Question

The annual federal budget is the plan for obtaining and expending revenue of the federal government. In a minimum of two paragraphs, describe the source(s) of government revenue and the types of expenditures in the typical federal budget.

Answer 1

You'll find lots of information in Wikipedia, and in the introductory paragraphs of the budget the President submits to Congress, available on the White House site.

Briefly put, there are three major and one minor sources of revenue:

(1) Borrowing. This represents the single largest source of revenue to the Federal Government. This year, the government will borrow $1.2 trillion (about 30%) of the $3.7 trillion it will spend.

The Federal goverment borrows money by selling US Treasury bonds, which are pieces of paper that promise to pay the owner $10,000 in a certain amount of time. (Both short-term bonds, which come due in a year or so, and long-term bonds, which come due in as long as ten years, are sold.) People buy them for a little less than $10,000, and the difference between what the government can sell them for and what they have to pay later is the cost of borrowing -- the interest. It varies, depending on how eager people are to buy Treasury bonds. If they don't want to, the price falls and the governmet is effectively paying higher interest rates.

An interesting wrinkle at the present time is that the Federal Reserve system, the national bank, is currently the largest single buyer of Treasuries. The way they do this is to print money at the Mint, and then use this newly-created money to "buy" the bonds, so they are in essence creating money out of nothing. This is called "quantitative easing" and it's supposed to help improve the economy.

(2) Individual income taxes. This represents about another $1.2 trillion of revenue. The bulk of these taxes are paid by people earning a lot of money. For example, about one third is paid by the top 1% of income earners, and 85% is paid by the top 25%. The bottom half of wage earners, those earning less than the average salary, pay about 2% of all income taxes.

(3) So-called payroll taxes, which include Social Security and Medicare taxes. These total about $700 billion. They are suppsoed to go to paying for SS and Medicare, but the way that works is that the SS and Medicare programs "lend" the money to the general government, which then writes the SS and Medicare programs an IOU for the money, promising to pay it back someday. So really it just goes into the general pot.

The minor sources of revenue include coporate income taxes (about $180 billion), excise taxes (like the Federal gasoline tax or phone bill tax, about $70 billion), estate taxes ($7 billion), customs duties ($30 billion), and so forth.

There are three major types of spending:

(1) Entitlements, including Social Security, Medicare and Medicaid, total about $1.5 trillion, and represents the largest chunk. Social Security includes pensions for people over 65 (about $500 billion), disability pensions for people who are certified permanently disabled and can't work (about $200 billion), subsidizing medical care for those over 65 (Medicare, about $480 billion), and helping states pay for medical care for those under 65 who the states say are too poor to afford it (Medicaid, about $260 billion).

There are other entitlement kinds of things, too, like veteran's benefits, salaries and retirement benefits for Federal employees, and what not, that add another $600 billion or so.

(2) The military. That totals about $700 billion a year.

(3) Interest on the national debt. That's the third largest single category of spending, and it is currently about $225 billion a year. That's not the cost to pay off the national debt (which is, indeed, rising rapidly), but just the interest cost to keep from defaulting on it. It's like a student loan or mortgage on which you only pay the interest.

Besides these, there are an enormous variety of programs on which the Federal government spends money, including aid to farmers, ethanol subsidies, building Federal highways, running the FAA and national air traffic control system, the TSA and Department of Homeland Security, NASA, NOAA, and other research agencies, the federal judiciary and federal prisons, managing federal land, diplomacy and aid abroad, and on and on. Tens of thousand of programs. But none add up to anything like the biggies above.