Do governments have bank accounts? If not, where do our taxes go when paid?

Every day our society revolves around money, and this cycle between consumers and businesses occurs day and night. This monetary cycle includes the payment of taxes, which goes directly to the government for the development of several welfare programs. Paying our taxes is standard practice, especially in our modern world. Furthermore, taxation is already a part of human lives ever since ancient civilization. These taxes come in the form of money or sometimes as labor equivalent.

With this said, we usually ask ourselves – do governments have bank accounts? And how do they keep our taxes?

Most people use banks to store and secure their money. Especially today, with its broader features, banking is a lot more convenient. However, would it be the same thing with the government? Do they have a bank account to keep our taxes?

Federal Reserve

The Federal Reserve System, commonly known as the Federal Reserve or the Fed, functions as the central bank of the United States. We can trace back its creation on December 23, 1913, during the country’s financial instability. Its purpose is to centralize the money flow in the country and provide proper funds to essential needs. The Federal Reserve System creates more effective supervision of banking in the United States.

Its function as the central bank holds several responsibilities. It manages the currency, money supply, and interest rates of a state or country – as well as printing its national currency. It also acts as the last resort to the banking sector during the financial crisis. Central banks mainly have their own system and have the power to override it. In simpler terms, central banks or the federal reserve functions as the government’s bank and the bank of other banks. With this said, the taxes would go to the IRS or the Internal Revenue Service, which is responsible for collecting taxes. Then, the IRS will bring the money as revenue to the federal government – in this case, would be the Federal Reserve or the central bank.

How does the government spend our taxes?

Now that we already know how the government stores our taxes, let us now follow it up with another question – how do they spend it?

This question might be common to some people, mainly those who are working in government institutions and the like. Also, just watching the daily news would give us a brief knowledge of where do our taxes go.

For starters, we already established earlier that taxes would go first to the IRS then the Federal Reserve. Once the government gets hold of the funds, it will be divided into various necessities.

On average, the Internal Revenue Service collects roughly $3.5 trillion in federal taxes each year. The federal government will break down the funds into three major categories – mainly, eight percent for the interest on government debt, sixty-one percent for mandatory spending. The remaining thirty-one percent will be for discretionary spending.

  • Interest on government debt

    this one is a no-brainer. The government of the United States owes a debt of more than $23 trillion. From the name itself, the debt has an interest, in which the eight percent of our taxes are what the government uses to pay it.

  • Mandatory spending

    the mandatory spending, also known as entitlements, provides benefits and services to the taxpayers. This category includes Social Security, Medicare, Medicaid, and Veterans Affairs. Upon knowing them, it’s pretty easy to distinguish why it is called entitlement – since the taxpayer will be entitled to a certain service or benefit once they met the conditions.

  • Discretionary spending

    now for the last category we have the discretionary spending. In simple terms, this is where all the government infrastructures and programs took their budgets. Mainly, it consists of the following – National defense; this is where the military gains budget for all their operations and engagements. Then we have Transportation, which is essential to any country as it covers a broader aspect, including planes, trains, automobiles, roads, and bridges. Next in Education, which provides funds for training and employment services for teachers and the like. We also have the Veterans Benefits, which is essential for providing funds for the expenses of the Veterans Administration. Lastly, we have Health, which is pretty evident why it is important to a country; the funds will be used to research diseases and new drug therapies, as well as medical research.