The U.S. Budget Deconstructed: Money In and Money Out

  • James Notaris

    CPA, ESQ, Legal Editor

  • Tyler Dikun

    Executive Editor

    In Brief:

  • The federal budget consists of revenue and expenses that combine to form either a surplus or deficit.

  • In 2019, the U.S. ran a deficit of almost $1T.

  • The national budget is approved after the Senate and Congress approve appropriations and the president signs the budget into law.

  • There are two types of debt that combine to make up the $24T that the U.S. owes, find out what they are below.

At its root, a budget can be separated into two components, revenue and expense. Each component operates on either end of the balance of payment scale. The more balanced the budget, the less debt later generations will likely have to pay-off. At a glance, the U.S. may appear to be a profit-producing machine. In 2019, total revenue amounted to an estimated $3.4T, yet total expenditure that year was $4.45T. Therefore, the U.S. actually spent 28% more than it produced in revenue for the fiscal year 2019, a near $1T deficit!

Total Revenue Broken Down:

  • Individual Income Taxes: $1.72T
  • Payroll Taxes: $1.24T
  • Corporate Income Taxes: $230.2B
  • Sales and Excise Taxes: $98.91B

Total Spending Broken Down:

  • Social Security: $1.04T
  • National Defense and Veterans: $883.3B
  • Transfers to States: $721.5B
  • Medicare: $650.9B
  • Interest on the Debt: $372.3B
  • Aid to the Disadvantaged: $337.7B

Per Capita Revenue and Spending:

The Federal Government Broken Down:

How Does The Federal Government Make Money?

A wise man once said, the only certainties in life are death and taxes. While we can’t do anything about our own mortalities at the moment, there is much debate about the efficacy of taxes. Why do we need them, where do they go, does the American taxpayer really get the best bang for their buck? 

Federal, state, and local governments create and maintain vital infrastructure such as highways, bridges, and dams. The multiple levels of government are also tasked with maintaining a police force, emergency services, government agencies, health programs, social security, Medicaid, etc.

As you well know, everything comes at a price. Without tax revenue, the federal government simply would not be able to operate. This is why tax fraud is met with severe punitive measures. When you cheat the government, you cheat your fellow tax paying citizens. As the chart above describes, the U.S. generates trillions in tax revenue each year. The majority of tax revenue is generated from two entities, income tax and payroll tax.

Individual Income Tax:

Income tax refers to the tax every business owner and employee must pay on the income they generate each year. By law, taxpayers must file a tax return each year to determine their tax obligation. The Internal Revenue Service (IRS) is tasked with the enforcement of tax law and the collection of taxes. The amount of income tax a person or household pays is largely dependent on the amount of income they generate. The higher the tax bracket, the more taxes someone will be obligated pay.

Payroll Tax:

This type of tax is calculated as the percentage of salary that business owners pay their employees. Payroll taxes are deducted each month from an employee’s paycheck and paid directly to the IRS. From there, the tax goes into Federal income, Medicare, Social Security, and federal unemployment programs.

How Does The Federal Government Decide To Spend Its Revenue?

Over a year before the federal budget is created, the government is already hard at work to ensure taxpayer money does not go to waste. The numerous government agencies like the CIA, FBI, and NSA submit their budget proposals to the White House. The president receives the proposal by each agency and factors each proposal into his/her budget request that is typically sent to Congress in early February.

Each branch of the government then reviews the budget proposal and adds their recommendations. A joint committee of senators and representatives vote on the budget.

The 12 government subcommittees that oversee the numerous government agencies then draft appropriation bills to set the funding for each agency.

Finally, both chambers vote on the appropriations before the bill is sent to the president. If an appropriations bill is not signed by the president before September 30, the government does not have a budget.

What Does The Federal Government Spend Money On?

The federal government bases its expenses on several missions: establish justice, provide for the common defense, promote general welfare, and to secure the blessings of liberty for ourselves and for posterity. According to the Department of Treasury, 2019 witnessed the largest federal spending increase in two decades. Where did that money go? The three biggest expenses are listed below:

Social Security:

Millions of retirees, people with disabilities, veterans, and family of the deceased rely on social security to maintain their quality of life. The labor force contributes a monthly portion of their income to social security each month which then gets redistributed to beneficiaries. In 2019, the federal government paid out over $1T to Social Security beneficiaries, or roughly 23% of total spending. 

National Defense and Veteran Benefits:

The U.S. is the proud owner of the most powerful and modern military the world has ever seen. Not surprisingly, such a robust and powerful fighting force comes with a hefty tab. In 2019, the government spent a combined $883B on the military and vetern benefits. Even though the number of military personnel has decreased since the end of the Cold War, advances in weaponry and an aging veteran population have pushed spending to a record high when adjusted for inflation.

Medicare: 

Medicare is a national health insurance program established by the Johnson Administration. The plan primarily covers Americans who are 65 or older and those with disabilities. Medicare has several parts. Part A covers hospitals, nursing facilities, and home health services. Part B covers preventative services like doctor visits, diagnostic tests, and medical equipment. 

Part D covers prescription drugs, and Part C, also known as Medicare Advantage, offers its own additional benefits. While Part A is typically free, Parts B, C, and D come with premiums. Taxpayers pay 1.45% of their earnings to FICA (Federal Insurance Contributions Act) which in turn goes to Medicare. The federal government spent $650B on Medicare in 2019.

Why Does National Debt Continue To Grow?

In 1835, Andrew Jackson became the only president to completely pay back all American debt. As it stands, Jackson’s action remains the only time in American history that the U.S. did not have any debt. As of April 2020, total U.S. debt stood at a whopping $24.1T. The national debt can be broken down into two categories – intragovernmental debt and public debt.

Intragovernmental Debt:

In total, government agencies own an estimated $6T in U.S. debt. Why does the government owe money to itself? When agencies take in more revenue from taxes then they need, they invest this surplus in U.S. treasuries. Agencies then redeem their treasury notes for funds when needed. The government either raises taxes or issues more debt to raise the cash to pay back agencies. 

Public Debt:

Public debt refers to the amount of debt a nation owes to lenders outside of itself. Businesses and individuals can own public debt, but the largest  amount of public debt holders are other countries. Currently, China and Japan combine to own over $2T worth of our public debt.

In the case with China, the asian super-power continues to loan the U.S. money so that it can continue to buy Chinese goods. The relationship is mutually beneficial because the U.S. can take advantage of low Chinese prices and China can enjoy a huge trade surplus.

Will The U.S. Ever Balance Its Budget?

Although there is no provision in the Constitution to ensure a balanced budget, many critics argue that the nation cannot run at a trade deficit year after year. With an astronomical amount of debt owed and rising expenditures many experts look to alternative ways to save money. The U.S. still remains the richest and most powerful nation on Earth, regardless of whether the nation ever operates at a trade surplus again.

 

Sign up for free tools.

Incredibly simple.

Your hear first.

Unsubscribe anytime.