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  • Yizheng Wang

Federal Revenue and Spending

Have you ever wondered why you have to pay tax, and where exactly does your money go? If so, this article may enlighten you. To answer the question straightforwardly: the federal government collects taxes in order to cover its spending, and the money goes to mandatory spending, discretionary spending, and interest on debt.

What are the main sources of federal revenue?




In the fiscal year 2019, roughly 50 percent of the annual federal revenue comes from the individual income taxes, 36 percent from payroll taxes that fund social insurance programs, 7 percent from corporate income taxes, and 3 percent from Excise taxes. The rest is from a mix of sources. Federal revenue collected by the U.S. government in 2019 is $3.5 trillion, about 16.3 percent of Gross Domestic Product (GDP).

It's easy to tell that half of the total revenue comes from the salaries, investments, and other incomes of individuals. Payroll tax, also known as social insurance tax, is supposed to fund Social Security, Medicare, and Unemployment insurance. Both employers and employees have to contribute payroll taxes. The third largest federal revenue source is the corporate income tax, which is collected from the corporations' profits. Excise Taxes consist of taxes on purchases of certain goods and services, such as tobaccos, gasoline, and alcohol, etc.

Apart from the four primary sources above, there are other revenues, including estate and gift taxes, custom duties, and the deposit of earnings from the Federal Reserve System. This typically ranges from 0.6 to 1 percent of GDP since 1965. However, it's been growing drastically in recent years because of the high profits the Federal Reserve made to stimulate the economy since 2008. (Tax Policy Center, 2020)

What programs does the federal government finance with its revenue?

The government spent $4.4 trillion in 2019, about 21% of GDP. More than half of the total revenue goes to mandatory spending while the rest goes to discretionary spending and interest on debt. Mandatory spending is spending dedicated by prior law, while discretionary spending is money voted by Congress and approved by the President during the annual appropriations process.

The federal government spent $1 trillion on Social Security, which is almost one-fourth of the total spending in the fiscal year 2019. Medicare is the second largest expenditure with $651 billion, followed by the $515.4 billion income security spending. These are referred to as mandatory spending.

Among all the programs funded by discretionary spending, national defense often gets a majority. For example, $687.6 billion flowed to national defense. The rest of the money is budgeted towards varieties of programs, including but not limited to, education, transportation, and housing. Other than that, net interest from debt is $375.6 billion. (USA Spending, 2019)

Similarly, federal spending used to stay below 20% of GDP, but the economic stimulus, along with two overseas wars, increased the federal budget. Social Security expense keeps rising since 2015 because it has to cover the monthly retirement benefits to over 45 million retired workers, and the number is growing. Furthermore, net interest from debt is also increasing in recent years, and the U.S. still has $22.7 trillion debt to pay by the end of 2019.

Explore more: https://datalab.usaspending.gov/americas-finance-guide/

Reference

1. Tax Policy Center. (2020, May). What are the sources of revenue for the federal government? Retrieved August 09, 2020, from https://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue-federal-government

2. National Priorities Project. (n.d.). Federal Spending: Where Does the Money Go. Retrieved August 11, 2020, from https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/

3. Peter G. Peterson Foundation. (n.d.). Understanding the Budget: Revenue. Retrieved August 11, 2020, from https://www.pgpf.org/finding-solutions/understanding-the-budget/revenue?utm_term=government+revenue

4. USA Spending (2019). Data Lab - Federal Spending and GDP – U.S. Treasury. Retrieved August 11, 2020, from https://datalab.usaspending.gov/americas-finance-guide/spending/

5. Center on Budget and Policy Priorities. (2020, April 09). Policy Basics: Where Do Our Federal Tax Dollars Go? Retrieved August 12, 2020, from https://www.cbpp.org/research/federal-budget/policy-basics-where-do-our-federal-tax-dollars-go

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