Policy Basics: Where Do Our Federal Tax Dollars Go?
Updated March 31, 2014
The federal government collects taxes to finance various public services. As policymakers and citizens weigh key decisions about revenues and expenditures, it is instructive to examine what the government does with the money it collects.
In fiscal year 2013, the federal government spent $3.5 trillion, amounting to 21 percent of the nation’s Gross Domestic Product, or the total value of goods and services that a country produces in a year. Of that $3.5 trillion, nearly $2.8 trillion was financed by federal revenues. The remaining amount ($680 billion) was financed by borrowing; this deficit will ultimately be paid for by future taxpayers. As the graph on the next page shows, three major areas of spending each make up about one-fifth of the budget:
- Defense and international security assistance: In 2013, 19 percent of the budget, or $643 billion, paid for defense and security-related international activities. The bulk of the spending in this category reflects the underlying costs of the Department of Defense. The total also includes the cost of supporting operations in Afghanistan and other related activities, described as Overseas Contingency Operations in the budget, funding for which totaled $93 billion in 2013.
- Social Security: Another 24 percent of the budget, or $814 billion, paid for Social Security, which provided monthly retirement benefits averaging $1,294 to 37.9 million retired workers in December 2013. Social Security also provided benefits to 2.9 million spouses and children of retired workers, 6.2 million surviving children and spouses of deceased workers, and 11 million disabled workers and their eligible dependents in December 2013.
- Medicare, Medicaid, and CHIP: Three health insurance programs — Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) — together accounted for 22 percent of the budget in 2013, or $772 billion. Nearly two-thirds of this amount, or $498 billion, went to Medicare, which provides health coverage to around 54 million people who are over the age of 65 or have disabilities. The remainder of this category funds Medicaid and CHIP, which in a typical month provide health care or long-term care to about 70 million low-income children, parents, elderly people, and people with disabilities. Both Medicaid and CHIP require matching payments from the states.
Two other categories together account for another fifth of federal spending:
- Safety net programs: About 12 percent of the federal budget in 2013, or $398 billion, supported programs that provide aid (other than health insurance or Social Security benefits) to individuals and families facing hardship. Spending on safety net programs declined in both nominal and real terms between 2012 and 2013 as the economy continued to improve.
These programs include: the refundable portions of the Earned Income Tax Credit and Child Tax Credit, which assist low- and moderate-income working families through the tax code; programs that provide cash payments to eligible individuals or households, including Supplemental Security Income for the elderly or disabled poor and unemployment insurance; various forms of in-kind assistance for low-income families and individuals, including SNAP (food stamps), school meals, low-income housing assistance, child care assistance, and assistance in meeting home energy bills; and various other programs such as those that aid abused and neglected children.
Such programs keep millions of people out of poverty each year. A CBPP analysis shows that government safety net programs kept some 41 million people out of poverty in calendar year 2012. Without any government income assistance, either from safety net programs or other income supports like Social Security, the poverty rate would have been 29.1 percent in 2012, nearly double the actual 16 percent.
- Interest on the national debt: The federal government must make regular interest payments on the money it has borrowed to finance past deficits — that is, on the national debt held by the public, which reached $12 trillion by the end of fiscal year 2013. In 2013, these interest payments claimed $221 billion, or about 6 percent of the budget.
As the chart above shows, the remaining fifth of federal spending goes to support a wide variety of other public services. These include providing health care and other benefits to veterans and retirement benefits to retired federal employees, assuring safe food and drugs, protecting the environment, and investing in education, scientific and medical research, and basic infrastructure such as roads, bridges, and airports. A very small slice — about 1 percent of the total budget — goes to non-security programs that operate internationally, including programs that provide humanitarian aid.
While critics often decry “government spending,” it is important to look beyond the rhetoric and determine whether the actual public services that government provides are valuable. To the extent that such services are worth paying for, the only way to do so is ultimately with tax revenue. Consequently, when thinking about the costs that taxes impose, it is essential to balance those costs against the benefits the nation receives from public services.
We based our estimates of spending in fiscal year 2013 on the most recent historical data released by the Office of Management and Budget. (The federal fiscal year 2013 ran from October 1, 2012 to September 30, 2013.)
The broad expenditure categories presented in this paper were constructed on the basis of classifications commonly used by budget agencies. The categories are constructed by grouping related programs and activities into broad functions, which are further broken down into subfunctions. The details of how the categories used in this paper were constructed from those functions and subfunctions are described below.
Defense and international security assistance:
The largest component of this category is the national defense function (050). In addition, this category includes the international security assistance subfunction (152) of the international affairs function.
This category consists of all expenditures in the Social Security function (650), including benefits and administrative costs.
Medicare, Medicaid, and CHIP:
This category consists of the Medicare function (570), including benefits, administrative costs, and premiums, as well as the “Grants to States for Medicaid” account and the “Children’s health insurance fund” account (both in function 550).
Safety net programs:
This category of programs includes all programs in the income security function (600) except those that fall in the following two subfunctions: federal employees’ retirement and disability (602) and general retirement and disability insurance (601). The latter contains the Pension Benefit Guarantee Corporation and also covers programs that provide pension and disability benefits to certain small groups of private sector workers.
Interest on debt:
This category contains the net interest function (900).
Remaining program areas:
This category includes all federal expenditures not included in one of the five categories defined above. The subcomponents of this category that are displayed in the graph are defined as follows:
- Benefits for federal retirees and veterans: This subcategory combines the veterans' benefits and services function (700) and the federal employee retirement and disability subfunction (602, which is part of the income security function).
- Transportation: This subcategory consists of the entire transportation function (400).
- Education: The education subcategory combines three subfunctions of the education, training, employment, and social services function: elementary, secondary, and vocational education; higher education; and research and general educational aids (subfunctions 501, 502, and 503 respectively).
- Science and medical research: This subcategory consists of the general science, space, and technology function (250), and the health research and training subfunction (552).
- Non-security international: This subcategory consists of the international affairs function (150) except for international security assistance, which is included with defense, above.
- All other: This subcategory consists of all other federal expenditures.
For a discussion of how recent budget policy, including recent budget deals and “sequestration” have affected the federal budget, see:
Policy Basics: Non-Defense Discretionary Programs
Chart Book: Deficit Reduction, the Economy, and the Budget Negotiations