    [A Citizen's Guide to the Federal Budget]
    [2. Where the Money Comes From - and Where It
    Goes]
    [From the U.S. Government Printing Office, www.gpo.gov]

    In a typical American household, a father and mother might sit around
    the kitchen table to review the family budget. They might discuss how
    much they expect to earn each year, how much they can spend on food,
    shelter, clothing, transportation, and perhaps a vacation, and how
    much they might be able to save for their future needs.

    If they do not have enough money to make ends meet, they might discuss
    how they can spend less, such as by cutting back on restaurants,
    movies, or other entertainment. They also might consider whether to
    try to earn more by working more hours or taking another job. If they
    expect their shortfall to be temporary, they might try to borrow.

                  Chart 2-1. Family Budgeting

    [[Page 6]]

    Generally speaking, the Federal Government plans its budget much like
    families do. The President and Congress determine how much money they
    expect the Government to receive in each of the next several years,
    where it will come from, and how much to spend to reach their
    goal--goals for national defense, foreign affairs, social insurance
    for the elderly, health insurance for the elderly and poor, law
    enforcement, education, transportation, science and technology, and
    others.

    They decide how much spending they will finance through taxes and how
    much through borrowing. They debate how to use the budget to help the
    economy grow, or to redistribute income. And, especially lately, they
    debate how to reduce spending in order to eliminate the deficit and
    balance the budget.

    In this chapter, we will discuss these decisions in some detail--that
    is, how the Government raises revenues and where it spends money.

                    Chart 2-2. National Budgeting

    [[Page 7]]

    Revenues

        Chart 2-3. The Federal Government Dollar--Where It Comes From

    The money that the Federal Government uses to pay its bills--its
    revenues--comes mostly from taxes. In recent years, revenues
    have been lower than spending, and the Government has borrowed to
    finance the difference between revenues and spending--that is, the
    deficit.

    Revenues come from these sources:

    . Individual income taxes will raise an estimated $691 billion in 1998, equal
      to about eight percent of GDP--roughly about the same percent as in
      each of the last 40 years.

    . Social insurance payroll taxes--the fastest growing category of Federal
      revenues--include Social Security taxes, Medicare taxes, unemployment
      insurance taxes, and Federal employee retirement payments. This
      category has grown from two percent of GDP in 1955 to nearly seven
      percent in 1998.

    . Corporate income taxes, which will raise an estimated $190 billion in
      1998, have shrunk steadily as a percent of GDP, from 4.5 percent in
      1955 to 2.3 percent today.

    [[Page 8]]

                    Table 2-1. Revenues By Source--Summary

                         (In billions of dollars)
    ------------------------------------------------------------------------
                                   1996                     Estimate
            Source                Actual  1997  1998  1999  2000  2001  2002
    ------------------------------------------------------------------------
    Individual income taxes          656   673   691   722   756   795   840
    Corporate income taxes           172   176   190   200   212   221   228
    Payroll taxes                    509   536   558   585   614   642   673
    Excise taxes                      54    57    61    64    65    66    67
    Estate and gift taxes             17    18    19    20    21    23    25
    Customs duties                    19    17    18    18    20    21    22
    Miscellaneous receipts            26    29    30    34    39    41    42
                                   -----------------------------------------
    Total receipts                 1,453 1,505 1,567 1,643 1,727 1,808 1,897
    -------------------------------------------------------------------------
    Notes: The revenues listed in this table do not include revenues from
    the Government's business-like activities--i.e., the sale of
    electricity and fees to national parks. The Government counts these
    revenues on the spending side of the budget, deducting them from other
    spending to calculate its outlays for the year.

    Numbers may not add to the totals due to rounding.

    . Excise taxes apply to various products, including alcohol, tobacco,
      transportation fuels, and telephone services. The Government earmarks
      some of these taxes to support certain activities--including highways,
      airports and airways, and the cleanup of hazardous substances-and
      deposits others in the general fund.

    . The Government also collects miscellaneous revenues--e.g., customs
      duties, Federal Reserve earnings, fines, penalties, and forfeitures.

    [[Page 9]]

                   Chart 2-4. Composition of Revenues

    Chart 2-5. Revenues as a Percent of GDP--Comparison With Other Countries

    [[Page 10]]

    Spending

    As we have said, the Federal Government will spend nearly $1.7 trillion 1~ in
    1998, which we divided into eight large categories as shown in Chart 2-6.

    . The largest Federal program is Social Security, which provides monthly
      benefits to more than 43 million retired and disabled workers, their
      dependents, and survivors. It accounts for 23 percent of all Federal
      spending.

    . Medicare, which provides health care coverage for over 33 million elderly
      Americans and people with disabilities, consists of Part A (hospital
      insurance) and Part B (insurance for physician costs and other services).
      Since its birth in 1965, Medicare has accounted for an ever-growing share
      of spending. In 1998, it will comprise 12 percent.

           Chart 2-6. The Federal Government Dollar--Where It Goes

    ---------
    1 In calculating Federal spending~, the Government~ deducts collections
    (revenues) generated by the Government's business-like activities, such
    as fees to national parks. These collections w~ill total an estimated
    $209 billion in 1998. ~Without them, spending would total an estimated
    $1.9 trillion in 1998, not $1.7 trillion.

    [[Page 11]]

    . Medicaid provides health care services to over 38 million Americans,
      including the poor, people with disabilities, and senior citizens in
      nursing homes. Unlike Medicare, the Federal Government shares the costs of
      Medicaid with the States, paying between 50 and 83 percent of the total
      (depending on each State's requirements). Federal and State costs are
      growing rapidly. Medicaid accounts for six percent of the Federal budget.

    . Other means-tested entitlements provide benefits to people and families
      with incomes below certain minimum levels that vary from program to
      program. The major means-tested entitlements are Food Stamps and food
      aid to Puerto Rico, Supplemental Security Income, Child Nutrition, ~the
      Earned Income Tax Credit, and veterans' pensions. This category will
      account for an estimated six percent of the budget in 1998.

    . The remaining entitlements, which mainly consist of Federal retirement
      and insurance programs and payments to farmers, comprise five percent
      of the budget.

    . National defense discretionary spending will total an estimated $260
      billion in 1998, comprising 15 percent of the budget and 3.2 percent of
      GDP.

    . Non-defense discretionary spending--a wide array of programs that
      include education, training, science, technology, housing, transportation,
      and foreign aid--has shrunk as a share of the budget from 23 percent in
      1966 to an estimated 17 percent in 1998.

    . Interest payments, primarily the result of previous budget deficits,
      averaged seven percent of Federal spending in the 1960s and 1970s. But,
      due to the large budget deficits that began in the 1980s, that share
      quickly doubled to 15 percent, where it stands today.

    [[Page 12]]

                        Table 2-2. Spending Summary

                      (Outlays, in billions of dollars)

    -----------------------------------------------------------------------------
                                   1996                     Estimate
            Category              Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    Discretionary:
      National Defense               266   268   260   262   268   269   274
      International                   18    20    19    20    19    19    19
      Domestic                       250   263   268   276   277   274   274
                                    ----------------------------------------
        Subtotal, discretionary      534   550   547   558   564   561   567

    Mandatory:
      Programmatic:
        Social Security              347   364   381   399   418   438   460
        Medicare                     171   192   204   217   227   243   261
        Medicaid                      92    99   106   112   118   125   133
        Means-tested entitlements
          (except Medicaid)           95   104   107   112   117   115   122
        Other                        117   122   147   156   169   167   166
                                   -----------------------------------------
          Subtotal, programmatic     822   880   946   995 1,048 1,089 1,142
        Undistributed offsetting
            receipts                 -38   -46   -56   -44   -46   -50   -68
                                   -----------------------------------------
          Subtotal, mandatory        785   834   890   951 1,002 1,038 1,074
        Net interest                 241   247   250   252   248   245   239
                                   -----------------------------------------
          Subtotal, mandatory
            and net interest       1,026 1,081 1,140 1,203 1,251 1,283 1,313
                                   -----------------------------------------
          Total                    1,560 1,631 1,687 1,761 1,814 1,844 1,880
    -------------------------------------------------------------------------
    Note: Numbers may not add to the totals due to rounding.

    [[Page 13]]

                            Table 2-3. Spending by Function

                            (Outlays, in billions of dollars)

    -----------------------------------------------------------------------------
                                   1996                Estimate
            Function              Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    National defense:
    Department of Defense-
      Military                       253   254   247   249   255   256   261
    Other                             13    13    12    12    12    12    12
                                   -----------------------------------------
       Total, National defense       266   267   259   261   267   268   273
    International affairs             13    15    15    16    15    15    15
    General science, space,
      and technology                  17    17    16    16    16    16    16
    Energy                             3     2     2     1     2     2    -*
    Natural resources and
      environment                     22    23    22    23    23    23    23
    Agriculture                        9    10    12    12    11    10    10
    Commerce and housing credit      -11    -9     3     6    13     7     8
    Transportation                    40    39    39    39    39    39    39
    Community and regional
     development                      11    13    11    11    10     8     8
    Education, training,
      employment, and social
      services                        52    51    56    62    63    64    63
    Health                           119   128   138   145   152   160   165
    Medicare                         174   194   207   220   229   246   263
    Income security                  226   239   247   256   266   269   280
    Social Security                  350   368   384   402   421   441   463
    Veterans benefits and
      services                        37    40    41    42    44    41    43
    Administration of justice         18    21    24    26    26    26    26
    General government                12    13    13    13    14    13    13
    Net interest                     241   247   250   252   248   245   239
    Undistributed offsetting
      receipts                       -38   -46   -56 ~  -44   -46   -50   -68
                                   -----------------------------------------
        Total                      1,560 1,631 1,687 1,761 1,814 1,844 1,880
    ---------------------------------------------------------------------------
    *  $500 million or less.
    Notes: Spending that is shown as a minus means that receipts exceed outlays.
           Numbers may not add to the totals due to rounding.

    [[Page 14]]

                           Table 2-4. Spending by Agency

                         (Outlays, in billions of dollars)

    -----------------------------------------------------------------------------
                                   1996                     Estimate
            Agency                Actual  1997  1998  1999  2000  2001  2002
    -----------------------------------------------------------------------------
    Legislative Branch                 2     3     3     3     3     3     3
    The Judiciary                      3     4     4     4     4     4     4
    Executive Office of the
      President                        *     *     *     *     *     *     *
    Funds Appropriated to the
      President                       10    10    10    10    11    11    11
    Agriculture                       54    57    59    58    60    60    62
    Commerce                           4     4     4     5     6     4     4
    Defense-Military                 253   254   247   249   255   256   261
    Defense-Civil                     33    34    35    36    37    38    39
    Education                         30    28    32    36    37    37    36
    Energy                            16    15    15    15    15    14    12
    Health and Human Services        320   351   376   397   414   439   462
    Housing and Urban Development     26    30    32    33    32    30    30
    Interior                           7     7     7     7     7     7     7
    Justice                           12    15    17    19    19    19    18
    Labor                             32    33    36    38    39    40    40
    State                              5     5     6     6     5     6     6
    Transportation                    39    38    38    39    38    38    38
    Treasury                         365   381   390   398   400   402   403
    Veterans Affairs                  37    40    41    42    44    41    43
    Environmental Protection Agency    6     6     7     7     7     7     7
    General Services Administration    1     1     1     *     *     *     *
    National Aeronautics and Space
      Administration                  14    14    14    13    13    13    13
    Office of Personnel Management    43    45    47    49    51    53    56
    Small Business Administration      1     *     *     *     *     1     1
    Social Security Administration   375   396   413   432   454   471   496
    Other Independent Agencies         9    10    20    23    26    24    25
    Undistributed Offsetting
      Receipts                      -135  -151  -166  -157  -165  -174  -197
                                   --------------------------------------------
        Total                      1,560 1,631 1,687 1,761 1,814 1,844 1,880
    ---------------------------------------------------------------------------
    * $500 million or less.
    Notes: Spending that is shown as a minus means that receipts exceed outlays.
           Numbers may not add to the totals due to rounding.

    [[Page 15]]

    ``On'' and ``Off'' Budget

    From time to time, you may hear about programs that are
    ``off-budget,'' meaning that the Government categorizes them
    separately from other programs.

    Specifically, the law requires that the spending and revenues of two
    Federal programs, Social Security and the Postal Service, be excluded
    from the budget totals--that is, categorized as ``off-budget.'' Therefore,
    the budget displays ``on-budget,'' ``off-budget,''
    and ``unified budget'' totals to satisfy this legal requirement.

    The unified budget is the most useful display of the Government's
    finances; it is vital in calculating how much the Government has to borrow.

    The ``off-budget'' category is designed to give special status to
    certain programs. Over the years, the Government has placed numerous
    programs ``off-budget,'' then returned them to the unified budget. But
    the mere listing of programs as ``off-budget'' does not, by itself,
    protect them from the budget process--e.g., Administration and
    congressional review, possible cuts, and hiring and procurement rules.

    Chart 2-7 illustrates the relationship between on- and off-budget
    items, and the unified budget.

            Chart 2-7. On- and Off-Budget Deficit Projections