The tax season has been here for a while now. Whether you have filed your taxes or are collecting documents, you must have looked at the numbers and wondered: where does all this money go? To understand that, first, you have to have a rough understanding of the tax system.
A simple way to understand tax is to think of it as a premium paid to the government in exchange for the government maintaining order, infrastructure, and services that benefit you.
The earliest record of taxation dates back to 3000 BCE in Egypt, where livestock owners, based on the value of their animals, paid taxes to the Pharaoh in grain, as no formal currency had yet been invented. The principles have not changed much since, but the system itself has gotten way more sophisticated.
In the United States, taxation is divided into federal and state levels. The federal tax is further divided into different categories, including the income tax, payroll tax and excise tax. The individual income tax, the tax levied on personal income, is the main source of revenue for the United States government, which accounts for just over half of its revenue. And the payroll tax, tax for social security and Medicare, makes up most of the rest.
State taxes are different; the categories vary significantly from state to state. Some states do not have any income tax, while others rely heavily on it.
Once the tax is collected, the federal and state governments allocate these funds through a budget process, where the House and Senate discuss where they want to spend this money.
But there’s a catch. At the federal level, some percentage of the budget must be allocated to social security, Medicare and Medicaid, which is called the mandatory spending. Because these programs are legally guaranteed, they dominate the budget without ever being part of the annual budget debate.
The rest is called discretionary spending. This includes defense, education, infrastructure and foreign aid. This is largely what the Congress is arguing about in the so-called budget fight.
In fiscal year 2025, here is roughly how every $100 of federal spending was allocated $22.50 for Social Security, $14.20 for Medicare, $13.90 for Medicaid and Health, $13.80 for Debt Interest, $13 for defense and military and $22.60 for the rest.
The federal government consistently spends more than it collects, a gap known as the deficit. To cover that difference, it often borrows money. Over time, it accumulates into national debt. The interest payment on that debt is now the 4th largest expenditure in the entire federal budget. In simple terms, nearly 14 cents of a federal dollar spent goes to paying interest on past borrowing.
In Mississippi, the picture looks different. In fiscal year 2024, the total state expenditure, including federal aid, looked something like this 26.2% for Medicaid, 17.9% for Higher education, 17.7% for K-12 education and 38.2% for the rest.
Medicaid and education account for more than half of the state budget, reflecting the state’s priorities.
A Mississippi resident earns a paycheck. Federal income and payroll taxes are withheld. Those dollars travel to Washington, where some fund Social Security directly, some fund defense, and a significant portion, about 17 cents on every dollar, flows back to states. Mississippi receives those transfers and directs much of that money toward Medicaid and schools. The same dollar that left a Mississippi worker’s paycheck on a Tuesday might be helping fund a child’s classroom or a senior’s prescription by the end of the week.
This is roughly where the tax money goes in the United States. Further analysis can be done by looking into individual contracts and grants in USAspending.gov.
