Components of the Federal Budget: Categories of the Budget
Mandatory Spending
These are long-term programs promised to the American citizens that are set by law and eligibility rules and benefit programs. The primary examples include Social Security and Medicare.
13.1% of GDP $2.5 Trillion
Discretionary Spending
These are programs that lawmakers control through annual appropriations acts. These are generally not long-term promised commitments and must be appropriated annually to continue expenditures under such programs.
6.3% of GDP $1.2 Trillion
Net Interest
The government’s interest payments on debt held by the public, offset by interest income the government receives.
1.4% of GDP $263 Billion
Revenues
Funds collected from the public that arise from the government’s exercise of sovereign powers. Revenues can vary by year, changes in tax rules and regulations. Revenues in excess of expenditures result in surpluses to pay down government debt, but recently it is more likely that expenditures exceed revenue, which increases government debt and interest expense.
17.3% of GDP $3.3 Trillion
Individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The progressive design of the U.S. income tax code leads to higher-income individuals paying a larger share of income taxes than lower-income individuals.
The top 1 percent of all taxpayers paid 40.1 percent of all federal income taxes, while the bottom 50 percent of taxpayers paid roughly 3 percent.
The taxation of dividends and capital gains is one of the most controversial issues in public finance. Corporations must pay corporate income taxes on profits before they distribute dividends to shareholders, and shareholders pay an additional, individual-level tax on those amounts.
A corporate income tax (CIT) is levied by federal and state governments on business profits. Since the Tax Cuts and Jobs Act (TCJA) of 2017, the statutory corporate income tax rate—state and federal combined—is 25.8 percent. State-level corporate income tax rates vary across the country. Six states (Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming) levy no corporate income tax, while the other 44 states and the District of Columbia do tax corporate profits.
The CIT generally taxes a business’ profits, which are revenues (what a business makes in sales) minus costs (the cost of doing business). However, costs of capital investments—such as equipment, machinery, and buildings—cannot be deducted when they incur.
Excise taxes, estate and gift taxes, customs duties, remittance from the Federal Reserve, miscellaneous fees and fines.
Estate taxes and generation-skipping transfer taxes are paid on the contents of estates or proceeds of trusts, while transfers of wealth between living persons are subject to gift taxes. The federal government enacted the first estate tax in 1916. Studies routinely find that estate taxes discourage entrepreneurship and lead to large tax compliance costs.
Payroll taxes that fund social insurance programs, primarily Social Security and Medicare’s Hospital insurance program. The largest of these social insurance taxes are the two federal payroll taxes, which show up as FICA and MEDFICA on your pay stub. The first is a 12.4 percent tax to fund Social Security, and the second is a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of payroll taxes (7.65 percent) are remitted directly by employers, while the other half (7.65 percent) are taken out of workers’ paychecks.
Where do revenues come from?
Revenues for the Federal Budget in Fiscal 2020
17.3% of GDP
$3.3 Trillion
Tax Revenue
What do we spend revenue on?
Discretionary Spending
Mandatory Spending
Spending
20.8% of GDP
$4 Trillion
The interest in the national debt is how much the federal government must pay on outstanding public debt each year. The national debt includes debt owed to individuals, to businesses, and foreign central banks, as well as intragovernmental holdings. Intragovernmental holdings are money that the government basically owes to itself because it borrowed the money from itself. For example, the government may borrow money from the Social Security fund, to cover a budget deficit, promising to repay the money at a later time.
National security is both a vital priority and a significant part of the federal budget. Consequently, negotiating levels of defense spending is often one of the more contentious parts of the budget process.
The Good: Defending our nation and its citizens is one of the most important responsibilities of the Federal Government. Our continued freedom depends, in large part, on the sacrifices made by the men and women who serve in the United States Armed Forces around the globe. Equipping and protecting those who serve in the military is without question the top priority of the Department of Defense – and the dollars prove it.
The Bad: For more than two decades the Pentagon has been unable to complete a financial audit. In recent years we learned it cannot provide adequate documentation for $6.5 trillion worth of year-end adjustments and it has failed to pursue reforms that could save billions. Waste and inefficiency runs rampant in the Department of Defense. Yet, Congress does little to address these issues, presumably, to look more “pro-military” to voters (as if any of our Representatives in Congress are “anti-military”). Areas inside the DoD ripe for improvement include its spending on overhead costs, unneeded personnel and bases, and procurement.
Spending on many programs related to transportation, education, veterans’ benefits, health, housing assistance, and other activities.
Spending on unemployment compensation, federal civilian and military retirement, some veterans’ benefits, the earned income tax credit, the Supplemental Nutrition Assistance Program, and other mandatory programs, minus income from offsetting receipts.
Unemployment compensation is paid by the state to unemployed workers who have lost their jobs due to layoffs or retrenchment. It is meant to provide a source of income for jobless workers until they can find employment. In order to be eligible for unemployment compensation, specific criteria must be satisfied, such as having worked for a minimum stipulated period and actively looking for a job.
Another example of Mandatory Spending is the Recovery Rebate Credit. This was authorized by the CARES (The Coronavirus Aid, Relief, and Economic Security) Act and paid out in advance to most eligible citizens in the form of an Economic Impact Payment in 2020.
Medicaid provides health coverage to millions of Americans, including eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities. Medicaid is administered by states, according to federal requirements. The program is funded jointly by states and the federal government.
Approximately 70.6 million people were covered by Medicaid as of September 2020.1
The federal government matches state spending on Medicaid while states are responsible for designing and administering the program. Eligibility is determined based on one’s income in comparison to the federal poverty level.
Eligibility was expanded to include adults under the age of 65, provided their incomes fell under 133% of the federal poverty level (FPL), as per the Patient Protection and Affordable Care Act.7 Children account for 38% of enrollees with about 18% of the total cost. By comparison, people with disabilities account for 14% of enrollees with about 36% of total costs.
Medicare is a social insurance program that provides health insurance coverage to about 60 million Americans- 51.2 million ages 65 and older and 8.8 million persons with disabilities- and is one of the nation’s largest sources of health coverage. The Medicare program was signed into law in 1965 to provide health coverage and increased financial security for older Americans who were not well served in an insurance market characterized by employment-linked group coverage.
Discretionary Funding is determined annually and is capped by a certain amount. Mandatory funding is more “permanent”. Mandatory funding is generally determined based on the language written into law. For example, with SSI, the law states “such sums as will be necessary” for this purpose.
Interest on the National Debt and How It Affects You
The interest on the national debt is:
The total National Debt was over $31 Trillion for most of 2021
The national debt includes debt owed to individuals, businesses, and foreign central banks, as well as intragovernmental holdings.
Congress raised the debt limit to $28.4 Trillion on Aug. 1, 2021 to accommodate this, then it raised it again by another $2.5 trillion on Dec. 16, 2021
The interest on the public debt for the fiscal year 2021 is estimated to be $413 billion.
