The Black Hole of Government: Where Does Your Tax Money Go?
Here’s an exercise: Imagine you are married with two children, and in 2013 you earned an income of $80,000. Assume, for the sake of the example, that you contributed 5 percent of that income to a traditional 401(k) or IRA (a good habit if you can afford it). Not itemizing for deductions and claiming the Child Tax Credit, you would have paid about $10,461 in total payroll and income taxes that year. This is the fee charged by Uncle Sam for his services as social and economic coordinator and regulator, and many people don’t have a very good idea of what they are paying for.
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Whether the government is overcharging for its services is a fair question and one that warrants thorough vetting, but the issue we want to unpack here is what we are paying for, not how much we are paying for it. Participation in the tax mechanism is, broadly, involuntary (most of us can’t afford to export cash to the Caymans), but it is still fair to think about taxes as a payment for goods and services. The government, after all, is a business — it is just in the awkward business of providing for the common defense and promoting the general welfare of the nation.
The White House provided taxpayers with a receipt for their 2013 payment to Uncle Sam. Using total federal spending as a starting point, the executive office broke down where it spent money that year and how much it spent there. In our hypothetical, nearly half of the tax bill, $4,960, was pulled due to the Social Security tax, and another $1,160 was pulled for Medicare. Combined, these two programs account for about 58.5 of the total tax receipt.
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The first big observation here is that a majority of your tax money goes to Social Security and Medicare. This isn’t exactly surprising, but it is important to understand. Social Security is “the nation’s largest insurance program,” as Acting SSA Commissioner Carolyn Colvin described it in a March 2014 update. Nearly 65 million Americans — about 20 percent of the population — receive monthly Social Security benefits. In fiscal year 2015, the Old-Age and Survivors Insurance (OASI) program alone is expected to pay out $744 billion to to 49 million people, a demographic that includes 89 percent of the population age 65 and older.
Although Social Security is the government’s best (biggest, at least) deliverable in the “promoting the general welfare” department, it is bloated with operational inefficiencies and handicapped by bureaucratic friction. Political snipers often use this as ammunition and take pot shots at the generally liberal-leaning policymakers who advocate for a robust, rather than lean, social welfare system. The criticism is often justifiable. For all the good it’s done, America’s Social Security program has, arguably, become a massive source of waste — one of the many financial black holes of government.
But there’s more to fiscal policy than Social Security. At the income level in question, the remaining 41.5 percent of the tax bill, or $4,341, is attributable to the income tax. It’s from this pool that the federal government pays for national defense, Medicaid and the Children’s Health Insurance Program (CHIP), education and job training, veterans benefits, and pretty much every other program conducted at a national level.
It is also from this pool that the government finds the money necessary to service its enormous debt. As of May 7, total debt held by the public in the U.S. was nearly $12.5 trillion, with another $5 trillion tied up in intra-governmental holdings, and the government spends 8.6 percent of of income tax payments servicing it. That’s a $375.06 item on the hypothetical taxpayer’s receipt.