The 2010 tax deadline has passed, and most of us have finalized our federal tax obligations. Now is a good time to reflect on the sources of federal revenue and how it gets spent. Most builders report taxes on their individual returns, either from pass-thru entities such as limited partnerships or sole proprietorship businesses. Hence, your tax payments are determined by individual tax rates and rules. The individual income tax was the largest component of federal revenues, contributing $900 billion in revenue or 26 percent of total spending in 2010. The next largest source of revenue came from social security and Medicare or payroll taxes at a quarter of expenditures. More than a third (37 percent) of spending in 2010 was paid for by borrowing. Corporate taxes paid 6 percent of federal spending, and the remaining 6 percent came from estate, excise, and import taxes.
How was your money spent? A typical builder had a near zero net income in 2010 and may not have paid significant federal taxes. For exhibit purposes, let us assume you had a $1,000 federal tax liability in 2010. Of that payment, the largest share was the $372 to pay people their social security, Medicare, federal retirement, and disability benefits. Another $81 went to a category of direct payments to individuals such as food stamps and assistance to families. Unemployment payments cost $46, and direct housing assistance was $17. The total of these direct payments to individuals absorbed just over half ($516) of the $1,000 tax payment.
The next largest component, national defense, cost $201. Within the defense bill, salaries for military personnel were $45, while defense operation and maintenance was $80. Veterans’ benefits and services cost another $31. Health and safety services and training, including OSHA, costs $107. Another $57 pays interest on the $14 billion outstanding debt.
That leaves $88 for what is often thought of as the federal bureaucracy: education and training, transportation, justice, natural resources and environment, international, space and technology, agriculture, energy, science, community development, commerce, and housing. All housing and community development spending except rent payments takes $6.
Within the last list of government departments and services, some often-attacked areas are actually very small portions of your final tax bill. Running Congress took $2, and running the White House constituted 15 cents of the example tax bill. Foreign aid took $6 of the total, and running the IRS absorbed $4.
An individual’s tax payment is based on total income less allowed deductions. Tax liability is reduced from a higher amount because a typical taxpayer deducts certain items of income to arrive at the taxable component of their total income. For a typical itemized tax return, deducting mortgage interest saved the taxpayer $2,612 and deducting real estate property taxes saved another $866. Only a small number of taxpayers sell a principal residence in a given year, but when that occurs, the exemption of capital gains tax saves those taxpayers an average of $4,950 in taxes.
The Congressional Budget Office estimates the future of federal expenditures and revenues. Given the current federal statutory obligations and expected economic conditions, the individual income tax is expected to support 40 percent of federal spending if all the current rules remain in place. Interest on debt is expected to grow from 5.7 percent of the 2010 budget to 12.6 percent of the federal spending by 2016 as expenditures continue to exceed revenues.
This simplistic example demonstrates the dominance of the individual income tax as the principal source of federal revenue, the concentration of a few areas on the expenditure side, and the importance of housing tax preferences to most taxpayers. However, if nothing changes and even with an expected increase in tax revenues as the economy improves, annual deficits are expected to increase. The outstanding debt will increase by 75 percent in 10 years to $18 trillion or $54,000 per person.