The U.S. Federal budget: Money goes in...more money comes out. It’s like a magic trick.
A lot of people frame this structure as a kind of political argument. But in the modern history of the U.S., it’s the same structure no matter who’s in power. Conservatives. Liberals. Idiots. Yes, they're always in power. The budget looks generally the same. They may change tax rates. They may spend money on different things. But overall, the shape of the budget has remained the same for as long as any of us have been alive. Except...it keeps getting bigger. Like...trillions bigger. Like a “4” followed by 12 zeros and a bunch of commas...big.
Most of the funds for the U.S. come from taxes on individual income, and from payroll taxes. There’s also a sizable chunk from corporate taxes. Specifically, we’ve got 47% from personal income taxes. Then another 9% of federal revenue comes from corporate taxes...basically, income taxes for companies. The next big chunk comes from payroll taxes. It makes up about a third of the federal government’s revenue. That’s the money for social security that you and your employer pay each time you get a paycheck.
Then you’ve got tariffs and all the little stuff that...doesn’t really add up to much. Members of Congress hash out what to spend. Once they make a deal, they need to get the president to sign off on it. And...that’s how the budget gets made. So...what does the Federal government spend our money on?
Three-fifths of the total budget goes to social programs...that’s stuff like social security, unemployment, Medicare, and Medicaid. After that, about a sixth of the budget goes to the military. Another 6% gets spent on debt service. That’s the interest expense on the bonds the U.S. government has issued to make up for its deficit spending.
Let’s look a little closer at the Federal government’s spending. There are two broad categories that the spending falls into. There’s Mandatory...stuff that’s been budgeted by previous legislation. It’s set in stone as part of the social programs...i.e. “entitlements." Again, we’ve got social security, unemployment, Medicare, Medicaid. The other big part of the Federal budget is called discretionary spending. This is stuff that lawmakers can negotiate on a year-to-year basis. The biggest part of the discretionary budget is the military; it also includes benefits for veterans.
There are a number of other, smaller expenses that fit into this part of the budget. There’s money for housing, for education, for international aid...pretty much anything else. But it’s important to remember that the mandatory spending and the military make up the biggest part of the total budget. Add in the service on the debt...and those programs combined equal 82% of the federal budget.
About those debts...each year, the government outspends its revenue, which is called “deficit spending.” To make up for it, the government has to borrow money. And it does this by issuing bonds. Every year, these additional debts get thrown onto the ever-growing debt pile, i.e. the “national debt.” which now tops $21 trillion, and is growing all the time. That said, debt service makes up just 6 percent of the total spending each year. The biggest chunk goes to everything in the mandatory spending category.
Less than a third goes toward discretionary spending. And remember that much of that is military and general government operations...salaries for government officials, sunglasses for FBI agents, fuel for Air Force One, cleaning the capital dome, and so on. And, of course, there’s the pork-barrel stuff. The $40 million pet projects that funnel money into particular districts. As a percentage of the total budget, these kinds of things are pretty much negligible. But they do add up in real-life terms.
Look at its this way:
The average dentist makes $173,860 a year. The federal income tax rate for a salary that size... is 32%. Which is $55,635 for each dentist.
So let’s see how many dentists it would take to pay for that $40 million pork barrel project. A little advanced calculus, and you would need the total income tax from about 719 dentists. Four out of five dentists agree…that’s a lot of dentists. Pretty much all the dentists in the state of Maine. Every one of them would have to get together and pool their federal income tax check to pay for that $40 million project. And they wouldn’t even be given Novocaine first…
Related or Semi-related Video
Finance: What is the Federal Funds Rate?21 Views
Finance a la shmoop what is the federal funds rate? all right think about it like
a suggested tip amount at a restaurant or on uber or lyft and you're going to [Man stood outside Pete's Pizza store]
gauge how your waiter or driver will react to that number
warmly coldly or well that's basically what the federal funds rates intentions
are as it relates to heating up or cooling down the economy well the Fed
heats and cools via the manner in which it rents money to its henchmen, the US
banking system that is in the most basic vanilla transaction the Fed rents money [Briefcase of cash lands outside Federal State building]
to banks for 1% a year and those banks then turn around and market that
money in the form of loans for homes and cars and re rents
that money with a big fat markup at three four five six seven eight percent
or more well a fair number of deadbeats exist on the planet they don't pay back [people appear all across a map of earth]
the money they promised to pay back and while sometimes the bank has to eat the
dough they loaned or at least incur a lot of lawyer bills chasing down the [Lawyer chasing man in a car]
deadbeats and in the event of a calamitous economic situation well,
banks need to be rock-solid so they can't lend out every dollar they have
that is they have to keep a fair amount of equity on their books so that if bad
things really do happen then they have what are called reserves well the bank [Bank reserve vault of cash appears]
also keeps reserves for direct daily deposits so that someday when a bunch of
people come in for their cash the bank can't turn their pockets inside out and [Person turns pocket inside out]
say yeah sorry we gave it all to the nice man wanting to buy a sports car
well that kind of thing leads to panic and disaster and it has sadly in our
country's history when a third of the banks went bankrupt in the Great
Depression so what happens when a bank has less money than it legally needs to
have as a reserve? well it borrows money in a short-term overnight loan from
either the Federal Reserve Bank or from other banks that keep their own reserves [Money transfers from Federal Reserve to bank]
at the Federal Reserve sort of like borrowing from Peter to pay Paul keeping
all that reserve grid number uh steady all right well now
we all know that borrowing money is not free
if a bank borrows overnight from other banks it is charged an interest rate at
the current federal funds rate the Federal Reserve influences that rate
while banks just need to be careful about paying back those loans because
stiffing the Fed is significantly more dangerous to your life than
sniffing your waiter at Applebee's [Object hits man outside Applebee's]
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