Where Does the US Spend Its Tax Money And Why Does It Have So Much Debt?

Photo by Kyle Glenn on Unsplash

A couple of weeks ago a friend texted our group chat: “Guys, I’m finally going to do it. I’m going to learn about politics.”

His message garnered swift feedback. A few handclaps. A Joe Biden meme.

Later in the morning, though, I asked myself, “Where is he going to start?”

I sent him a video detailing some basic economic principles, but a few days later I realized an even better starting point: The United States Budget.

Barring for a moment that a pandemic has inverted the global economy, let’s — for the purpose of understanding the US budget — turn the clock all the way back to 2019, when people frequently drove in cars and rode in trains to arrive at schools and offices.

In 2019 the US government spent $4.448 trillion (1 page 109). The department in charge of United States spending is called the Central Government. Their regulations on spending and taxation are called fiscal policy. If we imagine them to be a company, the first thing we would want to know is how much revenue they generate and how much they spend.

US taxpayers are by far the government’s biggest client base (if you will). Income tax (paid by workers) and corporate tax (paid by companies) account for more than 95% of US tax revenue. Excise tax (on gasoline, alcohol, and cigarettes) along with estate and gift tax make up most of the rest. Last year the government generated $3.464 trillion, making the Central Government’s 2019 “profit and loss sheet” look something like:

Revenue: $3.464 trillion

Costs: $4.448 trillion

Deficit: $984 billion

It is no secret that the United States has long held a public debt (upon ratifying the constitution, the US carried a massive Revolutionary War debt into its infant years). By adding a nearly $1 trillion deficit last year, the US debt total reached $22.7 trillion (1 page 127).

To shed a bit of perspective on these figures — which are so large we don’t even write them in their entirety — consider the United States GDP (the total dollar value of all the goods and services produced by the US economy). Last year it was about $20.58 trillion 1. Which means the Central Government spent the equivalent of roughly 22% of the value produced by the entire US economy.

Because just about every financial model in the world has grown more ominous in the last four weeks, consider for a moment that the nearly three trillion emergency dollars released into the economy by the Trump administration since late March equal about 60% of what the government spent all of last year! But let’s continue pretending things are normal for just a few more minutes.

To gain historical perspective, consider that from about 1960 through the W. Bush administration, government spending fluctuated between 19% and 22% of GDP (2). In other words, for 50 consecutive years the Central Government spent about ⅕ of the US GDP. In reaction to the 2008–9 financial crisis, the government issued an $800 billion stimulus package which bumped 2009 and 2010 spending to a record 25% of GDP (3).

Regardless of the Central Government’s spending total, US citizens want to know where the money goes. From a topline perspective, the breakdown is actually pretty simple. It’s divided into three categories.

  1. Mandatory Spending (61% of the 2019 budget)
  2. Discretionary Spending (31%)
  3. Interest Payments on the national debt (8%)

Mandatory Spending ($2.735 trillion)

The majority of Mandatory Spending flows into a few major programs that we all either interact with or hear about regularly.

1. Social Security: $1.038 trillion (1 page 112)

In its simplest form, Social Security is a public retirement fund for American workers. Social Security tax is excised from each American paycheck and invested into a public trust. When American workers reach their early 60s they are entitled to claim Social Security benefits (they also maintain the right to defer social security receipts until their 70th birthday and receive greater installments). In addition to retirees, the fund makes payments to survivors (often people who have lost a spouse) and citizens with disabilities. Government sources indicate that about 65 million Americans (20% of the US population) will receive social security payments in 2020, and nine out of 10 Americans aged 65 or older will receive some amount of payment from the fund 4.

Signed into law during the Great Depression (1935), some experts considered Social Security a strike against America’s “free market” system, while others believed it to mark the United States’ movement into a more modern era of government. By the end of the 19th century, several European countries had already adopted some variation of a welfare state 5.

2. Health Benefits: $1.053 trillion (1 page 112)

This fund is divided into

Medicare ($644 billion)

Medicaid ($409 billion)

An estimated 61 million people (19% of the population) received Medicare in 2019 (almost all of them aged 65+). The program divides into four broad coverage plans that include a range of inpatient and outpatient hospital visits, office visits, and prescription drugs 6.

Individuals and households earning at or slightly above the poverty level are eligible for Medicaid, which includes the Children’s Health Insurance Plan (CHIP). Last year, 76 million people (23% of the population) were enrolled in Medicaid (some of whom were also enrolled in Medicare) 6.

Both of these programs emerged during Lyndon B. Johnson’s presidency in the mid 1960s. They were part of Johnson’s “Great Society”, a term he introduced while speaking at the University of Michigan in 1964 (7).

Combined, Health Benefits ($1.053 trillion) and Social Security ($1.038 trillion) make up about half the US budget and about ¾ of the Mandatory Spending portion of the budget. Regardless of the intensity of our debates around Mandatory Spending, it is mandatory. These programs are protected by congressional law and automatically activate per the number of citizens who qualify based on their age, income level, disability status, and employment history.

The rest of the Mandatory Budget (a total of $644 billion) supports The Department of Veteran Affairs ($199 billion) 8 and The Department of Agriculture ($122 billion) 9, along with programs such as TANF 10 (temporary assistance for needy families) and Earned Income Tax Credit 11 (an incentive program designed to help low-income citizens become financially independent). Some of the programs within the Mandatory Spending budget (the Food Stamp Program, for example) require annual renewal, but the vast majority of Mandatory Spending vests automatically.

The portion of the budget more likely to fluctuate in a given year is Discretionary Spending.

Discretionary Spending ($1.338 trillion)

1. Defense Spending ($686 billion)

There are many ways to divide the US Military budget. Page A-4 of the Department of Defense’s 2019 budget sheet divides the figure by “Service” 12.

  • Navy: $194 billion
  • Air Force: $194 billion
  • Army: $182 billion
  • Defense-Wide: $116 billion

The largest expenditure categories within each Service are 1) Operation and Maintenance, 2) Military Personnel, 3) Procurement, and 4) Research & Development.

The United States spends more on its military than any country in the world, and you would have to combine the next seven highest-spending nations in this category to equal the US defense budget 13.

2. Non-Defense Spending ($661 billion)

Worth 15% of last year’s total budget, this is the category most likely to experience cuts when lawmakers are seeking budget reduction. When we talk about non-defense spending, we’re talking about:

  • Diplomacy and International Affairs
  • Law Enforcement and Governance
  • Science, Environment, and Energy
  • Transportation and Economic Development
  • Education and Training.

If it seems alarming that “Education and Training” is the last of five categories listed inside the section of the budget most likely to be cut, it is worth noting that in many regions of the country, citizens also pay state and local (city/town) tax, which combine to equal about 15% of US GDP. Adding up all the state and local funding for public education (including public K-12 schooling) produces a figure considerably larger than the entire US Military budget.

Together, Mandatory and Discretionary Spending (not state/local spending) have increased to the national debt for 19 years running, Since the American Revolution ended with The Treaty of Paris (September 1783), there has been just one fiscal year in which the Federal Government did not carry a public debt: 1835 14. The federal debt exceeded $1 billion during the Civil War (1863) 15 and surpassed $1 trillion toward the end of the Cold War (1982) 16. It has increased 3x since the 2008–9 financial crisis 17.

Interest Payments ($325 billion)

The United States manages its debt primarily by issuing government bonds. Citizens and firms have the right to purchase stakes in US treasury bonds and thus hold a portion of the national debt. As the debtor, the Federal Government, just like a homeowner or college graduate, pays interest based on the debt sum. Last year the US paid out $375 billion to US Treasury bond holders (1 page 112). That’s a less than 2% repayment rate. However, the US has not paid against its debt principal since its last surplus in 2001 18.

As grim as that sounds, economics becomes incredibly complex at this level. Consider for a moment that professional economists have not been able to agree on the primary reasons why the US operates at such a massive deficit. If you think the answer is as simple as overspending on Social Security and health benefits, why did the US operate at a deficit through the early-to-mid-1990s, a surplus from 1998–2001, and then a deficit again from 2002-present? It’s not as though the Central Government froze spending on entitlement programs during the second Clinton administration.

Consider for a moment all the moving pieces within the economy. We’re talking about hundreds of millions of people and hundreds of billions of dollars. We’re talking about immigration, international trade, tech booms, inflation, foreign investment in US assets, major banks, and the Federal Treasury Department leveraging debt 20 and 30 years into the future. Imagine managing all of that financial movement on one profit and loss sheet. Recently, no one has been able to.

Some believe the United States “trade deficit” is a major contributor to national debt. A trade deficit occurs when the total value of goods and services a country imports is greater than the value of goods and services it exports. The United States, due largely to its trade relationship with China, has been operating at a trade deficit for decades.

Especially in the midst of the Coronavirus, many people want to see a return to domestic manufacturing. This would employ more Americans and reduce the annual quantity of US dollars flowing into the Chinese economy.

It seems logical. Will it work?

Economists call it “protectionism” and often consider it a shortsighted means of strengthening an economy. From a growth perspective, the goal is not to contract globalization. Many believe the goal is to expand globalization to include more laborers, more landmass, and more resources (China is currently developing such projects throughout Africa).

For those who believe outsourced manufacturing is at the root of federal economic health, you might be right. But you might be wrong. consider that in 2019 the total value of goods produced inside the US and exported abroad equaled $1.7 trillion (about 8% of US GDP) 20. The Japanese economy, by comparison, has traditionally exported the same percentage (8–10%) of their own GDP, yet has famously operated at a trade surplus for decades 21.

The conversation only continues from there.

Bibliography

1. 2021 US Budget Proposal

2. The Instant Economist By Timothy Taylor

3. The Balance.com

4. Social Security Fact Sheet

5. FV Institute.org

6. Medicare.gov

7. Youtube

8. Veterans Affairs.gov

9. USDA.gov

10. Acf.hhs.gov

11. Irs.gov

12 Dod.gov

13. Military Mortgage Center.com

14. Treasury Direct.gov/1830s

15. Treasury Direct.gov/1860s

16. Treasury Direct.gov/1980s

17. Treasury Direct.gov/2000s

18. 2002 US Budget Proposal

20. The Balance.com

21. Japan Times.co

Writer, video-maker, and voice artist. Wrote and voiced an Emmy-winning documentary series for the New York Yankees. Literate in virtual reality production.

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