Where Do My Taxes Go?

There is probably not a person on the planet who likes paying taxes or doing their tax returns. Your income is your hard-earned money. It’s not fun having the government deduct their share from your paycheck every month. 

Have you ever looked at your paycheck and wondered, “where do my taxes go?”. It’s an important question, and it’s vital to understand what the government actually does with your money. We see large portions being paid to the Internal Revenue Service (IRS) but not that much always coming out. 

Well, we’re here to clear up the mystery and answer the question, “where do my taxes go?“.

Where Does Tax Money Go?

The federal budget is made up of three main things which eat up most of your tax money. 

They are: 

1. Interest
2. Mandatory spending (also known as entitlement spending), and
3. Discretionary spending.

Interest on Government Debt

Did you know the U.S. government has debt? And not just any small debt. Currently, the U.S. government owes more than $23 trillion in debt. And this debt just keeps on growing! The government uses your tax money (and 8% of their total budget) to pay the interest on this debt. 

Mandatory Spending

Mandatory spending is also known as entitlement spending. This makes up about 61% of the federal budget. We’ll look at exactly what makes up mandatory spending in more detail below. For now, all you need to understand is Congress doesn’t have discretion on whether to spend tax money (or how much tax money to spend) on the programs falling in this category.

Discretionary Spending

Discretionary spending is the money spent that Congress has to review regularly. With each review, Congress can reassess how much money they spend on the programs in this category. Discretionary spending makes up about 31% of the federal budget. 

These are pretty broad categories and doesn’t really answer, “where do my taxes go?”. So, let’s look at them in a little more detail. 

What is Interest on Government Debt?

As with all debt, there is interest charged on the outstanding balance. 8% of your tax money goes into paying interest on government debt. With $23 trillion outstanding debt, you can imagine the interest payments are quite large! In the 2019 federal budget, the interest on national debt totaled around $375 billion. 

The federal government must pay interest on national debt every year. However, the amount of interest that has to be paid can change based on two factors:

1. The size of the debt, and
2. The rising and falling interest rates. 

Unfortunately, the government’s debt keeps growing as Washington is spending more than the tax it’s collecting. In 2019, the deficit (i.e., the money government over-spent) was a whopping $1 trillion.

What is Mandatory Spending?

The mandatory spending portion of your tax money is spent on entitlements. These entitlements are Medicare, Medicaid, Social Security, and Veterans Affairs. These are referred to as “entitlements” because you, as a taxpayer, are entitled to these benefits. The government takes a portion of your paycheck to fund these programs, so you have to benefit from them if you meet specific requirements.

The tax money spend in this category grows each year as the portion of the population being entitled to these benefits grows. Mandatory spending is also one of the big reasons there is a deficit in the budget each year. 

Let’s take a quick look at each of these entitlements in more detail. 

Social Security

Social Security makes up about 39% of mandatory spending and consumers a full quarter of federal spending. 

Social Security was created a long time ago to ensure income for retired workers who are over 65 years old. The purpose of Social Security is to supplement your income after you retire or if you become disabled. You or your family can receive your Social Security benefits. Even if you die before you become eligible to receive Social Security benefits, your family will be entitled to your portion of this benefit. 

Medicare

Medicare is health insurance provided by the federal government and makes up about 28% of all mandatory spending. This program offers medical cover if you are over 65, have specific disabilities, or have End-Stage Renal Disease (ESRD). 

There are four different parts to Medicare:

1. Part A – this covers hospital stays, hospice care, some home health care, and a portion of care if you were in a nursing facility. 
2. Part B – this covers doctor’s visits, medical supplies, outpatient services, and preventative care.
3. Part D – only covers prescription drugs.
4. Part C – this is also known as Medicare Advantage and has all three parts together in one plan. 

Medicaid

Medicaid is also a government insurance program similar to Medicare, but with a different purpose. The Medicaid program gives health coverage for low-income adults, children, the elderly, people with disabilities, and pregnant women. The federal government splits the cost of Medicaid with state governments. But the federal government pays the bigger portion. 

Veterans Benefits

The veteran’s benefits that are part of mandatory spending cover disability compensation, pensions, burial benefits, rehabilitation, job training, insurance, and housing programs. 

What is Discretionary Spending?

Discretionary spending is subject to Congress’ discretion. Congress regularly reviews the amount of money spent on discretionary spending programs and make adjustments where necessary. 

The following categories fall under discretionary spending: 

• National Defense – this portion of spending funds the Department of Defense and its operations. This includes all the military operations in Afghanistan and Iraq. 
• Education – education-related discretionary spending is mainly aimed at funding the Department of Education and covers things like teachers’ salaries and funding grants and federal student loans. 
• Veterans Benefits – veteran benefits aren’t only part of the mandatory spending portion of the budget. About 44% of the Veterans Administration comes from discretionary spending as well. This portion accounts for approximately 6% of discretionary spending. 
• Transportation – this portion (about 7%) pays for things like roads and bridges and helps fund the Department of Transportation.  
• Health – about 5% of discretionary spending goes to agencies such as the Food and Drug Administration, the National Institute of Health, and the Centers for Disease Control. The purpose of these agencies is to research new drugs and diseases and oversee food safety. 

As we explained above, Congress regularly reviews the amount of money spent on each of these categories. 

Conclusion

Now you know the answer to “where do my taxes go?”. Even Dreamers pay taxes! But hopefully, you have more clarity on why the government deducts taxes and how you can benefit from this spending as well.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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