So…Where Does All of Your Tax Money Go To?

Filing your tax returns is never fun business, especially when you don’t really understand where your money goes. For the most part, Americans know that their tax dollars help the government pay for infrastructure such as roads and defense for the country. But exactly how much of their money goes towards these purchases? Nowadays, the answer can be found with the click of a button. As promised in the State of the Union, you can now visit http://www.whitehouse.gov/2012-taxreceipt the White House website and input your income tax details to see how the Federal government is spending your money.

So exactly how does the government spend the income tax of an average American family which makes $50,000 per year and consists of two parents and a child? Here is a listing of the departments that the government pays for with income tax payments:

National Defense - 24.64%

The primary job of a government is to protect its citizens, so it is not surprising that defense swallows nearly a quarter of the average family’s income tax. This includes the massive 10.26% that is currently being spent on ongoing operations in places like Afghanistan. While many see defense as a necessary big-budget item, others complain that America overspends: the US spends more on defense than the next 19 countries combined!

National budget estimates for 2013: http://comptroller.defense.gov/defbudget/fy2013/FY13_Green_Book.pdf

Health Care - 22.45%

Medicaid and Medicare make up most of the healthcare category which provides cheap health insurance for the elderly, the disabled and those receiving a low income. A small fraction of the health care budget is also spent on health research and disease control which helps to maintain a good quality of public health for all those in the United States.

More info about healthcare spending in the US: http://www.kaiseredu.org/issue-modules/us-health-care-costs/background-brief.aspx

Job and Family Security - 17.26%

The Job and Family Security section of your federal income tax receipt makes up most of the welfare which covers a wide array of safety-net programs. The largest item within this bracket however is actually retirement and disability benefits for federal military and civilian employees. These benefits ensure that everybody from soldiers to teachers has enough money to retire and live contently. This is followed by food and nutrition assistance (including SNAP, formerly known as food stamps) at 3.89% and unemployment insurance at 0.99%.

Breakdown of Job and Family Security section and other sections: http://www.whitehouse.gov/2012-taxreceipt


Net Interest - 8.01%

The government currently spends more on running the country than it receives back in taxes, meaning that the federal government currently runs a deficit in the borrowed. As you are probably aware from credit card bills or your mortgage, interest can be killer and there is no exception when it comes to sovereign debt. In the case of the US, 8.02% of the average family’s tax money is spent just on servicing the interest on loans the US government has taken out. 

More info about the Net Interest paid by the government: http://www.cbo.gov/publication/21960

Education and Job Training - 3.30%


Considering that education is supposed to be the silver bullet, a surprisingly small amount of tax money is spent on maintaining K-12 education, college financial aid and job training from federal income tax. This department also provides training and positions for those who have disabilities. This number can be seen as misrepresentation however, as some state taxes also go towards funding education.

Breakdown of Education and Job Training section and other sections: http://www.whitehouse.gov/2012-taxreceipt

Veterans Benefits - 4.53%

Veterans benefits is probably the one section of government spending that requires no squabbling, as looking after those who have served their country is seen by many as a duty and not as an option. In fact, many are arguing for spending on veterans benefits to be slightly included so as to quicken the process of veterans receiving their benefits, as currently the Department of Veterans Affairs does not use a computer filing system and therefore many needy veterans must wait months (if not years) to receive their due.

More information and detailed breakdown on Veteran Benefits: http://www.va.gov/opa/pressrel/pressrelease.cfm?id=2433

Natural Resources, Energy and Environment - 2.05%

Most of the energy and environment budget is spent on energy and environment concerns that most of us take for granted: reducing pollution, managing the nation’s water and undertaking conservation of our nation’s forests and protected areas. This section does contain some items that can be controversial: from the funding of renewable energy projects at one end and to the funding of oil pipelines at the other.

Breakdown of Natural Resources, Energy and Environment section and other sections:
http://www.whitehouse.gov/2012-taxreceipt

International Affairs - 1.72%

Most Americans think a much greater proportion of the federal budget is spent on international affairs than actual is with a tiny 0.8% of tax payers’ money being spent on development and humanitarian assistance. The figure for international affairs also includes the 0.5% that is spent on the essential components of foreign affairs like funding embassies and America’s participation in international organizations.


Detailed breakdown of the spending: http://www.state.gov/r/pa/prs/ps/2013/04/207281.htm

Science, Space and Technology Programs - 1.06%


Just over 1% of your tax bill is spent supporting scientific research, with that money roughly being split evenly between NASA and the National Science Foundation. As well as funding big ticket items like shuttle missions and probes, money invested in science in the US pays back dividends in all kinds of unusual ways. For example, the Internet was pioneered by NSF back in the late seventies.
Detailed breakdown of this sector and other sectors as well: http://whatwepayfor.com/default.aspx?f=2773


Additional Programs - 14.99%


The remaining items on the itemized federal tax receipt are small-ticket items that nevertheless are essential to the running of the USA, including the cost of law enforcement, response to natural disasters, and Additional Government Programs which includes the cost of running federal government and paying congressmen, senators and the President.

Author bio: This article was written by Simon a blogger, content manager, financial expert. He is a financially conscious guy with a Msc. in International Economics. He is a longtime contributor to various financial, accounting, taxation blogs among others the authoritative taxation and accounting blog of the Wallace&Associates APC Los Angeles a tax consulting services company.

4 Budgeting Lessons Families Can Learn from Federal Spending

Family budgets don't work like federal budgets. Still, the average person can learn from the successes and failures of the federal government. These stand out as 4 lessons that we should all learn.

Don't Buy Things You Can't Afford

Everyone knows, or should know, that you can't buy things you can't afford. A big line of credit does not mean it makes sense to spend money that you don't have. Chances are, if you don't have enough money now, you won't have it tomorrow.

Now, the government does this all the time. When you don't include two wars in your budget, you build a huge fence along the Mexican border, and you keep entitlements at about the same level year after year even though you don't have as much money coming in, you end up with a $16 trillion dollar deficit. And growing.

Learn from this. If you can't afford a Ferrari, buy a Corolla. If you can't afford a house, rent an apartment. There are smarter ways to spend money. You just might not like them as much.

Know When to Limit Subsidies

Subsidies are great for certain things. Federal subsidies, for instance, were instrumental in developing the Internet and countless medical breakthroughs that have improved the lives of millions. Even early subsidies to oil companies made sense. When an industry doesn't have the ability to generate profit yet, subsidies let the government give new companies a little push towards success.

It's similar as you giving your child an allowance. The allowance is basically a subsidy. Sure, it's a lot smaller, but it works in similar ways.

The problem is that the government, like some parents, never learn when to let subsidies expire. Once your kid gets old enough to earn a living, you don't need to give her a weekly allowance anymore. That would be like the government giving the oil industry $20 billion a year even though the top five oil companies made $375 million in profits per day in 2011.

Wait, that happened? You don't need a masters in public administration to see why that doesn't work.

Stop Relying on Fossil Fuels

Fossil fuels are considerably more expensive than you think. You might get a stress headache while pumping $5 per gallon gas into your car, but you're not even thinking about the tax dollars that were used to pay the subsidy mentioned above.

The fact of the matter is that the country and its people need to rely less on fossil fuels. Riding a bike not only uses less money, it contributes to your health, which will become increasingly important as healthcare costs continue to skyrocket.

 

More Money or Less Spending: You Have to Decide

The government and families face a similar choice: they can either make more money or spend less money. For the government, making more money means raising taxes. For your family, that means getting a higher-paying job or picking up extra hours.

For the government, spending less money means cutting programs, staying out of wars, and limiting subsidies. For families, it means living within your means by setting a budget and sticking to it, even if it means you don't get all of the things you want.

What other lessons do you think families could learn from the federal government?

How Sovereign Debt Differs from Private Debt

Sovereign debt differs from private-sector debt, or debt incurred by households and corporations, for two reasons according to the Congressional Research Service report "Sovereign Debt in Advanced Economies: Overview and Issues for Congress".

debt (Photo credit: Alan Cleaver)

First, there is no international bankruptcy court that can enforce debt contracts between private investors and sovereign governments. In the domestic context, private borrowers cannot simply refuse to repay debts to creditors. Domestic laws and courts can force debtors to turn over existing assets to creditors or put the debtor through bankruptcy proceedings, during which the borrower liquidates its assets and turns them over to the creditor. In the international context, by contrast, there are no internationally accepted laws or bankruptcy courts to provide creditors recourse against governments that refuse to repay their debts. 

Debt contracts between governments and private creditors often include provisions that stipulate what jurisdiction’s law is to be applied in the event of a dispute about the contract. 

However, there is no way to force a government that has defaulted on its debt to abide by another country’s court ruling that it must repay the loan. Proposals for creating internationally accepted bankruptcy proceedings and regulations, possibly to be overseen by the IMF, have not been fruitful.

A second reason why public debt differs from some private debt contracts is that sovereign debt is “unsecured,” or not backed by collateral. Governments cannot credibly commit to turn over assets if they are unable to repay their debts, because, again, there is no international authority to compel them do to so. 

This contrasts with the private sector, where debt contracts are frequently backed by collateral. For example, property serves as collateral for mortgages in most countries. Some private-sector debt is not backed by collateral. Credit card debt, for example, is unsecured.

This is not to say that public debt is inherently more risky than private debt. In fact, some credit rating agencies use the credit rating of the sovereign as an upper limit for the ratings that domestic borrowers in that country can receive. 

However, the strict use of a sovereign credit rating ceiling for domestic borrowers has waned in recent years. Sovereign debt may be less risky than private-sector debt because governments have the power of taxation to raise money in order to service debt, unlike private borrowers

Dave Ramsey Gives the U.S. Budget A Money Makeover

Cover of Dave RamseyThere is a great article over at DaveRamsey.com comparing the U.S. Federal budget to an average families budget. Whenever I hear on the news, how out of balance the federal budget is, it's difficult to understand how messed up it really is. The actual amounts of money talked about are mind numbing. 


Dave Ramsey is the financial guru who teaches people, at meetings all over the country and on his radio show, how to manage your money. Recently he posted a great article explaining how the government took in $2.173 trillion dollars in revenue in 2011. 


It is a lot of money and should pretty well do the trick to pay for a years worth of government expenses. The only problem is the government spent $3.818 trillion during the year. This leaves $1.645 trillion in overspending. Over the last few years the debt has grown to a grand total of $15 trillion. 

That deficit was borrowed and it was put on the big federal credit card.

Dave Ramsey gives a good example how this relates if the government was an average family:

"If a household income was $55,000 per year, they’d actually be spending $96,500—$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000! "

What would Dave recommend to this out of control family?

"Stop overspending! But that means a family that is used to spending $96,500 a year has to learn how to live on $55,000. That’s a tough pill to swallow. Those kinds of spending cuts seriously hurt, but it’s the only way out of debt for John Q. Public."

Is Dave Ramsey's advice to simplistic?

Personal finance is just a matter of spending less than you make and allocating your money correctly. The trouble with the U.S. federal budget is, plain and simple, it overspends. Cutting back to pay off debt and save can be painful. It's a great sacrifice. So it will be when the government begins to do this. The people who have been on the government dole will be the ones hurt the most.

But I have to agree with Dave Ramsey when he says the best way to not be affected by the governments future austerity programs is just to not be dependent on them. Have your financial house in order by doing the right things:

1. Live on less than you make.
2. Have an emergency fund.
3. Save for college and retirement.
4. Stay away from debt except your mortgage.

Link to original article - Federal Budget vs. Household Budget: How Do They Compare?