Fiscal Policy Research · Part 1 of 2

Where the Money Actually Comes From

A plain-language guide to taxes, spending, and the law behind them — checked against primary sources, not against what a politician or a pundit said about them.

Every year, politicians promise to cut your taxes, fix inflation, and stop government waste — usually all at once, usually without saying exactly how. This document doesn't argue for a side. It lays out what the law actually says, where the money actually comes from and goes, and what the real numbers are as of September 2026.

Where the government's power to tax and spend comes from

Before the numbers: a question a lot of people have but rarely see answered directly — when did the federal government get the authority to do any of this?

Taxing your income: the 16th Amendment (1913)

The Constitution always let Congress collect taxes. But for most of the 1800s, a national tax on people's income ran into a wall: any "direct" tax had to be divided up among the states by population, which makes almost no sense for an income tax. In 1895 the Supreme Court used this rule to strike one down, and that stood for the next 18 years.

The 16th Amendment, ratified February 3, 1913, changed that — Congress could tax income "from whatever source derived" without dividing it up by state. The modern federal income tax followed almost immediately. Everything in the tax code today traces back to this one amendment.

The power to spend on programs like Social Security: 1936–1937

The Constitution lets Congress spend for the "general welfare," but for over a century nobody was sure how far that went. One view (Madison's) said Congress could only spend on things tied to its other specific powers. A broader view (Hamilton's) said taxing and spending for the general welfare was its own standalone power.

The Supreme Court settled this in favor of the broader reading in United States v. Butler (1936) and Helvering v. Davis (1937) — the same case that upheld Social Security's payroll tax specifically. This is the legal foundation under almost every major federal program not tied to something like national defense.

The numbers, as they actually stand today

All figures below are current as of September 16, 2026, sourced directly from the Bureau of Labor Statistics, the Congressional Budget Office, the IRS, and the GAO — not secondhand summaries.

Inflation: what's actually driving it

As of August 2026, overall prices (CPI) were up 3.4% year over year. But that headline number hides something important: core inflation, excluding food and energy, is running at just 2.4% — the lowest since March 2021, and close to the Fed's own 2% target.

The gap comes down almost entirely to one thing: energy, up 16.3%, driven by a spike in global crude prices after shipping disruptions through the Strait of Hormuz — a chokepoint on the other side of the world, not a U.S. production problem. Part 2 covers why domestic drilling doesn't fix this.

The Federal Reserve just raised rates

On September 16, 2026 — the same day this data was checked — the Fed's rate-setting committee voted unanimously (12–0) to raise its target rate a quarter point, to 3.75%–4.00%. The Fed said the economy is growing at a solid pace and investment is strong, but inflation remains above target, which is why it raised rates rather than holding steady.

The federal budget: bigger picture

The deficit is projected at $1.9 trillion this year alone — against a 50-year historical average of about half that, relative to the economy. This isn't a stale projection either: CBO reported the actual deficit through the first 10 months of FY2026 was already about $1.8 trillion, $169 billion ahead of the same period last year.

Where the $5.6 trillion in revenue actually comes from

One of the most important tables here — this is where a lot of political promises fall apart on contact with arithmetic.

Individual income tax, as it stands in 2026

The current brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) and standard deduction ($16,100 single / $32,200 married filing jointly) were made permanent by the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. Before that law, these rates were temporary and scheduled to expire.

Payroll taxes — the tax most people forget about

Separate from income tax, every paycheck has payroll tax withheld: 6.2% for Social Security and 1.45% for Medicare, matched by your employer. Self-employed people pay both halves themselves — 12.4% and 2.9%. This structure hasn't changed at all in the current round of tax law — see the table further down for why that makes it the most stable number in the federal budget.

The tax gap: money legally owed but not paid

The IRS estimates that in 2022, about $696 billion in taxes were legally owed but not paid on time. After late payments and enforcement recover some of it, the real shortfall — the "net tax gap" — is about $606 billion. Most of it (74%) comes from individual income tax underreporting, not corporate avoidance.

Improper government payments

Federal agencies reported an estimated $186 billion in "improper payments" in FY2025. This is not the same as $186 billion in proven fraud — about $153 billion (82%) were overpayments, which can result from simple errors or outdated eligibility information, not necessarily theft. How much is actually recoverable is a separate, harder question.

Tariffs: a more complicated picture than it looks

Tariffs imposed under a law called IEEPA were struck down by the Supreme Court in February 2026 — the Court found the executive branch lacked authority to impose them that way, and no vote in Congress was ever taken on them at all. CBO now projects FY2026 tariff revenue will come in about $250 billion below its earlier estimate, partly because roughly $166 billion already collected is expected to be refunded.

How tax law actually gets made — and un-made

A law is a law, whether it passed with two votes to spare or unanimous support. But how a law passed tells you something the text alone doesn't: how much scrutiny it got, and how easily a future Congress could undo it.

• Budget reconciliation. A special process letting certain budget bills pass the Senate with a simple majority (51 votes) instead of the 60 normally needed. In exchange, everything in the bill has to be primarily budget-related — the "Byrd Rule" — and the Senate Parliamentarian can strike anything that doesn't qualify. This is how the last several major tax laws passed, including OBBBA (House 215–214; Senate 51–50, with the Vice President breaking a tie on a procedural vote).
• Riding a "must-pass" bill. Bills that fund the government or the military tend to pass no matter what, so unrelated provisions sometimes get attached — a lawmaker's odds go up dramatically if nobody wants to be blamed for a shutdown.

Where today's tax law actually came from

This research is presented for public understanding and does not constitute financial, legal, or tax advice. All figures are sourced to BLS, CBO, IRS, and GAO publications current as of the date noted above.