No one likes to pay taxes, and most people work hard to find ways to pay the absolute minimum in tax that they can. Yet even though you'll find plenty of tax charts that have personal income tax rates, tax brackets, and hints on ways to reduce your tax bill, the more important question that taxpayers really need to understand is why the federal government raises taxes in the first place and where all the money it collects actually goes. If you understand that, then it'll put your own personal tax burden into a much different perspective -- and it can serve as a motivator to get you to take the time and effort to find tax savings where you can.
Where the federal government gets its money
In fiscal year 2015, the federal government spent $3.7 trillion. To raise that money, the government resorted to a number of taxes. As you can see in the chart below, two types of taxes -- personal income tax and payroll taxes for Social Security, Medicare, unemployment, and other retirement programs -- amounted to more than 70% of the federal government's sources of funds for the year.
Image source: IRS.
In addition to those major sources of revenue, the government had some other ways of raising cash, but they didn't amount to a whole lot. Corporate income taxes get a lot of attention, but they represent only about a fifth of what the government gets from the personal income tax. Similarly, other types of taxes, including estate and gift taxes, excise taxes, customs duties, and various miscellaneous taxes, have complex provisions that create challenges in calculation and collection, yet while every dollar is important, the relatively small percentage of the overall revenue pie that they bring in seems out of line with the amount of scrutiny they get from lawmakers and tax policy advocates.
Finally, the government had to make up the difference between what it spent and what it could raise from taxation. Deficit spending forced the Treasury to borrow 12% of the government's overall budget to cover revenue shortfalls.
Where your tax money goes
Once the federal government brings in tax money, it's not slow to spend it. Nearly two-thirds of all government spending goes toward Social Security, Medicare, and national defense, along with related items like other retirement programs and veterans and foreign affairs spending. Other social programs make up almost a quarter of the pie, with Medicaid, food stamps, and public health programs being a few of the largest expenditures in the category.
Small portions of the budget are available for everything else. All together, outlays for agriculture, natural resources, environment, transportation, education, job training, science, bank insurance, and commerce and housing credits make up just 7% of total spending. That's only a bit more than interest on the national debt, and that's in an environment during which interest rates were at rock-bottom levels.
Why tax policy is such a challenge
The primary problem the government faces is that many of the expenditures that it has traditionally made are likely to keep rising at a quickening pace in the future. Social Security increases will come from an aging population, and higher medical costs will put more pressure on Medicare. Meanwhile, growth in taxes will rely on the success of the U.S. economy in generating more income and sustaining long-term gains -- or on some combination of eliminating existing tax breaks or boosting tax rates on some or all taxpayers.
As a citizen, you don't have any direct control over how your tax money is spent. Nevertheless, it's important to know where all the money you pay actually goes, so that you can hold your elected representatives accountable and make them explain how they've made the decisions that affect what you pay and how they spend it.
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