Revenue vs. Spending

In 2000, federal receipts were $2.03 trillion and expenditures were $1.79 trillion. The government collected more than it spent — a surplus of $236 billion. The lines were close together, almost touching. Over the next 24 years, the lines diverged like scissors opening. Revenue grew 155%, from $2.03 trillion to $5.18 trillion — a substantial increase driven by economic growth, population increase, and wage inflation. But spending grew 294%, from $1.79 trillion to $7.05 trillion. The spending line pulled away from the revenue line and never came back.

The gap widened in two ways. During crises, it blew wide open: the deficit hit $1.4 trillion in FY2009 and $3.1 trillion in FY2020 as spending surged and revenue fell. Between crises, it narrowed but never closed — the best post-2001 deficit was $161 billion in FY2007, still a deficit. The last time the revenue line was above the spending line was September 2001. It has been below it for every single month of the 21st century since, with the seasonal exception of April (tax day). Even in the booming economy of 2024, with record corporate profits and near-record employment, the gap remained $1.87 trillion.

To understand why, you have to decompose both lines. The revenue side has three big contributors: individual income taxes, social insurance contributions (payroll taxes), and corporate income taxes. The spending side has three big consumers: transfer payments (Social Security, Medicare, Medicaid, and other benefits), government consumption (defense, salaries, procurement), and interest on the debt. The mismatch between these two sides — which sources generate the revenue and which programs consume the spending — explains why the deficit is structural and why no president has been able to close it.

The federal government has three main revenue sources, and their relative contributions tell a revealing story about who finances the government. Individual income taxes are the largest source at $2.43 trillion in 2024 — 47% of all receipts. This includes everything withheld from paychecks and paid on April 15. The top 10% of earners pay roughly 74% of all income taxes, making the income tax highly progressive but also highly sensitive to the fortunes of high earners. When the stock market falls and capital gains evaporate, income tax receipts can drop 15–20% in a single year, as they did in FY2001–2003 and FY2008–2009.

Social insurance contributions — the payroll taxes that fund Social Security and Medicare — are the second-largest source at $1.87 trillion, or 36% of receipts. These taxes are flat: 6.2% on wages up to $168,600 for Social Security, plus 1.45% on all wages for Medicare (with an additional 0.9% surcharge above $200,000). Because they are capped and flat, payroll taxes are the most regressive major federal tax: a worker earning $50,000 pays 7.65% of every dollar, while a CEO earning $5 million pays an effective rate of about 2.5% on total income. Payroll taxes are also the most reliable revenue source — they barely fluctuate even during recessions, because they are based on wages rather than profits or capital gains.

Corporate income taxes are the smallest of the three at $492 billion — just 9.5% of total receipts. This represents a dramatic decline in the corporate tax burden. In the 1950s and 1960s, corporate taxes provided 25–30% of federal revenue. In 2000, they brought in $207 billion (10.3% of receipts). The Tax Cuts and Jobs Act of 2017 slashed the corporate rate from 35% to 21%, and revenues fell from $297 billion in 2017 to $205 billion in 2018. They subsequently recovered to $492 billion by 2024, driven by record corporate profits, but the corporate share of revenue remains roughly half what it was 60 years ago.

The spending side of the federal budget is dominated by three categories, and their relative growth rates explain why the deficit is structural. Transfer payments — Social Security, Medicare, Medicaid, food stamps, veterans’ benefits, unemployment insurance, and dozens of other programs — totaled $4.40 trillion in 2024, or 62% of all federal spending. In 2000, transfers were $1.03 trillion (58% of spending). They have grown 4.3x in 24 years, driven primarily by aging demographics (more retirees drawing Social Security and Medicare) and expanding health care costs. Episode 7 will examine the entitlement trajectory in detail.

Government consumption expenditures — defense, federal employee salaries, procurement, infrastructure — totaled $1.44 trillion in 2024, or 20% of spending. This is the “discretionary” category that Congress debates annually. It includes the $856 billion defense budget, but also everything from the National Park Service to the FBI to NASA. Consumption spending has grown 2.1x since 2000 ($675B to $1.44T), largely tracking inflation and population growth. As a share of total spending, it has actually fallen — from 38% in 2000 to 20% in 2024 — because transfer payments have grown so much faster.

Net interest is the third major category at $1.12 trillion in 2024, or 16% of spending. As covered in Episode 3, this is the fastest-growing line item. Together, these three categories account for 98% of federal spending. The remaining 2% consists of subsidies, grants, and capital transfers. The fundamental arithmetic is simple: transfers ($4.4T) plus interest ($1.1T) equals $5.5 trillion — which already exceeds total revenue ($5.2T). Everything else — the entire military, the entire federal bureaucracy, every road, bridge, and satellite — is funded by borrowing.

The table tells the core story in a single comparison. Revenue grew 156% in 24 years. Spending grew 294%. The arithmetic gap between those growth rates — spending growing almost twice as fast as revenue — is the deficit. Transfer payments alone grew 328%, from $1.03 trillion to $4.40 trillion. That single category now exceeds what the entire federal government spent in 2000 ($1.79T) by a factor of 2.5. The transfer state has swallowed the budget.