Where Does Your Tax Money Go?

CHAPTER 10, LESSON 1

NAME DATE

DIRECTIONS
Read and annotate the article below, then answer the following questions based on the information you just
read. You may also use the information in the student text to help you answer the questions.

If you’re like most folks, the first two ques- 2. Discretionary spending is spent on pro-
tions that pop into your head when you look grams that Congress sets aside for a specif-
at your tax return each year are How much ic purpose and must regularly review. This
did I make? and How much did they take? includes spending for defense/military,
Who’s “they”? The federal government, education, transportation, and health.
of course. 3. Interest on national debt
And while you grumble about how
much Uncle Sam takes out of your paycheck Take a look at how this is broken down.
every two weeks, there’s another question
INTEREST ON NATIONAL DEBT
you might wonder about: What are they
$475 BILLION 8%
doing with my tax dollars anyway?
That’s a great question . . . especially TOTAL
DISCRETIONARY SPENDING
since the IRS collected around $4.9 trillion 27%
$6.3
$1.7 TRILLION
in federal taxes in 2022 from hardworking TRILLION
65%
taxpayers like you. That’s trillion—with a T! MANDATORY SPENDING
Those tax dollars went toward the $6.3 tril- $4.1 TRILLION 2
lion in government spending that year.1
It’s time to pull back the curtain and find
out where your tax money goes. Basically, Interest on Government Debt
there are three main categories: The U.S. government is currently more than
1. Mandatory spending, also known as $32 trillion in debt—and counting—with a
entitlement spending, is not subject to small percentage of your tax dollars going
regular budget review. This is used for toward paying the interest on that debt.
things like Social Security, Medicare, The interest on the national debt, which
Medicaid, and veterans benefits. must be paid by the federal government each
This is a partial excerpt from “What Do Your Taxes Pay For?” (Ramsey Solutions, 2023).
1. Internal Revenue Service Data Book, 2022 (Washington, D.C.: Internal Revenue Service, 2023), 1.
2. “The Federal Budget in Fiscal Year 2022,” Congressional Budget Office, March 2023.

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 Where Does Your Tax Money Go? This is a partial excerpt from “What Do Your
Taxes Pay For?” (Ramsey Solutions, 2023).
CHAPTER 10, LESSON 1

year, changes based on two factors—the size SOCIAL SECURITY

of the debt itself and rising and falling interest Social Security was created in 1935 to
rates. And since both the national debt and provide income for retired workers and
the interest rates on that debt are expected accounts for a large chunk of mandatory
to increase over the next decade, so will the spending. It’s designed to supplement your
size of our nation’s interest payments—which income when you retire or become dis-
means more of our taxpayer dollars will likely abled. If you were to die before you become
be used to make those payments. eligible, your dependents would receive
those benefits.
Mandatory Spending The types of people who receive Social
Let’s talk entitlements. These are Social Se- Security benefits are:
curity, Medicare, Medicaid, and Veterans • Retired workers and their families
Affairs benefits and services. They’re called • Disabled workers and their families
entitlements because the government takes • Survivors of deceased workers
money out of your paycheck to fund them,
so you’re entitled to these benefits once you Social Security taxes and benefits are tied to
meet certain conditions. infIation, which means they go up as things
This category of spending has gone way get more expensive. Even so, the average
up since 1962, and there are two main reasons Social Security monthly payment for retir-
why. First, there was the introduction of new ees is only $1,788.4 So if you’re banking
entitlements such as Medicare and Medicaid on Social Security to fund your retirement
(started in 1965), the earned income tax credit dreams, you’re going to want to rethink
(also known as the EITC, started in 1975), and that plan!
the child tax credit (started in 1997). Second,
the population receiving these benefits has HEALTH CARE
exploded as baby boomers enter retirement There’s no way around the fact that health
age and begin collecting Social Security ben- care is expensive—especially for people in
efits and enrolling in Medicare. their retirement years and for people strug-
All of these factors, plus a handful of ben- gling to get by. That’s where Medicare and
efits for our military veterans and COVID-19 Medicaid come in.
relief programs, brought mandatory spend- Medicare is a federal health insurance
ing’s piece of the pie to more than two-thirds program that provides coverage for several
(70%) of the federal budget in 2020.3 Let’s groups of people but mainly folks over age
take a look at some of the big pieces. 65. Who pays for it? Most of it is on your
3. “Mandatory Spending in Fiscal Year 2020: An Infographic,” Congressional Budget Office, April 30, 2021.
4. “Policy Basics: Top Ten Facts About Social Security,” Center on Budget and Policy Priorities, last modified April 17, 2023.

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 Where Does Your Tax Money Go? This is a partial excerpt from “What Do Your
Taxes Pay For?” (Ramsey Solutions, 2023).
CHAPTER 10, LESSON 1

dime! American taxpayers fund Medicare Earning Limitations

through a 1.45% payroll tax on all of their It’s important to note that even though
earnings and an additional 0.9% tax on everyone pays taxes on these mandatory
earned income over $200,000 ($250,000 spending programs, not everyone is fully
for married couples). eligible to receive the benefits. This is be-
Medicaid is another government-spon- cause of earning limitations, which are ulti-
sored insurance program that provides mately based on your income and age.
health coverage for low-income adults, For example, if you choose to take
children, pregnant women, elderly adults, Social Security before you reach the age
and people with disabilities. The federal of 67, you’ll have to make $22,320 a year
government splits the cost of Medicaid with or less to be eligible for full Social Security
state governments, and the states get the benefits. If you make more than that, your
better deal—in some cases, Uncle Sam pays benefit would decrease by $1 for every $2
78% of their Medicaid costs. you make over this earning limitation. Start-
Together, health insurance programs ing with the month you reach full retirement
like Medicare and Medicaid make up 24% age, there is no limit on how much you can
of the government’s budget, totaling more earn and still receive your benefits.6
than $1.5 trillion to cover over 160 million For Medicare, anyone 65 or older is el-
Americans.5 igible to sign up for the benefit. But if you
make over $97,000 a year, you’ll end up
VETERANS BENEFITS paying more in premium costs.7
Mandatory veterans benefits include disabil- Medicaid is a little different. Eligibility is
ity compensation, burial benefits, pensions, based on the federal poverty level, which is
education, job training and rehabilitation, $14,580 for a single adult.8 However, since
insurance, and housing programs. it’s a joint federal and state program, each
These are the big programs that are fund- state gets to determine the income thresh-
ed by mandatory spending. While some of old. They do this by choosing what percent
the money for these programs (Social Secu- over the federal poverty level the earning
rity and Medicare) comes out of your check limitation will be.
automatically, some (including money for Since mandatory spending is 70% of
veterans benefits) comes from taxes on your the federal budget, that means your taxes
earned income and things like capital gains. are funding programs you might not even
5. “Policy Basics: Where Do Our Federal Tax Dollars Go?,” Center on Budget and Policy Priorities, last modified September 28, 2023.
6. “Receiving Benefits While Working,” Social Security Administration, accessed January 11, 2024.
7. “Costs for Medicare Drug Coverage: Monthly Premium for Drug Plans,” Medicare.gov, accessed January 11, 2024.
8. “HHS Poverty Guidelines for 2023,” U.S. Department of Health and Human Services, January 19, 2023.

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 Where Does Your Tax Money Go? This is a partial excerpt from “What Do Your
Taxes Pay For?” (Ramsey Solutions, 2023).
CHAPTER 10, LESSON 1

get to benefit from. But that’s not where the EDUCATION

spending stops. These funds mainly go through the Depart-
ment of Education and cover everything from
Discretionary Spending paying teachers’ salaries to funding grants
Discretionary spending is the last piece of to pay for college. Unfortunately, this also
the puzzle when it comes to how your tax includes funding for federal student loans.
money is spent. Every year when Congress Womp womp.
debates spending bills, they duke it out
over who gets how much money. In other VETERANS BENEFITS
words, these programs are subject to Con- While some veterans benefits are mandato-
gress’s discretion, meaning they can decide ry expenditures, almost half of the Veterans
to increase or decrease funding for certain Affairs (VA) budget comes from discretion-
programs as they see fit. ary funds set aside by Congress. This cov-
Let’s take a look at some of the major cate- ers things like medical care, construction
gories covered under discretionary spending. of VA facilities, and IT services at those
facilities.
NATIONAL DEFENSE
Defense spending, which funds the Depart- HEALTH
ment of Defense and all of its operations, Some discretionary spending goes to fund
usually accounts for about half of all discre- agencies like the Centers for Disease Con-
tionary spending. trol and Prevention (CDC), the Food and
Drug Administration (FDA), and the National
TRANSPORTATION Institutes of Health (NIH). These agencies
Transportation pays for roads and bridges, research diseases and new drug therapies,
air traffic control, and the Department of oversee food safety, and fund medical
Transportation. We have to get around in our research.
planes, trains, and automobiles somehow!

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 Where Does Your Tax Money Go?
CHAPTER 10, LESSON 1

1. What is mandatory spending? What are entitlements?

government expenditures that are required by law and automatically funded each year, primarily
consisting of "entitlement programs" like Social Security and Medicare

2. Why is there so much mandatory spending in the tax budget?

due to the existence of "entitlement programs" like Social Security and Medicare, which are funded
by law and automatically allocated to eligible recipients based on their participation

3. At what age does someone qualify to receive full Social Security benefits? Who gets
those Social Security payments?
67 years old people who are full in it

4. What’s the average Social Security monthly payment for a retiree? In your opinion, is
that enough to live on? Why or why not?
this is not enough 1,788 which many consider not enough to live on solely, as it often only replaces
a portion of pre-retirement income and might not cover basic living expenses,

5. Which category of government spending does the Department of Education funding

fall into?
discretionary spending

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 Where Does Your Tax Money Go?
CHAPTER 10, LESSON 1

6. What’s the major difference between mandatory spending and discretionary spending?
mandatory spending is automatically funded by existing laws and does not require annual
Congressional approval, while discretionary spending is subject to annual appropriations bills
where Congress decides the funding level for each program each year

7. How much of discretionary spending goes toward national defense?

half goes towards

8. Why is deficit spending and the national debt so crucial to pay attention to?
a large and growing debt can significantly impact economic growth, limit government flexibility to
respond to crises, increase interest payments which crowd out other spending priorities, potentially
damage investor confidence, and could lead to a decline in the value of the dollar on the global
stage, ultimately affecting the overall economic stability of a nation

9. If some discretionary funding for veterans benefits were cut, what would be impacted?
less people will become veterans

10. What are earning limitations?

Earning limitations are restrictions on how much a person can earn while receiving certain benefits,
such as Social Security

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 Where Does Your Tax Money Go?
CHAPTER 10, LESSON 1

11. What’s the earning limitation for Social Security?

22,320

12. What’s the earning limit for Medicare?

13. What’s the earning limit for Medicaid?

14. What’s your overall reaction to the tax article?

you get taxed for almost anything

15. What additional questions did this article raise for you?
why do they take so much how do they let you know their taking that amount

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