An examination of the current federal budget reveals some key points. First and foremost is the simple point that the federal government takes in and spends a great deal of money. It is hard to imagine revenues and spending of over $3.5 trillion.

Next, it is useful to recognize where this money comes from. Contrary to what some people might think, the huge majority of tax revenues comes from individuals in the form of individual income taxes and tax on wages linked to Social Security and Medicare.

For many people, it is surprising to learn what the federal government spends its money on. The obvious category of defense spending represents around 20% of spending. About one-third of the federal budget goes for Social Security and Medicare payments. Comprehensive general transfers to the elderly represent far more money than do welfare expenditures per se.

What about the future? The U.S. tax system is very complicated and not always transparent in its effects. Nevertheless, we can estimate future expenditures and revenues as a way of understanding the fiscal strength or weakness of a nation. It is very likely that federal expenditures will rise in the future, most of all because of rising health-care expenditures. One question is whether and how federal revenues will rise to keep the budget sufficiently close to balancing.

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