By Jerry Idaszak, associate editor, The Kiplinger Letters
Almost everyone agrees that the federal deficit is a ticking bomb. But few can agree on how to defuse it. Ideas run the gamut from raising taxes to the wholesale elimination of scores of government programs. Some are contradictory. All are controversial.
When you take a look at where the money actually goes, it's easy to see why it's hard to balance the budget.
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Many folks think that Social Security shouldn't be counted in the federal budget at all, because they contribute to the retirement fund with each paycheck.
Actually, though, taxes paid in by today's workers aren't socked away for their future retirement, but are used for benefits for today's retirees -- an estimated $779 billion worth of them in fiscal year 2012.
What's more, the so-called trust fund -- where payroll taxes not needed for current payouts are stashed -- consists of $2.7 trillion in IOUs from the U.S. Treasury. The funds have been borrowed over the past two decades to pay for other federal programs.
Nearly 18% of President Obama's proposed FY 2013 budget is for defense spending. It includes funds for military operations in Afghanistan, Iraq and South Korea as well as for 760 bases scattered across the U.S. and abroad.
The $716-billion tab also pays for research, construction, family housing and myriad defense-related items. About 25% of the total goes to personnel costs, and the figure doesn't include veterans' pensions and health care.
Combined, these two national health care programs rival defense and Social Security as Uncle Sam's biggest expenses. While the White House and Congress talk a lot about cutting these health care costs, lawmakers have avoided taking the tough -- and extremely unpopular -- actions needed.
In addition to Medicaid, about 9% of the total federal budget is dedicated to assistance for the needy. The total -- about $297 billion for FY 2012 -- includes funds for housing subsidies, food stamps, school lunch and other nutrition programs, aid to families with dependent children (welfare) and other aid, plus the earned income tax credit.
In addition, unemployment insurance will account for a bit less than $82 billion -- and about 2.1% of the budget -- in FY 2012. With the economy improving, that's well down from the $160 billion doled out in 2010. A $58-billion tab is expected in FY 2013.
Next fiscal year, Uncle Sam is expected to shell out a whopping $224 billion in interest to the owners of U.S. Treasuries, here and abroad. For the past few years, low interest rates have helped keep a lid on this category. But interest rates won't remain at historical lows forever. Meanwhile, the debt accumulates.
The White House estimates that debt held by the public will approach $12 trillion at the end of FY 2012. If you include intragovernment payments -- by the Treasury to funds such as Social Security, for example -- the nation's total gross debt will approach $16.5 trillion. In coming years, interest payments will gobble up even more.
The biggest five items in the federal budget -- Social Security, defense, Medicare, Medicaid, and net interest on the debt -- account for about two-thirds of the total.
Everything from transportation (3.3%), education (1.9%), federal employees' and military retirement (3.8%) to science and space (0.9%) and homeland security (1.3%) comes out of what's left.
International aid -- frequently mentioned as a potential source of savings -- accounts for just 1.7% of spending, and half of that is for humanitarian assistance. All environmental and natural resource programs -- 0.6%. Help for low-incomers, which we have already discussed, is an amalgam of programs whose total adds up to 9% of federal spending.
Only about a third of the federal budget actually falls under congressional control on an annual basis, and much of that is for defense spending -- mostly off-limits for political reasons.
About three-fifths of the budget is dedicated to programs such as Social Security, Medicare, Medicaid, food stamps, crop subsidies and other programs for which spending is automatic -- controlled by formulas. Add interest payments to the list of uncontrollables and untouchables, and the share of spending Washington can actually manipulate from year to year is about 16%.
If that entire 16% -- encompassing programs as diverse and as popular as medical and scientific research, space exploration, maintenance of national parks, repairing roads and bridges -- were eliminated, it would reduce the federal deficit only by less than half. Individually, these programs amount to crumbs on Washington's dinner table, where $38 billion is just 1% of the main course.
About 58% of all government spending consists of direct payments from Uncle Sam to individuals. Retirees get Social Security payments, veterans' pensions and Medicare benefits. Students get tuition assistance. Payments are made to farmers to idle erosion-prone land. Victims of natural disasters get a helping hand to rebuild their homes, businesses and lives.
Lobbies for many of these programs are immensely powerful and usually able to deflect attempts to trim spending. And while nearly everyone agrees that belt-tightening is needed, few are willing to cinch in their own waistlines.
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Congress has passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 tax year.