10 Things Taxes Pay For: Where Do Your Federal Tax Dollars Go?

Update: Due to the pandemic, the IRS has extended the tax deadline for the 2020 tax year from April 15, 2021 to May 17, 2021. This only applies to individual federal income returns and tax payments, not a state’s income tax deadline, including state payments or deposits. 

Your taxes pay for a variety of government services, as well as government debt and salaries.

A young Black woman sits at a desktop computer and looks intently at the screen. One hand rests on the keyboard and the other holds a mug of coffee or tea. There is a yellow wall and blackboard behind her and two notebooks stacked on the desk beside her.

The federal government spends a lot of money. In 2019, for example, the government spent a total of around $4.4 trillion. You know that sounds like a lot, but how much is it really? 

For comparison, $4.4 trillion was around a fifth of the total national GDP for that year. GDP, or gross domestic product, is the value of all the goods and services provided or made within the country during that year.

What funds the things the government pays for? Well, $3.5 trillion of that spending was paid for by “federal revenues,” which mostly refers to taxes. The other $984 billion was borrowed. Discover 10 things taxes pay for below to understand just how the federal government is spending those trillions of dollars.

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    10 Things Taxes Pay For

    1. Government Debt
    2. Social Security
    3. Medicare
    4. Other Health Care
    5. National Defense
    6. Veterans Benefits
    7. Safety Net Programs
    8. Education
    9. Infrastructure
    10. Salaries and Wages

    1. Government Debt

    If the United States’ government borrowed more than $900 billion in 2019 alone, you can bet the total debt is high. At the end of 2019, it was $22.8 trillion.

    According to the Peter G. Peterson Foundation, which keeps a daily national debt clock, as of February 24, 2021, the national debt was as much as $27,932,601,755,468—more than $27.9 trillion. Not sure exactly how much that really is? Consider this—if everyone in the United States covered an equal portion of that debt, each person would need to pony up $84,029.

    It’s not surprising that a large chunk of what the federal government spends goes to debt, then. In 2019, around 8% of federal spending covered only the interest on debts!

    2. Social Security 

    Funding the Social Security program is a big expense for federal taxpayers. Social Security spending is part of an overall government spending category known as mandatory spending. These don’t require appropriation because the spending is mandated by a previous law or appropriation. With mandatory spending, the government funds the programs based on the need—however many people are eligible for and draw from Social Security, for example, determines how much is funded.

    Many of the mandatory spending programs started in the middle of the 20th century. As the population has grown, so has the amount needed to fund these programs. In 1962, mandatory spending accounted for 31% of the federal budget. In 2019, it accounted for 61%.

    Social Security accounts for the largest amount of mandatory spending. In 2019, the program accounted for 38% of all mandatory federal spending. That was around 23% of the total budget, or about a trillion dollars.

    3. Medicare

    Medicare also represents a mandatory spending item on the federal budget. It’s typically second to Social Security, and in 2019, it accounted for more than 23% of mandatory spending. This program provides health care benefits for qualified retired individuals as well as some eligible disabled persons. Overall, about $651 billion went to Medicare in 2019.

    4. Other Health Care

    Medicare isn’t the only health care and wellness program covered by the federal government. Others include Medicaid, which the federal government funds in partnership with the states, the Children’s Health Insurance Program (CHIP), and health care market subsidies. These subsidies are funded under the Affordable Care Act and usually taken as a reduction on how much someone might pay in taxes.

    In 2019, all of these other health care programs cost around $450 billion.

    5. National Defense

    Defense is not included in mandatory spending. It is discretionary spending and it must be included in congressional appropriations bills annually.

    Defense tends to be the biggest discretionary spending item on the federal budget. Some, but not all, foreign aid can be classified under defense because that spending is meant to stabilize other nations for the defense of the United States.

    In 2019, defense accounted for around 50% of all discretionary spending. However, that was only around 16% of the total budget. 

    6. Veterans Benefits

    Veterans benefits refers to a wide range of health and wellness programs, financial assistance, and other programs designed to support veterans of the United States military. This type of spending can actually fall under both discretionary and mandatory, as there are VA programs in both categories. In either case, though, it’s a relatively small percentage of total spending.

    7. Income Security or Safety Net Programs

    Income security refers to federal spending on safety net programs to increase the health and safety of the general population. Programs included under this umbrella term cover, but aren’t limited to, housing assistance, nutrition and food assistance, unemployment compensation, foster care, and certain tax credits.

    In 2019, income security accounted for the third-largest mandatory spending category after Social Security and Medicare. Around 16% of mandatory federal spending was in this category. Around 5% of discretionary spending that year was also in this category.

    With two COVID relief acts in 2020, you should expect to see percentages in this category go up for that year. The types of spending related to those bills—such as the stimulus payments to qualifying Americans—would be considered income security. 

    8. Education

    The children are our future—but you might not know it by looking at how federal funds are spent. Education is normally a relatively small discretionary spending item (about 7% of discretionary spending in 2019), and it often includes both K-12 education as well as spending on college, training, and employment services. It’s also worth noting that only around 8% of K-12 public school spending across the country is federal. The rest is covered by state and local funds. 

    9. Infrastructure

    Infrastructure refers to physical structures and facilities that we depend on to function as a society. This includes buildings, roads, and power supplies. 

    As with education, infrastructure expenses are shared among federal, state, and local budgets. According to a report from the House Committee on the Budget, the total infrastructure spending across all these entities in 2017 was only 2.3% of GDP, or around $441 billion.

    10. Salaries and Wages

    Not including the military and other non-civilian workforces, the federal government employs more than 2 million people. That’s a lot of people to pay, which means a lot of spending on salaries, wages, and benefits. The federal government spends billions of tax dollars to cover these expenses every year.

    What If You Don’t Agree with Federal Spending?

    As much as we’d sometimes like to pull the plug on our own tax bills because we don’t agree with how the federal government is spending our money, you still need to pay your taxes. Not doing so has legal consequences and could also lead to debt that might derail your financial goals and credit score

    But you can take some actions if you don’t agree with how the federal government is spending your tax dollars:

    • Contact your legislators. Find your representatives in the House of Representatives and the Senate, then contact them about your concerns. Don’t forget to contact your state representatives as well as your US representatives.
    • Use your vote. Vote for candidates for president, the House of Representatives, or the Senate who align most closely with your policy beliefs and who may be more likely to spend money in a way you agree with.
    • Get involved. Learn more, get involved with grassroots change efforts, or sign or create petitions for change.

    But while you’re doing all those things, don’t forget to do your federal taxes.

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