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The Basics of Following the Money, Updated


As Tax Day approaches, we’ve updated three backgrounders that explain the sources of federal tax revenues and how we spend both federal and state tax dollars.

Where Do Federal Tax Revenues Come From?

In fiscal year 2012, the federal government spent $3.5 trillion on the services it provides.  Of that $3.5 trillion, federal revenues financed close to $2.5 trillion. The remaining amount (about $1.1 trillion) was financed by borrowing; this deficit will ultimately be paid for by future taxpayers.

The three main sources of federal tax revenue are individual income taxes, payroll taxes, and corporate income taxes; other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees (see chart).


Where Do Our Federal Tax Dollars Go?

In 2012, about three-fifths of federal expenditures went to three areas:  defense and international security assistance, Social Security, and the major health insurance programs (Medicare, Medicaid, and the Children's Health Insurance Program).  Two other categories together — safety net programs and interest on the federal debt —accounted for another fifth of federal spending.  The remaining fifth of federal spending supported a wide variety of other public services, including 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.

Where Do Our State Tax Dollars Go?

By far the largest areas of state spending, on average, are education (both K-12 and higher education) and health care.  But states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing, and aid to local governments.

Click here for the backgrounder on where our federal tax dollars come from, here for the backgrounder on where our federal tax dollars go, and here for the backgrounder on where our state tax dollars go.