Podcast: Where Do Our Federal Tax Dollars Go?

April 6, 2010

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In this podcast, we’ll discuss where our federal tax dollars go. I’m Michelle Bazie and I’m joined by Chuck Marr, the Center’s Director of Federal Tax Policy.

1.     Chuck, how are our federal tax dollars spent?

Michelle, for every dollar a taxpayer sends to the federal government about twenty cents is spent on our military and protecting the country. Another twenty cents is spent on Social Security which is the key program that keeps elderly people out of poverty, gives them a decent standard of living, and has been one of the most successful programs in U.S. history.  Another twenty cents of our tax dollar goes to health programs. Such as Medicare for elderly people and also some for Medicaid to insure lower-income people.  And about a dime of our tax dollar goes to pay interest on the national debt.

2.    That’s a little more than two thirds of the spending.  What else is there?

That leaves about 30 cents of our tax dollar for all other government services.  That’s everything from education investments to help kids go to college, to unemployment insurance and food stamps which are so critical now given the weak economy, to all the important research the National Institute of Health does, to food safety inspectors and all other programs that people think about as the responsibility of government.

3.    What about myths regarding federal spending on foreign aid or assistance to vulnerable populations?

Michelle, a major budget myth is that a large share of our tax dollar goes to foreign aid and that is very much not true.  Only a very small portion -- less than 1% of the budget -- actually goes to foreign aid.

As far as programs for poor people, there are many important programs that help people who are facing distress, like unemployed workers, kids who need a decent school lunch, and people who are disabled.  While these programs are very important, from a budget perspective, they only amount to about 10 cents of the average tax dollar, so they are actually relatively small.

4.    Chuck, how have recent economic problems affected tax revenues and government spending?

The economic crisis has made revenues go down and spending go up.  And this is by design.  The income tax responds to economic weakness by allowing people’s taxes to fall as their incomes drop.  And also the Congress has stepped in and cut taxes for average people and small businesses. This is designed to put more dollars in people’s pockets so they will spend it and generate more economic activity.

5.    So revenues go down, by design, as you said.  Why does spending go up in response to an economic downturn?

Let’s take one example, Michelle. When people lose their jobs, they’ve paid into the system so they get unemployment insurance. And that’s of one of these so-called “automatic stabilizers."  One example would be two neighbors, one who works in a factory and one who works in a hardware store.  Say the factory worker loses his job, his unemployment insurance allows him to keep spending some money at the hardware store so that hopefully his neighbor doesn’t lose her job. 

In addition to unemployment insurance, the government has increased spending on roads and on bridges through the Recovery Act, which is great because the construction industry has been hard hit by this recession.

They also had to step in and save the financial system and actually injected money into the banks and what we’re seeing now is that the banks are paying this money back.

6.    So we’re seeing lower revenues and higher spending. How does that affect the deficit?

The deficit during an economic crisis necessarily goes up. It gets larger and that’s what’s happening now.  And believe it or not, that’s actually a good thing because what that means is the government is stepping in temporarily and providing some demand, as a “shock absorber” for the economy.

We are much more concerned about long-term deficits, not the temporary deficit during an economic crisis.  These long-term deficits will need to be addressed once the economy recovers.

7.    What’s the key take-away?

Michelle, many people obviously do not consider paying taxes fun. It’s an obligation as a citizen. But I think that if people step back and think about what that money is doing -- whether it’s providing gear for a soldier, a hip replacement for an elderly citizen, access to college for a kid from a family who has never had someone gone to college -- if you step back and think about it that way, I think that people will feel a little bit better about the taxes they pay and actually proud about the money they are sending in.

Thanks for joining me, Chuck.

For more on the Center’s federal tax policy work, go to CenterOnBudget.org.

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