Where does my tax money go and why pay? 10 reasons why!

Suppose there is one thing almost everyone can unanimously agree on. Giving portions of our hard-earned money every month to the government is one of the last things we probably want to checkmark off our ‘Things I Want To Accomplish In Life’ list.

Unfortunately, the government is diligent in collecting your money, and the question I think everyone at some point in their life has asked themselves is why? Why does the government take money from me? Where does my tax money go? Go take money from the millionaires and billionaires and just leave me alone! 

Most of us have had these thoughts at some point, especially when we see the money being drained from our paychecks. Or when the dreaded tax season rears its head up for another round of money to the government. I want to break down these questions and understand why we have to pay the government and some of the main ways they collect money from us. Then, I want to share with you 10 different reasons the government is after your money. As well as strategies you can utilize to help reduce how much you are paying Uncle Sam.

The first topic to dive into to better understand why we pay the government is to know when American even begin paying the government? A few years before 1776, when America broke ties with the British to govern themselves, Americans had been struck by the British with heavy taxes & fees.

The Americans decided to board multiple boats carrying various teas and dump them into the ocean to retaliate. This was to protest the heavy fines and financially hit the British back. This would ruin the significant income expected from selling the teas placed on the boat to Boston. 

Up to that point, the leaders of America did not actively collect large amounts of money from its citizens because they understood the hardship of being taxed by the British. That began to change during the Revolutionary War from 1775 to 1783. The American leaders realized that they needed more income to fund the war. They slowly began to pick up steam, and individual states started to conduct their own trading by financing the state. Around 1787, the original founders were able to take control. The new Constitution allowed the government to have sole possession of taxing & collecting money from each citizen.

Now that we know that, our next question is, what are the main ways the government collects money from us? The primary form, as many of us know, is through taxes. According to George Mason University, around 65% of government funding through federal taxes comes from citizens. Another 32% of taxes are being paid by the corporations and businesses in America. The remaining 3% comes from other taxes, estate & gift taxes. In addition, America also collects money through tariffs, a tax between two countries who trade goods & services with one another. 

On average, the total amount of revenue that the government receives through all of these taxes each year (average number over the last 10 years) is around $3.15 TRILLION! To break that down in everyday language, KRWG PBS gave a great example of what this means. They said, “If you spent $40 per second, it would take you 289 days to exhaust a billion dollars. If you did the same thing with a trillion dollars, it would take you almost 793 years to go broke.” 

Now get this, at the end of 2021, the US will be over $28 TRILLION in debt. That $3.15 trillion Uncle Sam takes from us is chump change compared to how much the US owes. You can understand why they have a high incentive to tax us more…

Let’s dive into 10 reasons the government takes our money and where your money is going. I have organized it so that the government’s mandatory topics are listed first, and the most minor required issues are near the bottom.

Social Security

You have probably seen this figure on your paycheck at some point, and the standard amount taken out of each paycheck is 6.2%. The max dollar amount cap is $142,800 that can be taken from you per year. This amount goes to the government to help fund social security, and your employer is required to pay the other 6.2%. You are stuck with the whole bill paying 12.4% each paycheck as a self-employed entrepreneur. To summarize the mission of the Social Security Administration, their purpose is to help maintain and protect the essential well-being of its citizens and non-citizens that qualify. 

This program is considered to be the most extensive program we fund because it provides income for about 20% of Americans. Generally, those eligible who actively use this program are retirees, disabled people, and the family members of a person who passed away. 

In Charge Debt Solutions described the breakdown of every dollar you pay into Social Security and where it goes. About 85 cents will get eaten up by a trust fund that will pay out those who qualify for Social Security every month. 15 cents will go to those who claim disability, and the tiny remainder will go towards administrative costs. Many of us have heard people talking about Social Security and how they doubt they’ll ever see it in the future. Yes and no to answer that statement. 

The Social Security Administration has acknowledged that in 2037, they will have officially exhausted their ability to pay in full to everyone that needs it. Once that happens, they will have to decrease the amount they can offer to around 76% instead of 100%. Or their other option would be to increase the 12.4% required by the employer/employee to 14.4%. Either one of these options is said to keep the program on schedule for the next 75 years, so if you hope to retire on Social Security, keep that in mind.

Medicare & Health Care  

Another figure you are familiar with costs around 1.45%, employers pay the remaining 1.45%, and the self-employed pay the complete 2.9% per pay period. Most of you already understand the importance of having healthcare, and Medicare is health insurance for people 65+ years old. However, this plan can also cover those with disabilities or even people with end-stage renal failure disease. Both Medicare & Medicaid (usually for low-income families) are the most significant government-sponsored healthcare programs offered in the US. These two split up because Medicare is provided on the federal level. In contrast, Medicaid is supplied on a state-wide level. 

Investopedia broke down how each of these two programs is funded by us. Our tax money for Medicare goes into a hospital insurance trust fund. That portion is used to help pay Medicare Part A (inpatient hospitalization, nursing home care & hospice care). We pay into another medical insurance trust fund for Part B (medical services), Part D (drug coverage), & admin costs. Our tax money funds Medicaid, and each individual state is also putting money into the Medicaid program. The average price of Medicare & healthcare spending is about 28% of the federal budget. Combining that with 23% total Social Security spending gets you over 50% of where your taxes are going.  

Defense & International Security

Another mandatory area that our taxes go to is defense and international security. According to the Congressional Budget Office, it is about 17% of the total federal budget (almost 70% – SS, Health & Defense). The critical cost areas that fall under the defense umbrella are military operations, the Department of Homeland, the TSA, weapons, troop training, troop supplies, and equipment. This money is taken out of your paycheck under federal income taxes. 

Nationalpriorities.org used an excellent example of how much of your dollar goes to funding our defense. 24 cents out of every dollar goes to the military, and 12 cents automatically goes to military contractors. Almost 5 cents goes to the salary of our troops and their housing. The remainder goes towards the troops’ healthcare, training, and other benefits.

Safety Net Programs

These programs consist of Welfare programs like government-sponsored assistance programs, assisting those in poverty or struggling through hard times, protection for low-income families, and anyone who may need safety or help. Programs you may know include the Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI), public or subsidized housing, Temporary Assistance for Needy Families (TANF), child care subsidies, and nutritional programs. The average cost for this program is about 13% of the total federal budget, and you will find this cost included in your federal income tax. 

Interest on Debt

As I mentioned earlier in the article, the US will have accumulated around $28 trillion of debt by the end of the year. If you understand how debt works, the lender will give you a loan, but they expect you to pay the loan back in full. In addition to all of the interest growing on that loan. The Congressional Budget Office has predicted that this will cost Americans about 413 billion dollars to pay back. It can be challenging to pay back large sums of money you owe if the lender attaches interest to the loan. 

Our government has to focus on paying back all of the interest on the debt. THEN they can attack the original loan amount that remains. The more of your tax money that has to pay back all of the interest accumulated from the US debt. The more the government will need to take from you to pay back the remaining debt. Lenders become scared that the US cannot pay back their loans, so the lender agrees to allow the US to have a loan only at a high-interest rate. Interest on debt is around 7% – 8% of the total federal budget that we pay.

Pension Offerings 

People that generally rely upon and expect to receive a pension (guaranteed income usually meant for retirement) are government employees, teachers, police officers, and firefighters. Their salaries are paid from our federal income tax that is taken out every pay period. Like the Social Security crisis, pension plans are running out of money.

For many people, the dream of working for the government and receiving a monthly check for life is no longer guaranteed. The programs have become underfunded, and it does not help that we have even more people who qualify for the plan but not enough money to evenly distribute out.

Another thing most people forget (I worked in this field) is that many pension plans are tied to the stock market. If the market goes up, then great because your pension retirement plan increased. However, if it goes down, your pension gets hit, and you lose the money you were depending on for retirement. It is the same as having a 401K, IRA, or even ROTH IRA.

Any retirement plan tied to the stock market is almost entirely out of your hands because we cannot predict how the market will react on any given day. This is why we have heard the horror stories of people losing 70% of their retirement money in a few months because of a market crash. Or a public figure is talking down on a company you are heavily invested in, cough cough Elon Musk… The total federal budget on these programs is usually around 6% – 7%.

Education

Many of us hear how important education is and that you need to continue educating your mind and going to school. Most of the schools around the US are taken care of by the government. This costs us, taxpayers, about 2 cents out of every dollar. 

According to the international ranking of OECD (Organization For Economic Cooperation And Development), America is mediocre in general education. We rank 21st in science, 17th in math, and are considered below average, while reading is ranked in 17th place. US public education studies have shown that the average student spending is about $12,600. 

A constant argument made in both Congress and the school districts are that education does not receive enough funding to help uplift future generations. Education funding typically makes up about 2% of the total federal budget. This plays into the previous topic of pension offerings because most educators rely on their pensions to retire. Since both of these areas suffer from a lack of funding, their futures are uncertain, which causes many people to fear and worry about whether they can retire.

Transportation & Infrastructure

The government needs our tax money to support these programs to provide transportation services, buildings, bridges, roads, etc. Usually, our tax money will be funneled into trust funds redistributed to various programs and projects. Transit Costs Project displayed a graph that shows the countries that spend the most on transit infrastructure, and the US ranks number 6 on this list. There is no perfect answer as to why the US is rated so highly for transportation & infrastructure costs. However, a more general explanation would be that we need more money to pay for the same pavement equipment that was cheaper 10 years ago. Learn more about inflation and how it causes the dollar to become weaker.

The same item you paid for 2 years ago has become more expensive, even though it is the same product. You may have heard these large, trillion-dollar infrastructure budget plans thrown around by Congress. Still, the total amount spent on these programs is only about 1% to 2% of taxpayer money.

Science, Space & Medical Research 

Many of us would never have imagined NASA having any serious competition. They were a monopoly when it came to space travel. Fast forward to today, and you see SpaceX and Blue Origin stepping into the space arena. In addition, we have many companies dedicated to science and medical research for various diseases, cures, theories and ultimately working to push the human race forward. This category can be grouped with other categories listed above regarding your tax money. Still, generally, only about 1% falls in this bracket. 

Environment 

This is probably considered one of the least funded areas by taxpayer money. It makes you think about the millionaires and billionaires focused on space and finding a new world to call home. Not as much emphasis on trying to protect or revive the parts of Earth that could result in prolonged life, but that is an entirely different argument. This area focuses on helping protect Earth’s land & ocean against things that may be causing harm. This federal budget probably makes up about 1% or less of where your tax money is going. 

You are probably exhausted from reading about the different places your hard-earned money is being sent to within the government. Let’s actually talk about solutions to help you reduce the taxes the government can take from you. Hopefully, you can use some of that money for a vacation, a new car, or even buy that house you’ve had your eye on! 

Suppose you are currently putting away money for retirement in any plan such as a 401K, Roth IRA, IRA, pension, 457, to name a few. In that case, you can file that on your tax return to receive your money back. The government rewards you for stacking away your money so that they don’t have to give you as much money when you retire because you have been self-funding. There are quite a few tax credits you can report on your tax return that help cut down on how much you have to give to the government. For example, anyone who claims dependents such as children or disabled members can pay fewer taxes. Or those with low income can potentially receive a bigger tax refund when they file. 

The government is trying to offset the required taxes you must pay for anyone currently enrolled or attending school. The government wants to reward you for pursuing more education and give you a tax break when you file that into your tax return. If you have a business or even a side hustle that you are doing which requires you to spend money to bring in money, mark it down when you file taxes! Living in capitalism, you are rewarded by the government for having a business and contributing to the economy so your taxes can go down and result in a higher tax return. 

Also, if you are working out of your home and turning it into an office, you can claim office space and business expenses to reduce taxes. You can utilize many strategies for your mortgage and put that into your tax returns to help you save more money. So many options, tools, and resources to explore to find out which options work best for you. I always recommend that you research any ideas presented above and never be afraid to contact a professional for specific advice about your situation. Many tax professionals offer free consultations to discuss your situation and help you work towards a solution, especially for the long term. You can go on to my website to learn more and read articles such as whether you should hire a tax professional or DIY when filing your own taxes.

This concludes today’s article, and I hope that it was helpful to you and got you thinking more about your taxes. I always want to hear your thoughts and questions, especially financial literacy. Please email me your questions and leave comments below because I want to know what you think. Check out the website to keep reading more!

And remember, like Earl Nightingale said, “Everything begins with an idea.” See you again next time!