The Government Is Wasting Your Tax Dollars!

How Uncle Sam spends nearly $1 trillion of your money each year.

By Ryan Grim with Joseph K. Vetter from Reader's Digest | January 2008

Almost a decade ago, the federal government dropped $100 million for an Earth-monitoring satellite that never made it into space. Today it sits in a closet in Maryland.

Cost to taxpayers for storing it: $1 million a year. And that’s just what’s hiding in one closet. Who knows what’s in the rest of them? Reader’s Digest decided to find out.

Your Tax Dollars WastedPhotographed by Nicolas Eveleigh; Imaging by Joe Zeff Design, Inc.The U.S. spends more than $400 per person on health care administrative costs and insurance -- six times more than other industrialized nations.
 Because we think the government should be held to at least the same standards as a publicly traded company, and because as taxpayers, we’re America’s shareholders, we performed an audit of sorts of the federal books. We’re not economists, but we do have common sense. We tried to be apolitical and got help from Congressional staffers from both parties, as well as various watchdog groups and agencies (see list*). In the end, we found that the federal government wastes nearly $1 trillion every year.

That’s roughly equal to the amount collected annually by the Internal Revenue Service in personal income taxes. Put another way, it’s also equal to about one-third of the country’s $2.9 trillion total annual budget. And reclaiming that lost trillion could help wipe out the country’s annual budget deficit, improve education, and provide health insurance for those who don’t have it.

So how do you define “waste”? David Walker of the Government Accountability Office (GAO), a federal watchdog agency, calls it “the government’s failure to give taxpayers the most for their money.” For our part, we used the kind of household test you would use on a piece of meat sitting in your refrigerator: If it smells rotten, it’s waste. And there is plenty to sniff out. Our government regularly pays for products and services it never gets, wildly overpays companies to do things it could do more cheaply itself, loses money outright due to lax accounting and oversight, fails to collect what it’s owed, and antes up for unnecessary programs.

How exactly does the federal government fritter away your hard-earned tax dollars? We’ve identified what we consider ten of the worst ways. Now, we’re not naive. We know that not everyone will agree on every ripoff we’ve flagged. And we know that even with excellent discipline and management, it’s unlikely we could recover more than half of this waste. But hey, it’s a start.

1. Taxes: Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what’s owed and what’s collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn’t have the resources to adequately pursue big offenders and their high-powered tax attorneys. “The IRS is outgunned,” says Walker, “especially when dealing with multinational corporations with offshore headquarters.”

Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast “incomes” yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, “Some of the sweetheart deals that were negotiated for drilling rights on public lands don’t pass the straight-face test, especially given current crude oil prices.” And Big Oil isn’t alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

The Tab*
Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks)
Starting Tab: $352.5 billion

2. Healthy Fixes. Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

The U.S. spends more than $400 per person on health care administration costs and insurance — six times more than other industrialized nations.

That’s because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what’s spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

The Tab*
Wasteful Health Spending:
$60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs)
Total $185 billion
Running Tab: $352.5 billion +$185 billion = $537.5 billion

*All figures are estimates.

*Source list: OMB Watch, Tax Payers for Common Sense, Citizens Against Government Waste, Cato Institute, Heritage Foundation, Government Accountability Office