer lies in separating this topic into its main constituent elements: How tax revenue is generated, and how it is spent. MoneyTips will explore revenue generation more fully in an upcoming article. For today, though, let’s concentrate on how your federal tax dollars are being spent — or misspent.
The Big Picture (How We’re All Getting Skinned)
In fiscal year 2013, the US government spent $3.5 trillion, which equates to 21% of our Gross Domestic Product (GDP). To place this tsunami of greenbacks in historical context, federal spending averaged 18% of GDP since 1950, peaking at over 24% in 2009. To place it in more human context, consider Mark Twain’s mordant observation that “the only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.”
Of this $3.5 trillion in 2013 federal spending, some $2.8 trillion was funded by revenue and nearly $700 billion through borrowing. On the revenue side, nearly half (47%) came from individual income taxes; another 34% from payroll taxes (Social Security and Medicare); 10% from corporate income taxes; and the remaining 9% from excise taxes on alcohol and tobacco, estate taxes, leases and other levies. I’m so stressed about all this that I’d like a drink and a cigarette, but I can’t afford to pay the tax.
On the spending side, as the infographic on this page reveals, three major categories each comprise about one-fifth of total federal spending:
- Social Security (24%) – A cornerstone of Franklin Roosevelt’s New Deal, Social Security was authorized by Congress in 1935. Today, it is the federal government’s largest spending category. In 2013, Social Security payments averaging $1,294 per month went to 37.9 million retired workers. Benefit payments were also provided to 2.9 million spouses and children of retired workers, 6.2 million surviving children and spouses of deceased workers, and 11 million disabled workers and their dependents. Mr. Roosevelt would indeed be pleased.
- Medicare, Medicaid, Children’s Health Insurance (22%) – At a combined total of $772 billion, these health insurance programs comprised the next largest share of federal spending in 2013. Some two-thirds of this went to Medicare, which provided health coverage to 54 million people aged 65 and over, and also to people with disabilities. The other one-third funded health care and long-term care to nearly 70 million low-income Medicaid recipients and children. Both Medicaid and Children’s Health Insurance Program (CHIP) mandate matching payments from the states. As Obamacare becomes fully implemented, this segment of federal spending will further increase.
- Defense and International Security (19%) – In 2013, $643 billion was spent on global defense and security-related activities. Around 95% of this amount went to the Department of Defense —including the US Armed Forces operations — and to retired military pension payments. Some 5% was provided as security and development aid to other countries. To place US defense spending in a global context, we spent more in 2013 than the next largest 14 nations combined.
Two more spending categories, in combination, comprise another one-fifth of federal spending. They are:
- Safety Net Programs (12%)- Totaling $398 billion, these aid programs are on top of the health insurance and Social Security programs described above. They include the Earned Income Tax Credit and Child Tax Credit for low income families; Supplemental Security Income payments to the elderly or disabled poor; and other programs for the poor such as SNAP (food stamps); school meals; housing; energy; and child-care assistance.
- Interest on the National Debt (6%) – By the end of 2013, the total size of the national debt had swollen to $16.74 trillion. This is roughly equal to our GDP, which totaled $16.91 trillion for the same year. To finance this Everest of debt, the federal government borrows money from institutional and private investors at home and abroad. The interest payments on this debt in fiscal 2013 totaled $221 billion.
As our infographic reveals, the remaining one-fifth of federal spending is allocated to a host of domestic public purposes. These include: social services to veterans; federal employee retirement payments; operations of the Food and Drug administration; educational programs; environmental protection; scientific, technological and medical research; along with infrastructure spending on roads, bridges and airports. International aid is also funded here, to the tune of 1% of the total federal budget.
Fiscal Myth Busting
A clear-eyed appraisal of how our tax dollars are actually raised and spent busts a number of time-honored federal spending myths, including:
- Reducing the Budget Deficit Requires Little More than Congressional Will Power – With three out of of every five federal budget dollars pre-committed to massive safety-net programs (like Social Security, Medicare, SSI and Food Stamps) and at least one out of five earmarked for defense, our leaders have discretion over just 20% of the federal budget in the best of years. As all other federal bills are payable from this remaining pile, there’s more bluster than bludgeon in today’s deficit-hawk arsenal.
- US Budget Deficits Keep Growing – Despite the fact that so few budget dollars are discretionary – and that congressional leaders would rather gargle razor blades than pursue comity – budget deficits have been steadily shrinking since 2010. Astonishingly, we’ve managed $2.5 trillion in deficit reduction during that time, with 75% of the reduction coming from spending cuts and just 25% from increased revenue. Consequently, the projected rise in debt levels from today through 2022 has decreased by 10% of gross domestic product.
- Americans Are Burdened with Incredibly High Tax Rates – While stagnant wage growth is making it hard for most Americans to feel prosperous these days, the fact is our taxes are actually lower than at any time since the early 1980’s. We also pay lower tax rates than do citizens in 22 other industrialized nations. What’s more, US tax rates as a share of GDP fell to 26% in 2013, compared to an average of 38% for the world’s 30 next largest economies. So when you’re writing that check today to the IRS, keep in mind things could always be worse. You could be in icy Sweden or Denmark paying nearly 60% tax on income of just $85,000! But you could drown your sorrows in Carlsberg, so there would certainly be an upside.
The sheer scale of financing the American government is overwhelming. The larger these numbers become, the more powerless we tend to feel, especially on April 15. If there is any consolation to be found in examining this neo-ponzi scheme known as the federal tax system — any hope that we might someday get our fiscal house in order — it probably lies in the matchless ability of Americans to rationalize their future.
In that spirit, MoneyTips leaves you with the financial wisdom of the immortal Jackie Mason, who said: “I have enough money to last me the rest of my life, unless I buy something.”