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Where Federal Revenue Comes from and How It’s Spent


Wednesday, November 27, 2019

By Crystal Flynn, Public Affairs Staff

Bar Chart comparing the federal deficit to federal revenue and spending

Your Guide to America’s Finances shows a snapshot of fiscal year 2019.

Where does the federal government’s money come from? Where does it go?

What are federal spending trends over time, and how does the United States compare to other countries?

Americans ask these questions every day. So, over the past year, the U.S. Department of the Treasury’s Bureau of the Fiscal Service sought to answer them, with help from the Federal Reserve Bank of St. Louis.

Meet Your Guide to America’s Finances (Your Guide), an interactive analysis that presents viewers with an overview of the financial landscape of the United States in 2019.

It is focused on four core concepts:

  1. revenue
  2. spending
  3. deficit
  4. debt

Members of the project conducted interviews with the public to get their thoughts and opinions on the finances of the federal government. The team used that feedback to create Your Guide, a re-invention of the Citizen’s Guide to the Financial Report of the United States that makes federal financial information available and accessible to everyone.


Exploring Federal Revenue

In fiscal year 2019 (Oct. 1, 2018, to Sept. 30, 2019), the federal government collected $3.5 trillion in revenue.

If you live or work in this country, most likely you contribute to the revenue of the United States. The majority of revenue collected by the federal government comes from taxes.

Half of U.S. government revenue in 2019, about $1.7 trillion, came from the public via individual income taxes, of which a significant amount came from payroll taxes, which are paid by employees.

The second largest source is Social Security and Medicare taxes, which go to support those programs. Unemployment insurance, which is paid for by your employer, makes up a small part as well. Other sources of tax revenue include corporate, estate, and excise taxes. (Excise taxes are those paid when purchases are made on a specific good, such as gasoline).

The government also receives revenue from payments made to federal agencies. These could include admissions to national parks, the sale of natural resources, and various licensing fees.

This table shows the primary sources of federal revenue.

Major Sources of Federal Government Revenue, FY 2019
CATEGORY AMOUNT
Individual Income Taxes $1.7 trillion
Social Security and Medicare Taxes $1.2 trillion
Corporate Income Taxes $230.2 billion
Excise Taxes $98.9 billion
Miscellaneous Revenue (includes Federal Reserve Deposit of Earnings and Universal Service Fund) $84.6 billion
Customs Duties $70.8 billion
Unemployment Insurance $40.9 billion
Estate and Gift Taxes $16.7 billion
Other Retirement (includes Railroad Retirement and Federal Government Pension) $10.3 billion
Source: Your Guide to America’s Finances, Revenue Categories. Full category and agency breakdown is available at site.

Providing a Breakdown of Federal Spending

In fiscal year 2019, the federal government spent $4.4 trillion.

What does the U.S. government spend money on? As shown in the table below, the federal government’s largest expenditures include Social Security ($1 trillion, 23% of federal spending); national defense ($687.6 billion, 15% of spending); and Medicare ($651 billion, 15% of spending).

Top 10 Federal Spending Categories, FY 2019
CATEGORY AMOUNT
Social Security $1 trillion
National Defense $687.6 billion
Medicare $651 billion
Health $584.8 billion
Income Security $515.4 billion
Net Interest from Debt, Trust Funds, and Other Investments $375.6 billion
Veterans Benefits and Services $200 billion
Education, Training, Employment, and Social Services $135 billion
Transportation $96.2 billion
Administration of Justice $66 billion
Source: Your Guide to America’s Finances, Federal Spending by Category and Agency. Full category and agency breakdown is available at site.

Government spending can be divided into three types: mandatory, discretionary, and interest payments on federal debt.

Mandatory spending is spending designated by prior laws. Programs like Social Security and Medicare are considered mandatory spending since they are established by acts of Congress that dictate the amount of money budgeted for spending each year.

Discretionary spending is spending that is voted on by Congress through the appropriations process and formally approved by the president. Most discretionary spending is budgeted toward national defense; the rest is budgeted to other federal agencies and support programs including transportation, education, housing, social service programs, science, and environmental organizations.

In addition to funding programs and services for its citizens, the federal government also allocates funds to pay for interest incurred on the federal debt.


Knowing the Difference between Deficit and Debt

In 2019, the federal government spent more than it collected, resulting in a $984 billion deficit.

Are the federal deficit and national debt the same thing? No, but the budget deficit (or surplus) does have an impact on federal debt. In simplest terms, when spending exceeds revenue, the difference is a deficit. On the other hand, a budget surplus occurs when revenue exceeds spending. The last time the government had a surplus was in 2001.

To pay for a deficit, the government mostly takes on debt. In 2019, the national debt grew to $22.7 trillion, which averages to more than $69,000 per individual in the United States, using annual population estimates provided by the Census Bureau.

How the Federal Debt Has Trended Over Time

Line chart showing the rise in national debt

Note: This visualization was created using the U.S. Department of the Treasury’s Monthly Statement of the Public Debt as the data source for federal debt of the U.S.

Source: Your Guide to America’s Finances, Federal Debt Trends Over Time.

How did we end up with $22.7 trillion in federal debt? The change in federal debt is related to the deficit or surplus each year. When federal revenue exceeds federal spending, the government borrows money to make up the difference. The total debt is an accumulation of deficits over time, minus any repayments of debt, among other factors.

(Note: The increase or decrease in federal debt consists of the total amount of the deficit, along with changes to operating cash balance, intergovernmental holdings, and other financial activities.)

How does the U.S. cover its costs? Well, it borrows money from other sources. Most federal debt is financed through federal trust funds and domestic investors in the United States. Foreign investors, including other governments, also own part of the debt.


What is the Federal Reserve’s Role in Federal Finances?

The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank for the United States. The Fed works closely with the Department of the Treasury, which manages the finances of the federal government.

For example, the Fed:

  • Issues Treasury securities and conducts auctions of these securities to raise funds for the federal government.
  • Processes monetary transactions on behalf of Treasury, including issuing payments and other government receivables.

You may have noticed that the first table included “Federal Reserve Deposit of Earnings” in the miscellaneous revenue category. That’s because once the Fed pays its expenses, remaining profits are sent to Treasury to be used by the federal government.

However, the Federal Reserve does not set fiscal policy for the federal government. Knowing the difference between fiscal policy and monetary policy is essential to understanding who does what:

  • Fiscal policy refers to the U.S. government’s revenue collection and spending decisions. Congress and the administration conduct fiscal policy.
  • Monetary policy refers to actions that central banks take, such as to influence the supply of money in the economy and influence interest rates in markets. The Federal Reserve conducts monetary policy.

How Fiscal Policy Affects the Economy

How do the financial decisions of the federal government impact the U.S. economy? Gross domestic product (GDP) is one measure of economic health, as it provides an economic snapshot of the country. GDP measures the value of goods and services produced in a given time period.

On the revenue side, people and businesses earn more if an economy is performing well, which provides more revenue to draw taxes from — thus increasing government revenue. On the spending side, government purchases (including the federal level) are one of the expenditure components of GDP.

One way to assess the federal government’s ability to finance the national debt is to compare debt levels to GDP, as seen in the Explore Debt section of Your Guide to America’s Finances. Doing this, we can observe the government's ability to utilize the resources at hand to finance the debt — similar to how you and your family manage your finances to make sure that monthly payments for your mortgage, car loans and credit cards can be made.

What the Federal Debt to GDP Ratio Looks Like

Line chart comparing national debt to GDP over time

Notes: This visualization was created using the U.S. Department of the Treasury’s Monthly Statement of the Public Debt as the data source for federal debt of the U.S.; GDP figures come from the Bureau of Economic Analysis. GDP data is current as of June 2019 and is seasonally adjusted at an annual rate to show expected GDP for the year. Your Guide to America’s Finances uses GDP for the fiscal year, not the calendar year, to facilitate an appropriate comparison.

Source: Your Guide to America’s Finances, Federal Debt Trends Over Time.

Additional Resources

ABOUT THE AUTHOR
Crystal Flynn 

Crystal Flynn is a digital web strategist with St. Louis Fed Public Affairs.

Tagged crystal flynntaxesincome taxrevenuetax dollarsconsumerdebtdeficitfederal budgetmandatory spendingdiscretionary spendingfiscal policytreasury
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