- How much money did the government spend last year?

- No idea.

- 40 trillion.

- I'd say 100 trillion?

- I would say it's probably somewhere in the 5 trillions.

I'm not sure where, though.

- How much money did the government borrow last year?

- Couldn't tell you, but too much.

- How much is our national debt?

- Seven.

- It's a little higher.

- I'm pretty sure it's like, it's in the trillions.

It's like- - That's what I was- - 50 trillion?

- It's hmm.

Is it somewhere in the 25 trillion or is it more than that?

- Pretty close.

36 trillion.

- Okay.

I'll take it.

- If December 25th is America's favorite day, April 15th is its least.

Thanks to these guys.

Now, the Internal Revenue Service or the IRS are just tax collectors.

Meaning you having to pay taxes isn't their fault.

It's their fault.

Congress decides how much money the federal government spends each year and how much we have to pay in taxes to foot the bill.

They're the buzzkill.

So, what are the different ways that people and companies are taxed?

And where does the money really go?

By the end of this episode, I promise you'll have a better idea of how the federal government spends your hard earned cash whether you like it or not,.

I'm Ben Sheehan, and this is "Civics Made Easy."

What are taxes?

If you've ever held a job, you've probably paid tax.

And if you haven't paid it, some people in the IRS building would love to speak with you.

Taxes are how we fund America.

Now, state and local governments have their own unique tax systems to pay for your state, county, city, or town.

But in this episode, we're focusing on the federal government because these episodes are short.

This chart shows all the ways the federal government collected tax revenue in 2024.

As you can see, half of this money comes from income tax.

Taxes on your salary or earnings.

In 2024, we all paid $2.43 trillion in federal income tax.

The second largest source is Social Security and Medicare tax.

This is a payroll tax that comes right outta your paycheck.

It amounts to a third of federal revenue, $1.71 trillion.

Then, there's corporate income tax.

And then there's excise taxes on specific goods like alcohol, cigarettes, gasoline, or airplane tickets.

You know, the fun stuff.

These are paid by the seller or the manufacturer.

But make no mistake, you and I really pay that tax because it gets passed on to us, the consumers in the form of higher prices.

And then, there are estate and gift taxes, like on large transfers of wealth.

We're talking $14 million or more.

But don't worry.

The truly wealthy people in America have devised all kinds of creative ways to avoid this.

In fact, if you type loopholes to avoid into Google, the first two suggestions are for capital gains tax and inheritance tax.

And finally, there are miscellaneous sources of revenue like fees, fines, or admissions to national parks.

So, we've covered how the federal government raises money, but how does it spend it?

Because if you brought in nearly $5 trillion last year and spent nearly 7 trillion, someone's gonna have questions.

So, I went ahead and made an appointment with a real life accountant.

I brought some things for you to take a look at.

- Okay.

- As you can see here, federal government raised $4.9 trillion.

- [Accountant] Okay.

That's pretty good.

- [Ben] Problem is it spent $6.8 trillion and it borrowed close to $1.9 trillion.

- That's not so good.

- What do you think about that?

- It seems like we're headed towards trouble.

- Well, can I do an exercise with you real quick?

- Sure.

Yeah, absolutely.

- So, okay, let's just take these numbers.

- Okay.

- Divide them by 100 million, - Okay.

- And pretend they're my numbers and I'm a client of yours.

And I'm gonna have you- - Okay.

I really like that.

- Okay, so last year I made $49,200.

- Okay.

- Right?

I spent $67,960.

- Okay.

- I borrowed close to $19,000.

- Right.

- Okay?

And I'm $362,000 in debt and climbing.

- Oof.

- How would you say I'm doing?

- That sounds, that's concerning.

- Okay, I wanna talk about this debt.

And I did- - Okay.

- Prepare some things for us to look at together.

- Okay.

All tight.

- That's a good idea.

All right.

So, here you go is the first chart.

- All right.

- This is the things- - Yeah.

- That we're bringing in.

- Okay.

- That's good.

We're bringing in money, right?

- It's always good to bring in money.

- Right, right.

- All right, and then here are the things we're spending on.

So, I would just say that, you know, we're spending money on things like Medicaid, right?

Helping- - That's good.

- Low income people get healthcare.

- Right, right.

Yeah.

- Elderly get healthcare with Medicare.

- Right.

- Social Security, obviously.

Taking care of retirees, - Right, right.

- We're spending money on Defense.

But then, I also saw that we're spending, if I look here, $881 billion on interest on our debt.

- Yeah, that's not good.

- That's not good.

- That's not good.

- Okay.

I also wanna share the number that is our actual debt.

- Okay.

- It is $36.2 trillion and it's increasing a lot.

- Okay.

- Do you have any clients yourself that have been running deficits for 24 years?

- I mean, I have some people that might be in debt.

I do have clients that are in debt, but not to this extent.

- And what would you say to America if she were your client?

- I would tell her to get her house in order.

- I do feel like we should talk to somebody who has actual inside knowledge of Congress's spending habits.

No offense.

- None taken.

- Kent Conrad served in the US Senate for two decades from North Dakota.

For a third of that time, he was Chair of the Senate Budget Committee, so he understands this process.

I have an honest question to ask you.

Is America bad with money?

- Well, if you look at our fiscal situation, you'd have to say the answer to that is yes.

We've run up $36 trillion of debt, which is over 120% of our national income.

And most economists would say, you shouldn't have a debt of more than 80% of your national income.

- How dangerous is it being $36 trillion in debt?

- Well, here's the danger.

There are really two.

The most serious danger is that those who loan us money, and remember, we borrow, 70% of the money that we borrow are from our fellow citizens.

They buy treasuries, they buy US bonds, and help finance the debt in that way.

But when you become more and more in debt, those who are loaning you the money see that the risk of getting repaid is growing.

Therefore, they want higher interest rates in order to offset that risk.

That's the big problem, because if interest rates go up, that affects so much of what we buy.

That affects home loans, car loans, student loans, business loans.

You know, it's foundational to the economy.

The second problem is the crowding out.

As more money is spent on interest, that means there's less money in the federal budget for other things like education, like healthcare.

The second biggest expenditure now in the federal budget is for interest on the debt.

- How concerned about the price of all of these things are members of Congress?

Or are they just more concerned about getting re-elected?

- People who are in public office generally wanna be re-elected.

And so, they wanna do things that are popular with their constituency.

It's just not the elected official's fault.

The American people are electing the people that make these decisions.

So, it does ultimately fall back on all of us.

- So, how did America even get to this point financially?

Before the Constitution, America didn't have the power to tax directly.

Only states could tax their citizens.

And for the first 73 years under the Constitution, federal tax was limited.

America mainly raised money from excise taxes and tariffs, which we discussed earlier.

But again, those taxes are ultimately paid by us because when taxes go up, prices go up, which means people of lower financial means shouldered a larger share of the tax burden relative to their personal wealth.

Fast forward to 1862 when America established for the first time an income tax to help pay for the Civil War, but that tax only lasted 10 years.

So, it wasn't until the 16th Amendment in 1913 that Congress specifically got the power to establish income tax.

Now, Congress could tax wealthy people at higher rates than poor people.

But do we really need all these taxes?

On one hand, they fund lots of things we take for granted.

Highways and bridges, equipment for air traffic control.

Most of the money goes towards Social Security, supporting retired people, and to Medicare, which is healthcare for seniors, and Medicaid, healthcare for poor Americans, and income security, things like unemployment or supplemental security income, or SSI for people with disabilities, tax credits for things like having a kid, SNAP or food benefits for poor Americans, and pensions for former federal employees and military.

These programs aren't particularly glamorous or fun, but they keep people alive and comprise a crucial built-in safety net designed to quite literally prevent society from collapsing all around us.

Something that would be a lot more expensive for all of us than just paying taxes, which is why all the spending I just mentioned is mandatory.

Meaning the government is legally required to pay it.

Mandatory spending is 60% of our budget, and if you add on the interest we pay on our debt, which would be bad not to pay, that adds up to 73% of spending.

This means when we fight over things in the budget each year, or really when members of Congress fight over it, they're really fighting over a quarter of what we spend money on.

And since Defense rarely gets cut, we're really just talking about non-defense, non-mandatory stuff, which is 14% of the budget.

It's like they're going out to a fancy dinner, ordering steaks, lobsters, and caviar, and then when the bill comes, there's a screaming match over who got soda.

Many people think the US is spending too much money.

Our national debt is now more than $37 trillion.

A decade ago it was half that.

And today, it's four times the size it was in 2007.

Now, we've gone through periods where our debt has grown higher percentage wise.

After World War II, our debt was nearly seven times the size it was before the war.

So, maybe size is a bad metric.

The real number you wanna focus on here is gross domestic product or GDP.

The total value of all the goods and services that America produces in a year.

According to the International Monetary Fund or the IMF, healthy debt-to-GDP ratio is 60% or less.

And the World Bank says problems begin when the ratio goes above 77%.

America is currently at 124%.

The eighth highest of any country in the world.

The highest in US history was actually 126% in 2020 thanks to COVID.

Higher than the 119% after World War II.

But from 1952 until 2008, we were well below 77%.

Since 2009, however, starting around the financial crisis, we've been well above it.

And we've been above 100% since 2016.

This is objectively an issue.

It makes us more likely to default on our loan payments and hinders our growth.

I mean, if you saw those numbers, would you even be comfortable loaning America money?

But there's something you can do about it.

You know, besides panic.

Whether you want America to rein in spending or you want your state or district to get some of that 14% of our money that's actually up for grabs, your members of Congress control that.

Your two senators and one representative wanna get reelected.

Remember, they work for you.

They have an incentive to deliver money for their state or district or rein in spending if that's what their constituents want.

So, if you feel a certain way, you might wanna call those three people.

If you don't know who they are, you can find out.

Here's the number to reach them, 202-224-3121.

That's the Congressional Switchboard.

Call as often as you want.

But I advise against calling more than once a day per member of Congress.

So, at most three calls a day.

Any more than that, and you're just wasting time and resources, which you should try to avoid because after all, it's your money.

I'm Ben Sheehan, and I hope you learned something.