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Posted by Eric Strawder on Thu, Dec 12, 2019 @ 06:15 PM

Your taxes and the federal budget

The tax plans for each of the candidates in the 2020 Presidential campaign involve some varied and unique proposals, including a wealth tax, a tax on securities trading transactions, and new refundable credits for low-income housing. An understanding of the context out of which these proposals arise can help to explain how these plans fit into the real world. For example, a perceived wealth inequality is the undercurrent for many tax proposals. But these proposals and their underlying motivations must also be squared with the reality of the federal budget.

The federal budget is where the rubber meets the road, to use a common expression. The federal budget encapsulates everything the federal government plans to spend during its fiscal year. In recent times, Congress has been challenged to agree on a budget each year, and has instead resorted to passing continuing resolutions that allocate funding for various programs and departments. The bulk of the revenue that funds this spending is driven by tax revenue. Tax revenue is derived from individual income taxes, corporate taxes, estate and other miscellaneous taxes, tariffs, and payroll taxes (which include Social Security, Medicare, Medicaid, and unemployment taxes). 

Where Tax Dollars Go

During the federal government’s 2020 fiscal year (Oct. 1, 2019 – Sept. 30, 2020), the Treasury is expected to raise $1.824 trillion from individual taxes and another $255 billion from corporate taxes. Payroll taxes are projected to raise $1.295 trillion. Tariffs, a trending revenue source, are projected to raise another $48 billion, excise taxes $109 billion, and the estate tax and other miscellaneous taxes will generate $65 billion. The rest of the federal government’s income is derived from earnings within the Federal Reserve ($49 billion). As a brief aside, the Federal Reserve actually turns a profit on much of the money it prints, and it can also make a profit from investments it makes to stabilize the financial system. Even all of this is still not enough to balance the federal budget. The result of this shortfall is a projected $1.1 trillion dollar deficit, after considering the total anticipated amount that the government will spend in the 2020 fiscal year of $4.75 trillion dollars.

For contrast, $4.75 trillion dollars is more than double the combined net worth of the richest 50 people in the world, and a $4.75 trillion dollar stack of $100 bills would reach past the moon. But it is possible to understand how your tax dollars factor into this spending equation. To help simplify the analysis, a key item will be set aside. The Social Security program is generally a self-contained program that is primarily funded by payroll taxes and interest earned on the Social Security trust fund. This represents $1.1 trillion of projected spending that will be removed from the analysis. Medicare and Medicaid spending, although partially funded by associated payroll taxes, remains much less self-contained and will not be set aside for that reason.

After setting aside Social Security spending and associated payroll tax revenues, it becomes easier to see how your tax dollars will be put to work.  

A 2020 Projection

The following table (based on President Trump’s budget proposal) depicts the results of these assumptions. The per-taxpayer data depicts the portion of individual income taxes paid by the “average” taxpayer (which we assumed to be an individual or family whose adjusted gross income is above the 50th percentile, according to 2016 IRS data). The allocation of this tax amount paid by the average taxpayer to each program is assumed to be proportionate to each program’s total cost.

Program

Projected Budget
(in millions)

Per-Taxpayer
Amount

Medicare

$685,230,000,000.00

$4,757.65

Medicaid

$418,151,000,000.00

$2,903.28

Defense

$737,886,000,000.00

$5,123.25

Veterans Benefits and Services

$217,521,000,000.00

$1,510.28

International Affairs

$53,125,000,000.00

$368.85

Science, Space, and Technology

$34,587,000,000.00

$240.14

Energy

$3,536,000,000.00

$24.55

Natural Resources and Environment

$43,690,000,000.00

$303.35

Agriculture

$19,474,000,000.00

$135.21

Transportation

$100,889,000,000.00

$700.49

Community and Regional Development

$35,664,000,000.00

$247.62

Education, Training, and Social Services

$112,368,000,000.00

$780.19

Health

$197,799,000,000.00

$1,373.35

Income Security

$514,241,000,000.00

$3,570.45

Administration of Justice

$69,025,000,000.00

$479.25

General Government

$31,628,000,000.00

$219.60

Net Interest/Other Receipts

$368,753,000,000.00

$2,560.31

Total

$3,643,567,000,000.00

$25,297.82

 

Key

Mandatory Spending Other than Social Security

 

Military

 

Domestic Discretionary Spending

 

Interest on the National Debt

 

It is notable that each program has a mandatory amount and a discretionary amount. In the chart above, the projected budget reflects the combined total of each program’s mandatory and discretionary amounts. In the context of federal spending, a mandatory amount is an amount set by statute that is not part of the annual appropriations process. Discretionary spending is the amount set aside by Congress as a part of its budget, or as noted previously, the continuing resolution process.

How the Projections Could Factor into the 2020 Presidential Campaign

Turning back to the tax proposals from the 2020 Presidential candidates, these non-defense discretionary programs are the target of the most discussion. Some candidates may reference cuts to military spending or initiatives to make the Social Security and/or Medicare/Medicaid programs self-sustaining. But the primary focus is on these (or new) discretionary funding programs.

As evidenced by the table, these programs generally represent the smallest portion of federal spending. So if a candidate were to propose $50 billion in new spending for a chosen program, it would require a tax increase of about $315 for the average taxpayer, assuming the rest was covered by corresponding increases in taxes or additional debt. Under most of the tax proposals from the Democratic candidates, these programs will remain at current levels or they will see an increase. Generally, President Trump’s budget reflects a decrease in spending for these programs, though it does contain a significant increase in military spending.

For more information about your tax bill or how your tax dollars are spent, please contact us.

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Eric-Strawder.gifEric Strawder is a Tax Manager at CBIZ MHM in Kansas City. He can be reached at 816.945,5500 or EStrawder@cbiz.com

 

 


Copyright © 2019, CBIZ. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

Tags: Election, 2020 taxes, 2020 Presidential Campaign

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