Where do Taxes Go?

Here's where your tax money goes:

Item ('07 unless noted)         Amt ($billion)

Social Security Payments       586

Defense (minus Iraq, Afghan.) 548

Medicare      395

Unemployment          294

Interest on nat'l debt '08        244

Medicaid '08        202

Iraq and Afghan wars                186

Stimulus rebates '08 168

Foreign tax loophole discovered Sept '08              100

Education                      89

Transportation                                77

Veterans benefits        73

Justice Dept                                   44

Food Stamps         39

Foreign Affairs                             32

NASA                                  17

Earmarks '08                                                                  16

National Parks                       2

What does this tell us?

Three things. First, the media attention given to issues doesn't accurately reflect their real size in the budget. There are headlines over every wasteful 'bridge to nowhere' pork project, and while they're awful, they're also a small part of the budget.  In fact, a tax loophole the IRS just announced is more than eight times the size of all 'pork' projects combined. We aren't going to balance the budget just by trimming pork.

Second, our National Parks are being shamefully squeezed. We could quadruple its budget and it would still be one of the smallest  national programs. Ditto for NASA. If you think the money we spend on NASA would be better spent on schools, you're looking at the wrong source. NASA is small (half the size it was in 1965, by inflation adjusted dollars), and it's the big items we need to debate.

Third, if we want to balance the budget, it's going to be through defense cuts or tax hikes.

Yes, Social Security, Medicare, and Medicaid are big parts of the budget, but they also have their own tax sources. Social Security is currently in surplus, and while that will change, that's a topic for another time. For now, the items funded by your general income taxes are dominated by defense spending.

Take every other program in this chart - education, transportation, food stamps, and yes, NASA - and add them together. That's less than we spend on defense and the wars in Iraq and Afghanistan. Throw in unemployment expenses. It's still less.

I believe in a strong national defense, but I also believe in fiscal responsibility, and if we don't want higher taxes, we're going to need to rein in spending where it counts. Trimming the National Parks program won't balance the budget, but a careful look at defense just might.

The Bailouts Compared to the Cost of War

Figures in the hundreds of billions of dollars become mind-boggling and difficult to envision. How big are they really?

Here's a useful chart:

Item  Size ($ trillion)     % GDP

U.S. GDP  14.2   100

National debt   5.4   38

Annual gov’t spending   3   21

Revenue   2.5   18

Historical avg revenue   -   17 to 20

Bailout so far   1.6   11

Wars in Iraq and Afghanistan   0.8/yr   3 / yr.

What does this tell us?

First, America has a big economy. We produce nearly $15 trillion worth of goods and services each year. The national debt is big, too - more than the annual federal budget - but it doesn't need to be repaid all at once.

In one sense, the bailout is huge. It's more than half of what the government spends in a year. On the other hand, if people were really worried about debt, they'd be asking every day if we're getting our money's worth from the wars in Afghanistan and Iraq.

There are other ways to shrink the deficit. We could raise taxes slightly, since we're at the low end of the historical average, but that alone won't do it. Nor will cutting spending from the traditional budget, unless the cuts were huge - far deeper than is likely to be politically possible. A ten percent cut wouldn't do it, nor would twenty percent, if we include interest due on the bonds issued.

But there is a way. The gap between spending and revenue is about 3% of GDP, which is also the size of our spending on the wars in Iraq and Afghanistan. Without those, we're in far better shape, with many more financial tools to help our own economy.

We've spent nearly twice on those wars so far than on the entire financial bailout. Another way to think of that is to imagine how much economic stimulus we would have if we spent that money here at home, instead of wasting hundreds of billions on graft and poorly supervised projects abroad.

How you feel about the war is a political issue, of course. But if you care about national finances, it should be an economic one, too.