Every time you receive a paycheck, I am sure you see a nice portion of it being taken by the federal & state governments. If you do not have that money withheld on a paycheck you really notice when tax time comes, and you owe a good amount of money to the IRS.
We all know we must pay taxes and if you don’t there can be trouble with the IRS, but the big question is why we pay these taxes and where do these taxes go?
In this article, we will start by explaining exactly what income taxes are. I will then give you a little history of how our tax system was put in place and finally we will discuss where the money is being spent. Hopefully, with this information, it does not hurt so bad when you see that portion taken from your paycheck.
What Is Income Tax?
Income tax is a direct tax that a government levies on the income of its citizens. Paying a portion of income to the government is mandatory for anybody who meets minimum income amounts.
2020 tax filing requirements for most people
- Single filing status: $12,400 if under age 65.
- Married filing jointly: $24,800 if both spouses under age 65.
- Married filing separately — $5 for all ages.
- Head of household: $18,650 if under age 65.
- Qualifying widow/widower with dependent child: $24,800 if under age 65.
Even though the United States was founded to avoid paying high taxes to England taxes have crept into our system over many years. In 1862 Abraham Lincoln signed into law the nation’s first-ever income tax on personal income to pay for the Union war effort. At this point, the Bureau of Internal Revenue was established. This was repealed 10 years later.
Congress once again tried in 1894 but this tax was ruled unconstitutional. Then in 1909, the 16th amendment to the Constitution was ratified allowing the federal government to tax individual personal income. Congress used the power granted by the constitution and the 16th amendment and made laws requiring all individuals to pay taxes. They have delegated the IRS the responsibility of administering tax laws known as the Internal Revenue Code.
Income tax is the primary source of cash flow for the federal government. Income taxes include three separate categories: individual, payroll, and corporate income tax.
In 2020 individual and payroll tax revenue accounted for 85% of the government’s revenue. The US has a progressive tax system which means you are taxed a certain percentage based on your income. It is progressive because the more money you make the higher percentage of tax you must pay. The tax brackets are laid out below as seen directly on the IRS website.
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
Where Does Tax Money Go?
A lot of people are of the opinion that the government mismanages and overspends our tax dollars. I will not be addressing this in this article. I will get more into the basics of where and how the money is spent.
As much as it hurts to lose that chunk of the paycheck a lot of our tax money pays for things very necessary such as the roads we drive on, making sure our infrastructure is maintained, and giving citizens access to services they need to survive. They fund many government programs such as Social Security, Medicaid & Medicare, and the military.
The money also goes towards benefits for veterans and federal retires, education, transportation, international affairs, and science and medical research.
Government spending by the US can be divided into 3 different categories: mandatory spending, discretionary spending, and interest on the federal debt. Every year a budget is submitted and approved by the president and the Senate and the House. Mandatory spending accounts for the majority of where the money goes followed by discretionary funding.
Unfortunately, currently, there is a gap between government spending and government revenue. This means they are spending more money than they have coming in through taxes creating a deficit. This deficit creates the national debt on which interest must be paid.
Mandatory Spending
Mandatory government spending is all the spending that does not take place through appropriations, legislation. Mandatory spending includes entitlement programs such as social security, Medicare, and other programs required by law. It also includes smaller programs such as food stamps, housing assistance, earned income tax credits, and temporary assistance for needy families.
These are all permanent programs that the government cannot set the amount they wish to spend. They can only set eligibility rules for who qualifies for these programs. The only way they can manipulate mandatory spending is by changing these eligibility rules. They may make changes to exclude or include more people or offer more or less generous benefits to those eligible, but they cannot do direct budget cuts.
Mandatory spending continues to grow every year. Congress has a hard time making cuts to these entitlement programs because making these cuts guarantees voter opposition. Also, with the aging of America and the advancement in medicine prolonging life the costs of Medicare and social security are constantly on the rise.
Expectations have been set that with these two programs alone spending will almost double in the next ten years. In 2021 mandatory spending was estimated to be $2.966 trillion.
| Mandatory Spending Categories and Amounts | ||
| Mandatory Spending (billions of dollars) | 2020 | 2021 |
| Social Security | 1,091 | 1,142 |
| Medicare | 862 | 810 |
| Medicaid | 466 | 537 |
| Income Security Programs | 1,132 | 499 |
| Federal Civilian and Military Retirement | 173 | 179 |
| Veteran’s Programs | 122 | 132 |
Source: https://www.cbo.gov/about/products/budget-economic-data#3
Discretionary Spending
Discretionary spending is spending that is subject to the appropriations process, whereby Congress sets a new funding level each fiscal year for programs covered in appropriations bills. There are twelve separate appropriation bills that are supposed to be pushed through Congress and be signed by the President annually.
Discretionary spending can be broken down into 2 categories: defense and non-defense. Defense spending includes the Department of Defense, the State Department, and Homeland Security. Defense spending represents more than half of all discretionary spending.
Nondefense spending includes education, Veterans Assistance, and Housing and Urban Development. Historically most government spending was discretionary. In the 1960s two-thirds of total government spending was discretionary. Over time with the increases discussed above on mandatory spending, this has changed. Discretionary spending is projected to be about 32 percent of the budget. This decrease is expected to continue in the following decade.
| Discretionary Spending Categories and Amounts | ||
| Discretionary Spending (billions of dollars) | 2020 | 2021 |
| Defense | 757 | 752 |
| Nondefense | 1,139 | 668 |
Source: https://www.cbo.gov/about/products/budget-economic-data#3
Net Interest
The interest on the national debt is how much the federal government must pay on the outstanding public debt each year. Interest on the debt is currently exceptionally low but is projected to increase. With these increases, interest costs have become the fastest-growing program in the federal budget.
Even with the low rates, the federal government is projected to spend just over $300 billion on net interest payments in the fiscal year 2021. This is more than it will spend on food stamps and Social Security Disability combined.
| Fiscal Year | Interest on the Debt (in billions) | Percent of Budget |
| 2018 | $325 | 7.9% |
| 2019 | $375 | 8.4% |
| 2020 | $376 | 7.8% |
| 2021 | $378 | 7.8% |
In conclusion, taxes taken every year are necessary for all the programs out there and supporting our infrastructure. Also, there is an intricate system set up for the decision-making into where the money is spent. Decisions are not made by one person. Each year the budget is submitted by the president outlining plans for mandatory and discretionary payment.
This is just the beginning of the process. From there they must still be voted on and approved by Congress. To get through Congress there are also a lot of changes made before it gets final approval. To keep the government running the budget must be approved by September 30th. Many years September 30th comes, and the President and Congress can not come to an agreement. At this point, there are either temporary measures approved, or the government shuts down.
This is not a perfect system, and it may seem that some things need to be drastically changed with the system in the near future with the projections on necessary spending and the national debt but as you see a lot of the things that we really take for granted are made available because of the tax money taxpayers contribute. Without this funding, many things that everybody in our population depends on would not be available and many programs that people need to live would no longer exist.
Hopefully, with this knowledge, it may not hurt so much each time you see that pay stub with that chunk of taxes removed.
