We have all seen the signs. They might be referring to a road-widening project, a new city or county park, sidewalks being repaired, new airport terminals being constructed, potholes being filled in, additional trees being planted, or some sort of downtown development. But regardless of the project, the signs are usually the same: Your Tax Dollars at Work.
Now, it is true that most improvement ventures are state, county, or city projects. But it should be remembered that many of them are still funded in whole or in part by the federal government. Nevertheless, because the spending of tax dollars by the federal government is so much greater than that state, county, or city governments, it is the federal government that we are most concerned about.
According to the year-end data from the September 2018 Monthly Treasury Statement of Receipts and Outlays of the U.S. Government — as reported by U.S. Treasury Secretary Steven T. Mnuchin and Office of Management and Budget (OMB) Director Mick Mulvaney in a joint press release — total spending by the federal government in fiscal year 2018 (which ended on Sept. 30, 2018) was a staggering $4.107 trillion. The federal government spends about $11.232 billion per day, $468 million per hour, $7.8 million per minute, or $130,000 per second. That means that in one week, the federal government spends more than the governments of Connecticut, Kansas, New Mexico, and North Carolina spend in a year — combined. It means that federal spending in one day is higher than each of the yearly budgets of the governments of Alaska, Delaware, Idaho, Iowa, Maine, Mississippi, Nebraska, Oklahoma, Rhode Island, South Dakota, Vermont, West Virginia, and Wyoming.
Although the total outlays of the federal government were $4.107 trillion in fiscal year 2018, its receipts were “only” $3.328 trillion. That means that the federal budget deficit for fiscal year 2018 was $779 billion. The only way that the federal government was able to spend more than it took in was by borrowing the $779 billion. Deficit spending by the federal government is the norm, and has reached the $1 trillion mark a few times since the turn of the century. That is why the national debt (the total of each year’s deficit since the country was founded) is now more than $21 trillion.
Before looking at how the federal government puts Americans’ tax dollars to work, let’s look at where and how the government gets all of its money in the first place.
Government receipts
Government receipts come primarily from the collection of taxes. Of the $3.328 trillion that the federal government took in during
fiscal year 2018, miscellaneous receipts (various fees, penalties, forfeitures, and fines) were only $110.5 billion.
Estate and gift taxes were $23.0 billion. They are imposed by the federal government on the transfer of property from one person to another, either at death (estate tax) or while the giver of the property is living (gift tax). The estate tax rate is 40 percent of the value of the estate exceeding $11.18 million. The gift tax, which is related to the estate tax, kicks in when you give someone — in cash, property, or assets — more than $15,000 in a year. However, the amount of the gift simply counts against your $11.18 million lifetime exclusion.
Customs duties were $41.3 billion. The Harmonized Tariff Schedule of the United States, published by the U.S. International Trade Commission, lists the thousands of imports subject to tariffs and the tariff rate.
Excise taxes were $95.0 billion. The largest excise tax is on fuel: 18.4¢ per gallon on gasoline and 24.4¢ cents per gallon on diesel fuel. Other excise taxes include the taxes on passenger air fares, air cargo, and aviation fuel; the taxes resulting from the Patient Protection and Affordable Care Act (the ACA or Obamacare), such as the taxes imposed on health insurers, importers and manufacturers of prescription drugs, medical devices, and indoor tanning services; and the taxes on tobacco and alcohol.
Corporate income taxes were $204.7 billion. Because of the passage of the Tax Cuts and Jobs Act of 2017 (the Trump tax cuts), beginning on January 1, 2018, the corporate tax rate was lowered to a flat 21 percent. Previous to that, the maximum corporate tax rate was 35 percent — one of the highest corporate tax rates in the world.
Social insurance and retirement receipts were $1,170.7 billion. Payroll taxes consist of Social Security and Medicare taxes. The Social Security tax rate is 12.4 percent (split equally between employer and employee) on the first $128,400 of employee income. The Medicare tax rate is 2.9 percent (split equally between employer and employee) on every dollar of employee income. “The rich” also pay a 0.9 percent Additional Medicare Tax on income exceeding $200,000 ($250,000 married filing jointly).
Individual income taxes were $1,683.5 billion. Under the Tax Cuts and Jobs Act, there are seven tax rates and corresponding income brackets:
Single
10% — $0–$9,525
12% — $9,525–$38,700
22% — $38,700–$82,500
24% — $82,500–$157,500
32% — $157,500–$200,000
35% — $200,000–$500,000
37% — $500,000+
Married filing jointly
10% — $0–$19,050
12% — $19,050–$77,400
22% — $77,400–$165,000
24% — $165,000–$315,000
32% — $315,000–$400,000
35% — $400,000–$600,000
37% — $600,000+
In addition, some Americans have to pay capital gains taxes on their income from investments. And then there is the Net Investment Income Tax at a rate of 3.8 percent on investment income exceeding $200,000 ($250,000 married filing jointly). According to data on consumer expenditures released by the Bureau of Labor Statistics (BLS), Americans on average spend more annually on taxes than on food and clothing combined, with most of their taxes being income taxes and Social Security taxes.
Government outlays
As mentioned previously, total outlays of the federal government in fiscal year 2018 were $4.107 trillion. Here is a brief summary of how Americans’ tax dollars were put to work:
The federal government contains a myriad of agencies, bureaus, corporations, commissions, administrations, authorities, and boards organized under fifteen departments. These departments (and their spending in billions of dollars for fiscal year 2018) are: Agriculture (136.7), which includes the food stamp program; Commerce (8.5); Defense (600.7); Education (63.7); Energy (26.4); Health and Human Services (1,120.5), which includes Medicare, Medicaid, and a myriad of other welfare programs; Homeland Security (68.3), which includes the Federal Emergency Management Agency (FEMA) and the Transportation Security Administration (TSA); Housing and Urban Development (54.6); Interior (13.2); Justice (34.5), which includes the Drug Enforcement Administration (DEA); Labor (39.6); State (26.3), which includes funding for the United Nations; Transportation (78.4); Treasury (629.4), which paid $521.5 billion in interest on the national debt; and Veterans Affairs (178.5).
And then there is the alphabet soup of independent agencies of the federal government, each of which has its own budget. They include the SBA, USPS, NASA, CPSC, CFTC, CIA, NSF, FCC, FTC, NEA, NEH, NSA, EPA, and USAID. The biggest-spending independent federal agency is the Social Security Administration (SSA), which spent $1.039 trillion in fiscal year 2018.
There are two kinds of spending by the federal government: mandatory and discretionary. Mandatory spending refers to the portion of the budget that Congress legislates outside of the annual appropriations process. It accounts for about two-thirds of the federal budget. It includes spending on Social Security, Medicare, Medicaid, welfare and subsidies, food stamps, unemployment benefits, refundable tax credits, and veterans’ benefits. Discretionary spending refers to the portion of the budget that is decided by Congress through the annual appropriations process each year. It accounts for about one-third of the federal budget. Aside from military spending, which dwarfs all the rest, it includes spending on education, NASA, foreign aid, job training, Head Start, veterans’ benefits, scientific research grants, and the Women, Infants, and Children (WIC) program.
What the government doesn’t reveal in its reports and press releases is some of the outrageous things it spends its money on. For that we are indebted to publications such as Waste Watch, issued annually by Oklahoma congressman Steve Russell; Wastebook, formerly issued annually by Sen. Jeff Flake; the Congressional Pig Book, the annual compilation of the pork-barrel projects in the federal budget by Citizens for Government Waste, and investigative reporting by journalists such as John Stossel and James Bovard. Here are some examples:
The Department of Agriculture and the National Institutes of Health spent more than $3.5 million on Hip-Hop to Health, a nutrition and physical activity obesity-prevention program that uses hip-hop songs to help obese preschoolers lose weight with music. The State Department gave $17 million to the Asia Foundation, which is “committed to improving lives across a dynamic and developing Asia.” Two robots purchased by the Department of Veterans Affairs for the Madison VA Medical Center in Wisconsin for $313,000 that went unused for two years were sold back to the manufacturer for less than $2,000. Three National Institutes of Health grants totaling more than $3.5 million were given to researchers at West Virginia University to find the root cause for people’s fear and anxiety about going to the dentist. The University of California-San Diego Scripps Institution of Oceanography received a $560,000 grant from the National Science Foundation to study the endurance of mudskipper fish on a treadmill.
The nature of government spending
Aside from its sheer magnitude, it is the nature of government spending that is a problem all its own. The overwhelming majority of federal agencies are neither constitutional nor the proper role of government. Take, for example, the federal government’s National Railroad Passenger Corporation (Amtrak). Since its creation in 1971, it has cost taxpayers more than $40 billion because it has continuously failed to make a profit. An audit last year by Ernst and Young found that Amtrak “has a history of operating losses and is dependent upon substantial Federal Government subsidies to sustain its operations and maintain its underlying infrastructure.” Yet the Constitution nowhere grants authority to the federal government to subsidize, let alone operate, a transportation system. And doing either one is contrary to the only legitimate functions of government in a free society: defense, judicial, and policing activities.
But it’s not just federal agencies: whole departments of the federal government are illegitimate; for example, the departments of Agriculture, Education, Energy, Health and Human Services, Housing and Urban Development, and Labor. Nowhere in the Constitution is the federal government authorized to have anything to do with agriculture, food, education, energy, health, housing, urban development, or employment. In fact, spending by those departments is so illegitimate that the entire departments should be shut down, their assets sold to the highest bidder, and every last one of their bureaucrats laid off.
Even the spending of legitimate departments of the federal government is suspect. The Department of Defense (DoD) is, obviously, intended to “provide for the common defense” of the country. Who could argue with that? But most of what the DoD does is offense, not defense. The DoD fights unnecessary foreign wars and maintains an empire of troops and bases around the world. And those are not recent developments. The United States has been sending its soldiers all over the world for more than a hundred years. According to data from the Stockholm International Peace Research Institute, the United States spends more on defense than China, Russia, the United Kingdom, France, Japan, Saudi Arabia, and India combined. The DoD’s budget could be cut drastically and it wouldn’t affect the real defense of the United States one bit.
The worst thing about federal spending was recently pointed out by economist Walter Williams of George Mason University:
Tragically, two-thirds to three-quarters of the federal budget can be described as Congress taking the rightful earnings of one American to give to another American — using one American to serve another. Such acts include farm subsidies, business bailouts, Social Security, Medicare, Medicaid, food stamps, welfare, and many other programs.
And of course, all that spending is first filtered through the hands of government bureaucrats.
Libertarianism and taxes
Contrary to liberals and conservatives — who are fine with government spending as long as it is funding their agendas and who have no philosophical objection to taxes — libertarians have usually maintained on principle that taxation is theft. The libertarian view of taxes is not that taxes should be fair,
adequate, sufficient, constitutional, uniform, flat, simple, efficient, apportioned equally, or low. The usual libertarian view of taxes is simply that they should not exist in the first place. Taxation is theft because it violates the nonaggression principle. As explained by the Austrian economist Murray Rothbard in The Ethics of Liberty (1982),
All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.
It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay, his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.
The income tax is especially egregious. As Frank Chodorov explained in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens, “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.” So, if taxation is theft, why do libertarians pay taxes? Libertarians pay taxes for the same reason that they hand over their wallet to someone who points a gun in their face and says, “Give me your money or I will shoot you.” They do not pay taxes because, as the inscription engraved on the exterior of the IRS Building in Washington, D.C., reads, “Taxes are what we pay for a civilized society.”
Conclusion
One of the main objections of liberals and conservatives to the libertarian view that taxes are government theft is that without income and payroll taxes the federal government could not function because it would not get the revenue it needs. But since the vast majority of spending by the federal government, as explained above, is on wealth-redistribution schemes, income-transfer programs, pay and benefits for government bureaucrats, war and militarism, and assorted boondoggles, federal spending could probably be cut 95 percent and the constitutional functions of government could still be adequately funded.
In a libertarian society, that is, in a free society, the federal government wouldn’t tax the incomes of individuals or businesses. In fact, the federal government wouldn’t even know the incomes of individuals or the profits of business (unless they were public corporations). In a free society, all Americans would be entitled to keep all of the fruits of their labor and spend, save, invest, or donate their money as they see fit. The federal government wouldn’t give out any grants, send any foreign aid or disaster relief, subsidize anything, supply welfare, distribute food, regulate anything, undertake job training, perform any research or exploration, fight poverty, provide student loans, operate a retirement system, or fund arts and culture. And the federal government certainly wouldn’t take money out of the paychecks, pockets, and purses of some Americans and redistribute it to other Americans after funneling it through multiple layers of an expansive bureaucracy. In a free society, U.S. troops would not fight foreign wars; be stationed on overseas bases; or bomb, maim, invade, occupy, or intervene in other countries.
The only reason it appears that the federal government “needs” the money it currently collects in taxes is that we have a massive welfare/warfare/regulatory state. But the actual constitutional functions of the federal government could be funded by tariffs, lotteries, donations, user fees, and land sales.
The federal government was funded primarily by tariffs before the income tax was instituted. Yes, tariffs are taxes on imports, but if they are low and for revenue and not for protection, they are much preferable to income and payroll taxes.
Every state except Alabama, Alaska, Hawaii, Nevada, and Utah has a lottery. Although the Constitution doesn’t authorize the federal government to have a lottery, the lack of constitutional authorization has never prevented the government from doing anything. But to satisfy purists, the Constitution could easily be amended to allow for a national lottery. Because the odds of winning the lottery are so low, playing the lottery can almost be considered paying a “voluntary tax.”
According to 31 U.S.C. §9701, federal agencies are permitted to “charge for a service or thing of value provided by the agency.”
Even though Americans are obligated to pay taxes, they still give millions of dollars every year to the federal government in donations or bequests to reduce the federal debt held by the public. According to the Department of the Treasury’s Bureau of the Fiscal Service, Americans gave to the federal government $2.6 million in fiscal year 2017, $5.1 million in fiscal year 2014, and a whopping $7.7 million in 2012. Just imagine how much Americans might donate if they were freed from their income and payroll tax burden.
The federal government currently owns roughly one-third of all land in the United States, including more than 80 percent of Alaska and Nevada, and more than half the land in Idaho, Oregon, and Utah. That land could and should be sold.
Federal tax dollars should never be put to work.
This article was originally published in the February 2019 edition of Future of Freedom.