A Trillion here, a Trillion There -- And Soon It's All Spent

There's one fellow who doesn't fear tax day one bit. For Uncle Sam, this April 17 is more like payday, and his biggest ever at that.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

April 6, 2007

Do you wonder what your tax dollars buy? As the deadline for filing federal income taxes rolls around again this year, you may well wonder where those hard-earned bucks you’ve forked over to Uncle Sam actually go. The answer might surprise you.

This year the federal government expects a haul of about $2.7 trillion -- give or take a couple hundred billion or so, depending on the economy, corporate profits and Wall Street and of course, how honest everyone filing a return is. In theory, at least, the White House and Congress work together -- or battle it out -- to decide how to divvy up every dollar paid to the federal government. In fact, most of it is already as good as spent.

About 70% of the annual budget pays for commitments already incurred -- everything from Social Security benefits to interest on the national debt. Neither President Bush nor Congress has much say over that.

The biggest single chunk of that so-called nondiscretionary spending -- more than 20% of the total budget -- is used to pay Social Security benefits to existing retirees. Another 15% pays the tab for Medicare health benefits. An additional 7% goes for Medicaid, 3% for veterans benefits and 1.3% for supplemental security income used to assist the aged, disabled and blind. All types of aid to the needy -- Medicaid, housing subsidies, aid to poor families with children (welfare, which accounts for about 1% of the budget), food stamps, school lunches and so on, plus unemployment benefits -- account for about 16% of the budget. In fact, all government payments to individuals amount to about 58% of the budget. That’s twice the share of the budget such payments claimed 40 years ago. And the percentage continues to climb -- giving those pushing reform of such entitlement programs a powerful argument.

Interest on the debt claims about 10% of the budget. When President Bush took office, the national debt was $5.6 trillion, but deficits have pushed that number closer to $9 trillion today. Where’s the red ink coming from? Depends on who you ask: Democrats blame Bush’s tax cuts and wasted defense spending. Republicans say that’s not so, claiming that Bush’s tax cuts boosted the economy and increased revenue. They blame increased deficits on wasteful social programs and spending necessary to fight the war on terrorism.

The military gets the biggest piece of what’s left -- the 30% of the budget called discretionary spending because it’s the part of the budget that Congress and the White House can control from year to year. About two-thirds of this spending (20% of the total budget) pays for the tanks, jets, ships, missiles, rifles and other paraphernalia of defense, not to mention the salaries of our country’s soldiers, sailors, airmen and Marines. In the next fiscal year, which begins on Oct. 1, this will amount to nearly $600 billion, possibly more if costs in Iraq and Afghanistan climb higher than expected. Some big-ticket Defense Department projects, such as purchase of new combat fighter jets, Navy shipbuilding and space weapons research, may be trimmed in light of the war costs. But that would barely dent the Pentagon’s share of the overall budget, especially with more funds sure to be added to support medical and other needs of Iraq war veterans.

You might think a fifth of the federal government’s total spending is a lot to put into defense. But in comparison to some earlier periods in our country’s history, it’s actually a smaller share. During President Ronald Reagan’s defense buildup, the military claimed 26% of the budget. And at the height of the Vietnam War in 1968, 46¢ of every tax dollar Americans paid was for defense.

Of the remaining discretionary spending, the Department of Homeland Security claims about 1.5% of the budget, or $43 billion. Foreign aid spending, though it raises the ire of many taxpayers, accounts for just half of one percent and is likely to be reduced by Congress even further.

The last 8.5% of Uncle Sam’s budget pays for everything else: Transportation -- federal highways and bridges, support for Amtrak, funds to help states with other roads, bridges, railroads, airports and so on. Science and medical research. Food and drug safety. Guarding the environment. The Strategic Petroleum Reserve. Export promotion. Import protections. Space exploration. Air traffic controllers. The FBI, the Drug Enforcement Agency and the rest of the Justice Department. Federal education funding. And an alphabet soup of federal agencies tasked with helping to keep Americans safe, healthy and, sad to say, honest -- from the CPSC (Consumer Product Safety Commission) to the NLRB (National Labor Relations Board) to the SEC (Securities and Exchange Commission).

And when all is said and done, the $2.7-trillion tax revenues aren’t enough to pay all of Uncle Sam’s bills. This year, the federal government will spend about $200 billion more than it will take in. Next year, the deficit will run about $300 billion. Coincidentally, that’s just about the same amount that the government figures it’s being stiffed by individuals and companies who don’t pay all the taxes they owe, either by intent or by error.

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