Income tax is the primary source of revenue for the federal government but it has three separate categories that contribute to its cash flow. Individual and payroll taxes are two categories with the third being corporate income tax. In 2018 individual and payroll tax revenue accounted for 86% of the government’s revenue. In 2019 this percentage is estimated at 85%. So overall, income tax from individuals does contribute the majority of revenue and this can translate to a majority of the spending as well.
Who Pays Income Taxes?
Paying a portion of income to the government is a mandatory obligation. Any individual or company that earns income must allocate a portion of that income to the federal government as designated by U.S. tax law. Any gaps between the government’s spending and its revenue from taxes is covered by borrowing which also represents the deficit.
All U.S. government spending can be divided into three categories: mandatory spending, discretionary spending, and interest on federal debt. Each year’s budget is submitted by the president of the U.S. and approved by both the Senate and the House. The federal budget is publicly provided on the website of the Congressional Budget Office here. Below is a breakdown of the U.S. government’s three main spending categories for 2018 and 2019.
In 2018 mandatory spending accounted for the greatest portion of total spending at 62%, followed by discretionary at 31%. Then, because government spending exceeds government revenues which requires the government to cover the gap with debt, the $325 billion or 8% went toward interest on federal debt.
Breaking down the three main categories further provides some deeper insight.
Mandatory spending consists primarily of Social Security, Medicare, and Medicaid. Several welfare programs are also included like food stamps, child tax credits, child nutrition programs, housing assistance, the earned income tax credit, and temporary assistance for needy families. Other programs include unemployment benefits, student loans, and programs for veterans.
This spending is considered mandatory because the programs are permanent and the government does not set a dollar amount that it wishes to spend in each of these categories. Instead, it creates eligibility rules by which individuals qualify to receive payments from the government through these programs. Thus, any eligibility program can be expected to fall in the mandatory spending category. The only way to increase or decrease mandatory spending is to adjust the eligibility requirements so that individuals receive more or fewer benefits.
Discretionary spending includes spending that is appropriated annually. Overall, this part of the budget can be broadly broken out into defense and non-defense.
When further granulated it covers the following U.S. departments:
- Department of Defense
- State Dept
- Homeland Security
- Veterans Assistance
- Housing and Urban Development
Interest on federal debt is the last component of the federal government’s spending. In 2018 net interest was $325 billion, and in 2019, the net interest was $375 billion.
President Trump’s 2020 budget
The 2020 federal budget is the third budget proposed by Donald Trump in the Trump Administration presidency. It was presented on March 11, 2019. Developments on the 2020 budget are followed daily by the New York Times and can be found here.
For 2020, President Trump’s budget has seven key areas of focus:
- Curbs Wasteful Washington Spending
- Strengthening Border Security and Immigration Enforcement
- Provides for a Robust and Rebuilt National Defense
- Combatting the Opioid Epidemic
- Investing in America’s Students
- Reorganization to Modernize Government for the 21st Century
- Care for our Veterans
The Bottom Line
Mandatory spending has historically represented the greatest portion of government expenditures at over 60%. Each year a federal budget is submitted by the president of the United States outlining plans for mandatory and discretionary spending overall. While the president’s federal budget submission kicks off the process for agreeing on a federal budget, this budget must still be voted on and approved by Congress which leads to several changes and iterations. The final signing of the annual budget must be done by September 30 to maintain orderly operations of the government since its fiscal year runs from October 1 to September 30. If Congress and the president cannot agree on a final budget the government will shutdown or spending will be based on temporary measures.