How Uncle Sam spends your tax money

NPP Pressroom

Business Week
Moira Herbst

Tax time may be the least pleasant harbinger of spring for Americans. Wading through the math of a Form 1040—built atop the rules of an exceedingly complex tax code—can take weeks of preparation and calculation. After all that, do you ever wonder how—specifically—your money is being spent? Here are a few of the ways. The biggest chunks of cash fund the military, Social Security, and health care—as well as hefty interest payments on the ballooning national debt. Of the $2.7 trillion federal tax coffers, about 20% goes to military spending, 20% to Social Security payments, and 15% to Medicare for the elderly and disabled. An additional 35% funds education, government agencies, and a range of social programs. And the remaining 10%? That's for interest payments to service the debt from all that spending. "We're spending big on both guns and butter," says Steve Ellis, vice-president for programs at Taxpayers for Common Sense, a Washington group that calls itself a "watchdog" against government waste and inefficiency. "Costs exceed revenues by far, but the Defense Dept. budget just keeps increasing. That means bigger interest payments on our debt." THE BREAKDOWN There are two main categories in the federal budget: federal funds and federal trust funds. Federal funds are considered "discretionary" dollars—meaning Congress and the President have a say in how they're spent. Federal trust funds are "nondiscretionary," meaning the money has been spoken for. Each category takes up about half the total budget. Federal trust funds include spending mainly on Social Security payments, the Medicare program, and part of the Medicaid program, or $1.5 trillion. The remaining $1.2 trillion—used on everything from the military to education to the arts—is left for political priorities. AVERAGE FAMILY BILL: $7,300 On Apr. 5 the left-leaning, Massachusetts-based National Priorities Project released a study called Where Do Your Tax Dollars Go? focusing on this discretionary chunk of spending. The median income for a U.S. family—defined as a household of one or more related persons—is about $46,500 a year, and the average federal tax bill is about $7,300. Of that, there's about $3,376 in discretionary federal income taxes, according to the project's analysis of data from the Office of Management & Budget. The analysis reveals that the biggest share of discretionary tax dollars for that median tax bill—$1,014, or 31 cents per dollar—goes toward Pentagon spending and military-related debt service. Of the 2006 budget, $510 billion was spent on the Defense Dept., plus $32 billion for the Homeland Security Dept. The Defense figure is up about 75% since 2001. The increases in military spending come as the American public is becoming increasingly dissatisfied with the war in Iraq. "Military spending this year is the highest it's been since World War II," says Pamela Schwartz, communications director for the National Priorities Project. "And to pay is to borrow, so spending spirals further. When Americans find this out, there is a shock and awe in the air; not enough people have the opportunity to trace the money they're giving up." HEALTHY SPENDING After the military, spending on health-care programs, including Medicare, Medicaid and the National Institutes of Health, makes up $546 of the total median tax bill, or 19 cents on the dollar. It may surprise some taxpayers that health spending takes up such a large part of the discretionary tax bill, even though 46 million Americans remain uninsured. Critics say that soaring health-care costs—coupled with government picking up the tab for emergency services for the uninsured—makes for an inefficient system. "If we're spending this much and not seeing results, there's a serious efficiency problem in the system," says Schwartz. Above all the partisan fray that surrounds government spending, what irks many taxpayer watchdogs the most is interest payments. In federal budgets, just as with credit cards, spending begets more spending. WITH INTEREST To service the $9 trillion-and-growing national debt, the U.S. government spent $406 billion on interest in 2006, up 13% since 2001. All told, about 15 cents of each tax dollar is spent on interest payments. "The biggest thing people don't recognize is how much we're spending on interest servicing our national debt," says Ellis of Taxpayers for Common Sense. "If we're taking in under $3 trillion in tax revenues, it's a pity to spend $400 billion in interest for goods and services we used a year ago. We're living beyond our means, and we just keep adding to the tab." (The Treasury Dept. measures the annual interest at $406 billion, but the White House reports "net interest" at $220 billion because it subtracts the amount of interest that the federal government pays for borrowing money from Social Security and other programs.) After accounting for military, health care spending, and interest on debt, the rest of the discretionary tax dollar goes to areas such as disability insurance and other benefit programs, education, nutrition programs, public housing, and agencies such as the Agriculture Dept. and the Energy Dept. DISGRUNTLED TAXPAYERS—AND RESISTORS Is there anything you can do if you're unhappy with how Uncle Sam is spending your tax money? A small minority of Americans simply refuse to pay. These tax rebels range from radical libertarian groups who don't believe in federal government to anti-war activists who do not want to support war efforts. "With Congress passing more money for Iraq, we're seeing a lot more anger and a lot of people looking for ways to protest," says Ruth Benn, a spokeswoman for the National War Tax Resistance Coordinating Committee, a national network. Benn estimates that 10,000 individuals in her network refuse to pay income tax. It's a risky strategy, to be sure: The Internal Revenue Service will assess penalties, go to court to seize assets, and even toss people in jail for not paying their tax bills. There's a less controversial—and less dangerous—means of influencing how tax receipts are spent, of course. It's at the ballot box.