Pay day has arrived and upon receiving your check you've noticed that the federal government has taken chunks of your hard-earned cash. Where has the money gone?

The federal government collects trillions of dollars from taxpayers to finance public services and programs. For instance, the federal government spent $3 trillion in 2008, amounting to 21% of the nation's Gross Domestic Product (GDP), according to the Center on Budget and Policy Priorities (CBPP). The government financed $2.5 trillion by federal tax revenues and $459 billion by borrowing, which future taxpayers will end up paying back.

The recent recession and the unstable financial markets are among the factors that have led the Congressional Budget Office to project that the deficit will become $1.3 trillion for fiscal year 2010. That's if current laws and policies don't budge. Reduced revenues or a spending boost could exceed last year's shortfall of $1.4 trillion. (Learn how to trace where your tax dollars and charitable donations are going in Navigating Government And Nonprofit Financial Statements.)

Federal tax dollars mostly go to the military, social security, health care initiatives and underprivileged families and individuals. Here's a look at how three major areas of spending each made-up one fifth of the budget in 2008, according to CBPP.

  1. Defense and International Security
    These activities received $625 billion. Operations in Iraq and Afghanistan were included. Congress had appropriated $188 billion to fund the wars.

  2. Social Security
    Social security received $617 billion. Thirty-five million retired workers and their eligible dependents received retirement benefits from this program averaging $1,041 per month. In addition, 9.1 million disabled workers received disability benefits and 6.4 million surviving children and spouses of deceased workers received survivors' benefits.

  3. Medicare, Medicaid and Children's Health Insurance Program (CHIP)
    These government health coverage programs collected $599 billion. Medicare, which serves 45 million people over the age of 65 or with disabilities, received two-thirds of that amount. The rest went to Medicaid and CHIP, which require matching payments from the state.

Where Did The Rest Go?
Two other categories each make-up one-tenth of federal spending: safety net programs and interest on national debt. Safety net programs help the underprivileged through programs such as food stamps, school meals and low-income housing assistance.

The other category focuses on how the federal government makes regular interest payments on money it has borrowed to finance past deficits. For instance, by the end of fiscal year 2008 the national debt reached $5.8 trillion. The interest payments took $253 billion or nearly 8% of the budget. (Learn the functions of the U.S. Treasury, and find out how and why it issues debt in What Fuels The National Debt?)

The last 19% of federal spending goes towards public services that provide healthcare benefits to veterans and retirement benefits to retired federal workers. It safeguards food, drugs and the environment and makes investments in education, scientific and medical research, and transportation infrastructure. A sliver of the money goes to international humanitarian aid.

The Bottom Line
Keep in mind that your tax dollars not only pay for government expenses and debt, but also for public services that benefit many disadvantaged people. Ultimately, it's the policymakers that will make key decisions about the expenditures that impact your paycheck.

Related Articles
  1. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  2. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  3. Fundamental Analysis

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
  4. Investing Basics

    The 4 Biggest Bond Myths

    Bonds can be a great addition to a portfolio but be aware of these four myths.
  5. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  6. Entrepreneurship

    START-UP NY: How a Tax-Free Zone Would Work

    START-UP NY is an initiative designed to attract companies to New York State by giving them 10 years of tax breaks. Sounds good, but is it a success?
  7. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  8. Economics

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  9. Economics

    Explaining Capital Flows

    The movement of money for investing, trade or business production, is commonly referred to as capital flows.
  10. Bonds & Fixed Income

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  1. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  2. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  3. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>
  4. How do I calculate insurance premium tax?

    In the United States, consumers do not pay any additional tax on health insurance premiums. However, your insurance premiums ... Read Full Answer >>
  5. How can I find tax-exempt mutual funds?

    Tax-exempt mutual funds can be found at many prominent investment firms. Most mutual funds offer a variety of investment ... Read Full Answer >>
  6. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!