How Uncle Sam spends your tax dollar

By Kiplinger's Personal Finance Magazine

Do you wonder what your tax dollars buy? As the deadline for filing federal income taxes rolls around again, you may wonder where those hard-earned bucks you've forked over to Uncle Sam actually go. The answer might surprise you.

This year the federal government expects a haul of about $2.7 trillion -- give or take a couple hundred billion or so, depending on the economy, corporate profits and Wall Street, and, of course, on how honest everyone filing a return is. In theory, at least, the White House and Congress work together -- or battle it out -- to decide how to divvy up every dollar paid to the federal government. In fact, most of it already is as good as spent.

About 70% of the annual budget pays for commitments already incurred -- everything from Social Security benefits to interest on the national debt. Neither President Bush nor Congress has much say over that.

Budget-eating benefits

The biggest single chunk of that so-called nondiscretionary spending -- more than 20% of the total budget -- is used to pay Social Security benefits to retirees. Another 15% pays the tab for Medicare health benefits. An additional 7% goes for Medicaid, 3% for veterans' benefits and 1.3% for supplemental security income used to assist the aged, disabled and blind. In fact, all government payments to individuals, including aid to poor families with children (welfare, which accounts for about 1% of the budget), food stamps (about 1.3%), farm subsidies (1%) and a variety of other government assistance and benefit programs, amount to about 58% of the budget. That's twice the share of the budget such payments claimed 40 years ago. And the percentage continues to climb, giving those pushing reform of such entitlement programs a powerful argument.

Interest on the debt claims about 10% of the budget. When President Bush took office in 2001, the national debt was $5.6 trillion, but deficits have pushed that number closer to $9 trillion. Where's the red ink coming from? Democrats blame Bush's tax cuts and wasted defense spending. Republicans, claiming that Bush's tax cuts boosted the economy and increased revenue, blame increased deficits on wasteful social programs and spending necessary to fight the war on terrorism.

The military gets the biggest piece of what's left -- the 30% of the budget called discretionary spending because it's the part of the budget that Congress and the White House can control from year to year. About two-thirds of this spending (20% of the total budget) pays for the tanks, jets, ships, missiles, rifles and other paraphernalia of defense, not to mention the salaries of our country's soldiers, sailors, airmen and Marines. In the next fiscal year, which begins Oct. 1, this will amount to nearly $600 billion, possibly more if war costs in Iraq and Afghanistan climb higher than expected. Some big-ticket Defense Department projects, such as purchase of new combat fighter jets, Navy shipbuilding and space weapons research, may be trimmed in light of the war expenses. But that would barely dent the Pentagon's share of the overall budget, especially with more funds sure to be added to support medical and other needs of Iraq war veterans.

Big spending on defense

You might think a fifth of the federal government's total spending is a lot to put into defense. But in comparison to some earlier periods in our country's history, it's actually a smaller share. During President Reagan's defense buildup, the military claimed 26% of the budget. And at the height of the Vietnam War in 1968, 46¢ of every tax dollar Americans paid was for defense.

Of the remaining discretionary spending, the Department of Homeland Security claims about 1.5% of the budget, or $43 billion. Foreign aid spending, though it raises the ire of many taxpayers, accounts for just 0.5% and is likely to be reduced by Congress.

The last 8.5% of Uncle Sam's budget pays for everything else: transportation (federal highways and bridges, support for Amtrak, funds to help states with other roads, bridges, railroads, airports and so on); science and medical research; food and drug safety; guarding the environment; the Strategic Petroleum Reserve; export promotion and import protections; space exploration; air traffic control; the FBI, the Drug Enforcement Administration and the rest of the Justice Department; federal education funding; and an alphabet soup of federal agencies tasked with helping to keep Americans safe, healthy and, sad to say, honest -- from the CPSC (Consumer Product Safety Commission) to the NLRB (National Labor Relations Board) to the SEC (Securities and Exchange Commission).

• Video:Spending your tax money. Who does it and where does it go?

And when all is said and done, the $2.7 trillion in tax revenue isn't enough to pay all of the bills. This year, the federal government will spend about $200 billion more than it will take in. Next year, the deficit is expected to run about $300 billion. Coincidentally, that's just about the amount that the government figures it's being stiffed by individuals and companies who don't pay all the taxes they owe, either by intent or by error.

This article was reported and written by Richard Sammon for Kiplinger's Personal Finance Magazine.