What do you know about your tax money?
Every April, millions of Americans file their tax returns, often wondering where exactly their hard-earned tax money ends up. The answer might surprise you. In fiscal year 2024, the federal government spent $6.9 trillion in tax revenue and borrowed money, amounting to 24 percent of the nation’s gross domestic product (GDP), according to recent estimates. That’s roughly $20,000 in tax money for every man, woman, and child in America.
But tracking where this massive sum of tax dollars goes reveals a complex web of priorities, trade-offs, and surprising allocations that don’t always match public perception. From defense spending that could fund entire education systems to healthcare programs that dwarf most countries’ entire budgets, understanding America’s tax money spending patterns offers crucial insights into our national priorities and values.
This deep dive will take you through the major categories of federal tax spending, compare how tax priorities have shifted over decades, and reveal some eye-opening comparisons that might change how you think about government tax money allocation.
Where does most of your money go, or the Big Three
The federal budget isn’t evenly distributed. There are three major categories that dominate government spending, just like some financial giants. Social Security, Medicare and Medicaid, and national defense together account for roughly two-thirds of all federal spending.
Social Security alone represents the largest single government program, providing monthly benefits to over 67 million Americans, including retirees, disabled individuals, and survivors of deceased workers.
Medicare and Medicaid, the government’s healthcare programs, serve as the nation’s largest health insurer, covering hospital visits, doctor appointments, and prescription drugs for seniors and low-income Americans.
Defense spending rounds out this trio, funding everything from military salaries to advanced weapons systems. The federal deficit in 2024 was $1.8 trillion, equal to 6.4 percent of gross domestic product, highlighting how spending consistently outpaces revenue.
These “Big Three” categories are often called mandatory spending because they’re driven by eligibility requirements rather than annual congressional appropriations, making them politically difficult to reduce but financially essential to address as the population ages and healthcare costs rise.
Healthcare
Healthcare spending represents the most rapidly expanding portion of the federal budget, with Medicare and Medicaid costs growing faster than the overall economy. These programs don’t just provide healthcare coverage, they’re economic engines that pump hundreds of billions of dollars into hospitals, clinics, pharmaceutical companies, and medical research.
Medicare serves as the primary insurer for Americans over 65, while Medicaid provides coverage for low-income individuals and families, including many working Americans whose employers don’t offer health insurance.
The growth in healthcare spending reflects both an aging population and rising medical costs that outpace inflation. Every day, about 10,000 Americans turn 65 and become eligible for Medicare, creating a demographic wave that will continue for years.
Additionally, medical technology advances, while improving care, often come with higher price tags. Prescription drug costs alone represent a significant budget challenge, with some new medications costing hundreds of thousands of dollars per patient annually. This spending growth isn’t necessarily bad; it reflects longer lifespans and better medical care, but it creates fiscal pressures that require careful management and policy innovation.
Supporting America’s most vulnerable
Beyond the major entitlement programs, the federal budget includes numerous smaller programs that collectively form America’s social safety net. These include food assistance programs like SNAP (food stamps), housing assistance, unemployment insurance, and various programs for veterans, disabled individuals, and low-income families.
While individually smaller than major programs, these safety net programs serve tens of millions of Americans and provide essential support during economic downturns or personal crises.
The social safety net has evolved significantly over the decades, with some programs expanding while others have been restructured or reduced. Food assistance programs, for example, serve over 40 million Americans monthly, providing crucial nutrition support that also stimulates economic activity as recipients spend benefits at grocery stores and farmers markets. Housing assistance, while serving fewer people due to limited funding, provides stable housing that enables families to maintain employment and children to attend school regularly. These programs often provide the most direct federal impact on individual lives, even though they represent a relatively small portion of total federal spending.
Where federal tax dollars make the biggest impact
Federal education spending, while smaller than defense or healthcare, plays a crucial role in supporting schools and students nationwide through targeted tax money investments. The Department of Education’s budget focuses heavily on supporting disadvantaged students through programs like Title I, which sends extra tax money to schools serving low-income communities, and special education programs that ensure students with disabilities receive appropriate services. Federal student aid programs, including Pell Grants and subsidized loans, help millions of Americans access higher education using tax dollars.
However, it’s important to understand that most education funding comes from state and local tax sources rather than federal programs. The federal government typically contributes about 10-12% of total education spending through tax revenue, with states and local districts providing the majority through property taxes and state allocations.
This means federal education tax dollars often serve as targeted interventions rather than broad-based support, focusing on specific populations or priorities like special education, low-income students, or education research. Despite representing a relatively small portion of total education funding, federal tax money programs can have outsized impacts by addressing gaps that state and local tax funding might miss.
Tax money for prisons vs. schools
One of the most striking comparisons in American government spending occurs at the state and local level, where the contrast between prison and education tax money reveals uncomfortable truths about priorities. States spend $71 billion in tax money on prisons and $534 billion on schools each year, according to recent data. However, when broken down per person, the numbers become more alarming.
Almost every state spends more tax money per prisoner than it does per student in public schools, and in 20 states, the difference between per-inmate and per-student tax spending is more than $24,000.
This tax money spending disparity highlights a fundamental policy choice: investing in punishment versus prevention. Average state and local per capita tax spending on corrections increased by 44 percent as higher education funding per full-time equivalent student decreased by 28 percent, showing how tax money priorities have shifted over time.
The irony is particularly sharp when considering that two-thirds of state prison inmates did not complete high school, suggesting that educational investment of tax money might prevent some of the costly incarceration that states are funding. This comparison forces uncomfortable questions about whether America is spending tax money wisely on human development versus spending reactively on consequences.
Understanding where tax dollars go isn’t just an academic exercise; it has real implications for every American’s future and how their tax money will be spent. Current spending patterns suggest that healthcare and Social Security will consume increasing shares of the federal budget as the population ages, potentially limiting tax money funding for other priorities that affect quality of life and economic competitiveness.
Infrastructure needs will continue growing, education funding will face pressure, and debt service will consume tax money resources that could otherwise address pressing national challenges.
If you want to learn more about how to take care of your taxes, this book might help.
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