Discretionary and mandatory outlays of the US federal government

- [Instructor] What we're going to do in this video is talk about the broad categories of where the federal government gets its revenue, and also the broad categories of where it spends its revenue. Now when we talk about revenue for the federal government that primarily comes in the form of taxes. And what we see in this visual, it shows the four basic types of taxes that the federal government collects. You have individual income taxes, which you are probably familiar with. If you ever get a pay stub, and if you thought you were making, let's say, $1,000 in a pay period, you might see your paycheck is closer to $600 because there might be individual income taxes taken out, and both the federal and the state level. Then you have payroll taxes, and unless you are an employer, you might not be familiar with payroll taxes. Above and beyond your individual income taxes, your employer also pays taxes called payroll taxes. Now these are primarily to pay for things like Social Security, Medicare, unemployment insurance, and some of you are saying well don't they take that out of my individual income taxes, as well? And the answer is yes, but above and beyond what is individually paid by you, they also take payroll taxes to fund that. Corporate taxes are taxes on corporations' profits, and excise taxes, which you don't hear folks talk a lot about these days, but these are taxes on things like gasoline, or alcohol and tobacco, or airline tickets that are usually baked into those products, and those taxes can oftentimes go to the federal government. Now pause this video and see if you see any interesting trends. This visual here shows the breakdown between these four taxes for the federal government's revenue and how it's changed from 1950 all the way to 2015. Well it looks like individual income taxes, as a percent of total government revenue, has stayed roughly stable. But what you see is that payroll taxes have grown dramatically while corporate taxes have shrunk. Payroll taxes have gone from 11% of the federal government's revenue in 1950 to nearly 1/3 of the federal government's revenue in 2015. Corporate taxes have gone down from 26.5% all the way down to 10.6%, and excise taxes are a very small percentage. They used to be a significant part, but they are now a very small part of total government revenue. Now one thing to keep in mind, this visual over here just shows the breakdown. It's not showing the absolute level. If you were seeing the absolute level of government revenue you would see that grow as the nation's GDP grew as well. But in big categories, where does that revenue get spent? Well this is a similar diagram that shows the breakdown of outlays by the federal government from 1962 all the way, and these are going into projected outlays, to 2020. At the time of this video, we are right over here in 2017, and this chart was made in 2016, so it was made at around this time. But you see a couple of big categories. You first see the mandatory outlays, and in parentheses it says on autopilot. What does that mean? Well these are commitments that the federal government has already made by law to people. These are things like entitlements, like Social Security, like Medicare. And one interesting trend is these have grown in 1962 from 25% of the total federal budget, to a projected almost 2/3 of the federal budget in 2020. Now the discretionary outlays are things that, when we talk about the appropriations committees in the Senate, or the House, this is what they're debating where to spend the money. And even though it might sound something that's just nice to have, there's some pretty important things in the discretionary budget. Things like military expenditure, and as you can see, the discretionary budget has gone from over 2/3 of federal outlays, to a little under 1/4 projected in 2020. And then this top category, net interest, well the federal government has a debt, and anyone who has a debt tends to pay interest on that debt. So many people will often categorize this as a mandatory outlay as well, because we need to pay the interest on that debt, even though it's not officially a mandatory outlay. And to see how significant these entitlement programs are, and how big of an impact they have, not just on the federal government's budget, but as a percentage of GDP, we have this visual right over here. Once again, this is projecting well into the future. This chart was created in 2016, so right about here, but you can see that these mandatory outlays, as a percentage of the GDP here, so this is not just as a percentage of the budget, they are growing, and growing, and growing, and expected to keep on growing while total revenue as a percentage of GDP is expected to stay flat. And take all of this with a grain of salt. This is based on assumptions made at the time when this diagram was made. If we have varying levels of economic growth, or the tax policies change, it's possible that the total revenue as a percentage of GDP might change. Also, if there are changes to some of these entitlement programs, like Social Security, or the health care programs, or if some of the cost assumptions baked into this chart changes, well, then this diagram might change. But if you assume the data in this visual here, and the source is the White House in 2016, you see that the mandatory outlays from these entitlement programs, and the net interest, which is also essentially mandatory, these are going to take up all of the revenue that the federal government collects. And so if the federal government wants to do anything above and beyond those things, discretionary spending, and once again, some of this discretionary spending is pretty important, like the military, well, then they would have to run a deficit in those years to fund those things, or they would have to increase the total revenue. And the thing is, even once we get past this point, go into the 2040's all the way to the 2050's, it gets worse, and worse, and worse. So something has got to give here.