Tax Analysts Blog

Do You Know Where Your Tax Dollars Go?

Posted on Oct 25, 2010

We Americans tend to be poorly informed about how the government spends our tax dollars. Consider this -- a Kaiser Foundation survey shows that, by a margin of two-to-one, the public thinks the government spends more money on foreign aid than on Social Security. (That happens to be wildly false.) Misperceptions of this sort are very common.

Does this collective ignorance matter?

Arguably it matters a lot. That's because sooner or later our elected officials will need to address the federal budget deficit. As has been argued repeatedly on this blog, our current fiscal position is unsustainable in the long term. The big question that's buzzing around Washington these days is: "What should we cut?"

Useful responses to that question are difficult to come by. True, most of us can think of several federal programs we can live without, but the resulting savings typically don't come close to curbing future deficits. In order to have an educated dialogue on this topic, the average Joe needs to be better informed about where our tax dollars go.

A policy group called "Third Way" has an idea that might remedy our knowledge gap. The plan is for the IRS to make available to each taxpayer a receipt showing: (a) how much they paid in federal income and payroll taxes for the year, and (b) an itemized accounting that allocates their tax bill to specific governmental programs. A sample receipt appears on the Third Way web site. Here is what it looks like:

itemized taxpayer receipt
This material was published by Third Way

This sample is based on a hypothetical taxpayer with an adjusted gross income of $34,140, corresponding to the statistical median tax return filer for the 2008 tax year. Depending on the assumptions one makes about available deductions and filing status, that translates to a federal income tax liability of $2,790. Assuming the earnings took the form of wage income, we need to factor in another $2,610 for payroll taxes. That produces an annual federal tax burden of $5,400.

The idea, of course, is that each taxpayer would get a unique receipt based on their actual tax payments for a given tax year. In theory, generating these receipts using actual taxpayer data should be neither difficult nor costly. The math involved is easy, and the entire process could be made paperless by housing an online calculator on the IRS web site. Simply log-on using your taxpayer identification number, and in a matter of seconds you could see your proportional share of the costs for ... say ... NASA's space program, public housing, or interest paid on the national debt.

Admittedly, the receipt has its limitations. It ignores federal taxes that fall outside the income tax and payroll tax systems. Some indirect costs of government might not be adequately represented. And it fails to distinguish between discretionary and nondiscretionary costs.

So the receipt isn't perfect. That said, is it preferable to where we are today, with millions of Americans possessing laughably false notions of the cost of government -- and thus gross misconceptions about suitable fiscal solutions?

Third Way claims that taxpayer receipts would shed light on the relative cost of public services and lead to a better informed electorate. Critics might dismiss such receipts as incomplete, ill-conceived, or even as a gimmick.

We'd love to hear what you think.

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