Where do your federal tax dollars go?

Written by Carly Simon-Gersuk

It is that time of year where we prepare for our taxes, looking at how much money we made and how much money was taken for taxes. If you are like many of us, we look in awe at how much money they took and ponder what they are doing with it. 

This is a good question to ask, “What are they doing with my tax dollars?” since the federal government collects trillions of dollars from taxpayers. Basically, there are three main categories that our tax money pays for the interest on government debt, mandatory spending, and discretionary spending. 

Interest on government debt is about 8% of federal spending. The interest rate on each bill, note, or bond depends on when it was issued, this means it depends on the demand for treasuries. When the demand is high the interest rates are likely to be low, and vice versa. 

Mandatory spending is also known as entitlement spending. It accounts for 61% of federal spending. This includes Social Security, Medicare, Medicaid, and Veterans Benefits. These are called entitlements because the government takes the money out of your paychecks to fund them and so you are entitled to these benefits once you meet certain criteria. 

  1. Social Security - It is designed to supplement income for when you retire or become disabled. In 2019, this program accounted for 38% of mandatory spending at about a trillion dollars. 
  2. Medicare - This program provides health care benefits for qualified retired individuals, as well as some eligible disabled individuals. In 2019 about $651 billion went to Medicare, which equates to 23% of mandatory spending. 
  3. Medicaid - This government-sponsored insurance program cost around $450 billion in 2019. Medicaid provides health coverage under the Affordable Care Act for low-income adults, children, pregnant women, elderly adults, and individuals with disabilities. 
  4. Veterans Benefits - These benefits include disability compensation, burial benefits, pensions, education, job training, insurance, and housing programs.

Discretionary spending is where the remaining 31% of tax money is spent. Programs under discretionary spending are ones that Congress must regularly review and set aside for. This means that Congress can decide to increase or decrease funding for certain programs as they see fit. Such programs include National Defense, Transportation, Education, Infrastructure, Health Organizations, and Salaries. 

  1. National Defense - This funds the Department of Defense and all its operations, as well as some foreign aid. Its spending accounts for 48% of discretionary spending. 
  2. Infrastructure and Transportation - Funding for physical structures and facilities, such as buildings and roads, as well as planes, trains, and automobiles. These funds are around $450 billion. 
  3. Education - A small percentage, 7%, of discretionary spending goes toward K-12 education, college, training, and employment services. This covers everything from teachers’ salaries to federal student loans. 
  4. Health Organizations - Government-funded health agencies like the Centers for Disease Control, the National Institute of Health, and the Food and Drug Administration account for 5% of discretionary spending. These agencies are important for an array of items such as research on diseases and drugs, and to oversee food safety. 
  5. Salaries - With over 2 million people employed by the government, excluding military and other non-civilian workforces, billions of dollars go toward salaries, wages, and benefits every year.


Written by Carly Simon-Gersuk