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.

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