Leading up to the April 15th tax deadline, a number of publications have discussed strategies to reduce tax liabilities. However, I thought it would be enlightening to investigate how and to what degree your federal income taxes are spent.
Because federal spending and debt get into the billions and trillions of dollars, it can become difficult to understand the magnitude of these figures. Therefore, in comparing federal income taxes, federal spending, and the national debt, the dollar amounts listed below are on a per-household and per-person basis.
All figures associated with spending and expenses are for fiscal year 2014, figures associated with income are expected results for fiscal year 2014, and the debt figures are as of the end of 2014, all according to the Congressional Budget Office. The number of people and households are according to the Census Bureau as of the end of 2014.
- Individual Income Taxes: Individual income tax will generate approximately $1.38 trillion of revenue, accounting for 40% of total federal spending, or about $11,350 per household (about $4,300 per person). Although most of us pay federal income tax, nearly 50% of individuals pay no federal income tax as a result of various exemptions, deductions, and credits.
- Social Security & Medicare Taxes: Social Security and Medicare taxes will generate approximately $1.02 trillion of revenue, accounting for 29% of total federal spending, or about $8,375 per household (about $3,175 per person). Generally, an employee pays half of these taxes and the employer pays the other half, subject to income limits.
- Corporate Income Taxes: Corporate income tax will generate approximately $380 billion of revenue, accounting for 11% of total federal spending, or about $3,125 per household (about $1,200 per person). Corporate income taxes and associated reform are certainly ongoing discussions in Washington, D.C.
- Excise, Estate, Gift, and Miscellaneous Taxes: These taxes will collectively generate approximately $262 billion of revenue accounting for 8% of total federal spending or about $2,150 per household (about $825 per person).
- Borrowing Costs: Fiscal year 2014 resulted in approximately $430.8 billion of interest expenses, accounting for 12% of total federal spending, or about $3,550 per household (about $1,350 per person). Financing approximately an eighth of our national spending obviously does not create a sound cash flow statement.
- Health Care: This includes Medicare and Medicaid. Total expenses are approximately $921 billion, representing 26% of total federal spending or about $7,575 per household (about $2,875 per person).
- Social Security: This includes both retirement and disability benefits. Total expenses are approximately $915 billion, also representing 26% of total federal spending, or about $7,525 per household (about $2,850 per person). Those currently receiving Social Security benefits had their own Social Security taxes spent to fund the previous generation’s retirement income. Therefore, this obligation is funded from current taxes. Note, no “lock box” or separate account is available for workers once they retire. All of this current tax revenue is spent on current retirees.
- National Defense: Total expenses are approximately $800 billion, representing 23% of total federal spending, or about $6,575 per household (about $2,500 per person).
- Welfare: This includes unemployment compensation, assisted housing, food stamps, social services, and other welfare programs. Total expenses are approximately $370 billion, representing 11% of total federal spending, or about $3,050 per household (about $1,150 per person).
- Education: Total expenses are approximately $103 billion, representing 3% of total federal spending, or about $850 per household (about $325 per person).
- Other: Total expenses are approximately $169 billion, representing 5% of total federal spending, or about $1,375 per household (about $525 per person).
- Interest on accumulated debt: Total fiscal year 2014 interest paid was approximately $229 billion, representing 7% of total federal spending, or about $1,875 per household (about $725 per person). Fortunately, the U.S. government is considered to have very low credit risk and current interest rates are very low.
Total fiscal year 2014 spending was approximately $3.5 trillion, while total revenue is anticipated to be just more than $3 trillion (therefore adding nearly $500 billion to the federal debt). This is accounted for by approximately $25,000 of tax revenue per household (about $9,500 per person), and yet another $3,550 was borrowed per household (about $1,350 per person). As a result, approximately $28,550 was spent by the federal government on behalf of each household (about $10,850 per person).
- “Net” Public Debt: Now totals about $13.0 trillion, or about $107,000 per household (about $40,700 per person).
- “Gross” Public Debt: Stands at about $18.1 trillion, or about $149,000 per household (about $56,700 per person). This includes the net public debt plus an additional $5.1 trillion the U.S. government internally lends itself. For example, current Social Security “surpluses” are invested in U.S. Treasuries, which essentially means it is lent to the rest of the government to spend now.
I hope that as you take the time this income tax season to ponder the amount you contributed to the federal government, you will have some notion of how it fits into the grand scheme of government income and spending.
Mark E. Howe, CFP®, firstname.lastname@example.org. Mark is the Director of Financial Planning at Frontier Wealth Management, Kansas City.
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