Budget 2013: Which 2013 Budget Proposal is Best For America?

Congress has now adjourned for the Easter holiday and won't return until April. There are no worries about a partial government shutdown anymore. The House passed legislation to extend funding and keep every agency running through September 30 by a vote of 318-109, which was easily passed by the Senate 73-26 and sent to President Barack Obama's desk for his signature.

So that gives them another six months to work on approving a 2013-2014 budget, which going into the Easter break, still seems to be miles apart. Examining both the House-passed budget authored by Rep. Paul Ryan (R-Wisc.) and the Senate-passed budget penned by Sen. Patty Murray (D-Wash.), there doesn't seem to be much common ground to work with.

Let's examine the three biggest aspects of both budgets: spending, entitlements/health care and taxes.

SPENDING

Federal spending as a percentage of GDP has skyrocketed since the 2008 recession:

As you can see in the historical chart, President Bill Clinton and the Newt Gingrich-led GOP Congress were able to slash federal spending all the way down to 18% of GDP during the 1990s, on par with the historical rate of revenues (taxes) as a percentage of GDP. That marked the first significant reduction of spending since the 1950s and helped balance the budget for the first time in 30 years – following up on a promise to deliver a government that "lives within its means." It also didn't affect the economy in any detrimental way. To the contrary, the 1990s saw an economic boom of growth and prosperity throughout the decade.

After 9/11, the Bush administration oversaw spending levels return to their historical rate of 20%. Once the recession hit, President George W. Bush and the Democratic Congress approved massive bailouts of the major banking and auto companies and when Obama took over the White House in 2009, spending had spiked all the way to 26% of GDP – exceeding the all-time high of 23% in the early 1980s. It has lowered slightly to 24% today, still way above the historical rate.

The 2013 Ryan budget attempts to gradually reduce spending as a percentage of GDP back down to its pre-recession level/historic rate of 20% by 2023:

It's not like it hasn't been done before. Washington was able to reduce federal spending by that same amount during the 1990s. The sequester that went into effect on March 1 reduces federal spending over the next 10 years from $47.2 trillion to $46.1 trillion. Contrary to the Democrats' apocalyptic warnings, it had no effect on the markets, which hit an all-time high that same week.

The Ryan budget cuts an additional $4.6 trillion over the next decade it its attempt to balance federal revenues (taxes) with federal expenditures (spending) by 2023 – a feat also not accomplished since the budget was last balanced in 1999-2000.

The Murray plan, by contrast, repeals the sequester and replaces it by trimming less than $1 trillion over the next decade (which is actually a net spending increase of about $200 billion once you factor in the sequester difference), mostly through defense cuts. That also includes another $100 billion in stimulus spending upfront for infrastructure projects and job training programs. Murray's plan would leave the government with a $566 billion annual deficit in 10 years and $5.2 trillion in additional debt over that same time period.

In other words, the Murray plan doesn't even try to balance. But several Democrats have now been "pulling a Clinton" and trying to change the definition of what "balance" is. Balance is a good buzzword; it always tests well when it comes to moving the needle with focus groups. In budgeting, balance means your budget doesn't spend more than it takes in. Every time it does, it racks up a deficit, and the borrowing needed to close it adds to the debt.

But Democrats are now trying to change the definition of "balance" to meaning: "It includes spending cuts and higher taxes." By that logic, you could claim the fiscal cliff deal reached earlier this year was "balanced" because its coupled merely $15 billion in spending cuts with $620 billion in tax hikes – or $1 in spending cuts for every $41 in tax hikes. That "balance" also produced another $4 trillion in debt over the next decade (even with the tax hikes) according to the CBO.

ENTITLEMENTS

Social Security, Medicare, Medicaid, unemployment and welfare now consume more than half our tax dollars (55% — nearly three times that of defense) and is more than double our spending as a percentage of GDP on defense. It is the biggest driver of our national debt.

Entitlements are also going bankrupt. According to the trustees who oversee Social Security, Medicare, and Medicaid — former Treasury Secretary Tim Geithner, Social Security Commissioner Michael J. Astrue, Labor Secretary Hilda Solis, and Health and Human Services Secretary Kathleen Sebelius — the nations entitlement programs are going bankrupt even faster than predicted. The trust funds that support Social Security will run dry by 2033. Medicare's hospital insurance fund is projected to run out of money by 2024.

The Ryan budget attempts to substantially reform entitlements along a more sustainable path to not only reduce the national debt, but extend these programs' longevity. On welfare, Ryan's plan would give power back to the states, restoring local accountability and turning Medicaid and food stamps into block grants and making recipients work for certain benefits. The federal government would give states a set amount of funds to cover their Medicaid recipients in the form of a block grant (instead of leaving it open-ended as it does now). States would also be given more flexibility to tailor the program's requirements and enrollment criteria.

On Medicare, the Ryan plan advocates a premium-support system that puts more power and decision-making responsibilities in the hands of the consumer instead of government bureaucrats. Existing spending would be repackaged as a fixed-amount benefit to each senior that he or she can use to purchase an insurance plan, while competition among plans to provide high quality service and charge low premiums will hold costs down while also improving the quality of coverage for seniors.

The Ryan budget also repeals the Affordable Care Act and eliminates the subsidized insurance exchanges and Medicaid expansion that make up the core of the law – a big part of the planned $4.6 trillion in spending reduction.

The Murray budget lacks any substantial changes to entitlements. All it proposes is approximately $265 billion in spending cuts to Medicare, but offers very few details about how those reductions would be made. The budget does indicate, however, that they would not be focused on beneficiaries and offers suggestions of policy approaches that could reduce the cost of delivering care. The plan also suggests that efforts to reduce waste and fraud could contribute to these savings, but doesn't offer a specific approach.

The Murray budget lacks any major reform to Medicare that could bend the cost curve in the long run. It also doesn't touch Medicaid at all, nor does it make specific proposals to improve the solvency of Social Security. Ryan's budget doesn't do much about Social Security either, save for calling for adjusting the way inflation is calculated as a way to lower the future cost of benefits.

TAXES

As referenced earlier in the fiscal cliff deal, the top income tax bracket (individuals making $400,000+ and households making $450,000+) has now been restored to the Clinton-era level of 40% while middle class tax rates have been frozen in Bush-era levels. That's expected to bring in a whopping extra $62 billion a year. Last year's spending deficit alone was $1.1 trillion.

The Ryan budget enacts a broad overhaul of the income tax rate system by simplifying the rates from six brackets (40%, 33%, 28%, 25%, 15%, 10%) into just two: 25% and 10% – similar to a plan the bipartisan "Gang of Six" in the Senate came up with. Like the bipartisan Simpson-Bowles commission recommended, it also calls for closing tax loopholes, using the 1986 Tax Reform Act as a model – which closed loopholes that allow for overseas tax shelters and lowered rates across the board to keep us internationally competitive – though the Ryan budget doesn't specify a plan on how to close those loopholes.

All the Murray plan proposes is to close corporate tax loopholes without touching any rates, claiming it will raise $975 billion over the next 10 years – or just under $100 billion a year.

As you can see in this historical chart, most of our revenues clearly come from income taxes. Employment taxes (taxes withheld for Social Security and Medicare) have steadily been ballooning due to rising entitlement costs. Corporate taxes are a distant third. It's clearly no recent phenomenon as they've been steadily decreasing for decades in the age of globalization, outsourcing and offshore banking.

We have the highest corporate tax rate in the world: 39.2% (including state and local taxes), which has only pushed global corporations to park more money (and the jobs that go with it) overseas and keep record profits from their foreign subsidiaries outside of the country indefinitely.

According to the SEC, 60 of America's top largest non-financial corporations kept $166 billion in cash outside of the country last year, shielding more than 40% of their profits from taxes. That's from total overseas earnings of $1.3 trillion, up 15% from 2011. Microsoft, Apple and Google Inc. together hold $134.5 billion in cash abroad; more than double the $59.3 billion they held two years earlier.

Now there are two schools of thought when it comes to collecting this lost revenue. The strategy taken by the Murray plan is to just close the loopholes. But as you can see in the historical tax chart, the last time it was tried in 1986, it led to modest gains over the next 15 years before dropping off again in 2000. It's the same reason why those loopholes are created in the first place: lobbyists. Washington lobbyists and corporate attorneys are constantly working round the clock, year after year, to exploit loopholes in our tax code. Very seldom do they ever get eliminated, and even when they do, it's only a matter of time before new ones are created.

The other school of thought is to eliminate the incentive to cheat altogether and reward reinvestment by lowering the corporate tax rate. Notice the large spike in corporate tax revenues around 2004-2005 (reaching it highest rate since the 1970s). Back in 2004, Congress passed a bill that allowed corporations to bring back after-tax dollars earned in other countries relatively tax-free. Rather than having to pay the IRS the difference between the foreign country's tax rate and our own 39.2%, companies choosing to bring profits back to America only had to pay the IRS a maximum rate of 5.25%.

This "repatriation holiday" was in effect for all of 2005. The result was $320 billion brought back to the U.S. — tax revenue that otherwise would have been kept overseas indefinitely. The money was used to fund pension plans, raise wages, create jobs, and invest in new plants and equipment.

THE VOTES

The Ryan budget passed the House 221-207 – with 10 Republicans and every Democrat voting against it – but was blocked in the Senate 40-59. All Senate Democrats solidly voted against it. Senators Susan Collins (R-Maine) and Dean Heller (R-Nev.) are in blue states that broke for Obama in 2012 so voted against it, while Senators Ted Cruz (R-Texas), Rand Paul (R-Ky.) and Mike Lee (R-Utah) joined their ten GOP colleagues in the House by voting against the Ryan budget because "it didn't go far enough" to reduce spending/debt.

The Murray budget (the Senate's first in four years) barely passed the Senate last week 50-49. Every Republican voted against it and joining them were four Democratic senators up for re-election in red states next year: Mark Pryor (D-Ark.), Mark Begich (D-Alaska), Kay Hagan (D-N.C.) and Max Baucus (D-Mont.). The House won't take it up until they return from the Easter break.