Congressional Spending

• When looking at a chart of the U.S. Congressional budget, three departments stand out as the recipients of the largest allocations: Defense, Health and Human Services (HHS) and the Treasury. This is a bit misleading, however, because of these three, only two are funded primarily by income taxes. The large spending through HHS is the result of Social Security, disability and similar programs. Most of this is funded by the FICA tax withheld from every worker's paycheck. It's a common misconception that the taxes people pay on their income go to services provided by the government. In reality, schools and police and fire departments are largely funded by local property taxes, and roads and infrastructure are paid for by a tax on gasoline. Most of the income tax revenue goes to national spending, like building up the military, and paying interest on the national debt.
  
  

Military Spending

• By far, the single largest component of U.S. spending is military-related. It is estimated the U.S. alone accounts for almost half of all annual military spending on the entire planet. And this is only using the official figures for current military spending ($522 billion in 2004). In reality, a good deal of the rest of total federal outlays goes to veterans' benefits and interest on the debt used to finance past military activity. And, the Department of Defense budget does not include the cost of the "global war on terror" in Iraq, Pakistan and Afghanistan, which cost $145 billion in 2008. No matter how you slice it, the biggest chunk of income tax dollars goes to fund the largest standing army in the world.
  
  

Interest on the National Debt

• The other major category of federal spending is payments to the Department of The Treasury. This is the department responsible for printing and engraving our money, regulating the currency, issuing bonds to finance deficits, enforcing the tax code and other laws involving money-laundering and banking. The real 200-lb. gorilla in the room is the interest paid on the national debt, which the Treasury itself reports cost $451.154 billion in 2008 alone, or about 12 percent of total federal spending. That money goes to a variety of places, primarily to the holders of U.S. Treasury securities, like T-bills, notes and even savings bonds. The largest holders are foreign countries, like Britain, Japan and China, as well as large international banks. Paying interest is the natural consequence of having to borrow to finance deficit spending.
  
  

The Other Half

• The federal government took in about $2.5 trillion in 2008, about 45 percent of which, or $1.125 trillion, was contributed by income tax revenues. The next largest contributor was payroll taxes, or the money employers must pay for having employees. Third, at 12 percent of federal revenue, were taxes on corporate profit. To be fair, all three sources contribute to federal spending, including military and interest, but income tax revenue is the largest single component, accounting for nearly half. The two largest expenses account for about half of federal outlays. The remaining government outlays go to college loan programs, public schools, subsidized housing, farm subsidies, homeland security, the Department of Justice (which includes the FBI and the Bureau of Alcohol, Tobacco, Firearms and Explosives), NASA and other miscellaneous items.