A Tale of Two Budgets

House Budget Committee Chairman Paul Ryan (R) of Wisconsin recently submitted an eight-year budget plan for America. Much has been written in the last few weeks about the similarity between Ryan’s budget and Obama’s budget. While it would be easy to go through both budgets line by line and point out the differences, the simple fact is only the Ryan plan addresses the core principles needed to get our country moving on a path toward fiscal security. Four of the core principles Ryan tackles are tax reform, spending cuts, military spending and shrinking the government.

Taxes

Over the last 50 years the average tax revenue generated as a percentage of GDP (Gross Domestic Product) has been steady at about 18%, regardless of the tax rate.[1] The GDP for 2011 was around $15 trillion.[2] The Congressional Budget Office projected total tax revenue of $2.2 trillion for 2011.[3] The problem is our annual Federal budget is close to $3.6 trillion,[4] leaving a deficit of $1.4 trillion. These numbers can vary by $200 billion dollars depending on your information source, but the point is we run a huge deficit every year. Obama wants to shrink this deficit by increasing tax rates on the rich, but if overall tax revenue remains at about 18% of GDP, then the only way to increase tax revenue is to increase GDP – in other words, grow the economy.

Growing the economy is a function of lowering the tax rate and increasing consumer confidence. Lowering the tax rate puts more money in the hands of the citizens to spend, invest, or save as they see fit. This in turn increases consumer confidence. When consumer confidence is high and spending increases, the increased number of transactions means more taxes get collected.

The uptick in spending and consumer confidence is what boosts GDP. 18% of a larger GDP pie means larger federal tax revenue. Without increasing the number of transactions that take place, you cannot hope to tax your way out of a deficit by raising taxes on the rich. Doing so will only decrease the number of transactions overall as more money has to be put aside by people to cover the higher tax rates.

Chairman Ryan’s budget plan cuts personal taxes from the current 35% maximum down to 25%.[5]  The lowering of the tax rate is what gets extra money into the hands of the people and primes the engine of economic growth.

Spending Cuts

Now that you have increased the GDP you must follow this up with spending cuts. Washington has shown that if you let them spend, they will. As government gets bigger the cost to run it goes up, and this takes more money (in tax revenue) away from the private sector economy.

Chairman Ryan’s plan would reform entitlement spending and do away with ObamaCare.[6] Obama’s Health Care bill alone could cost trillions of dollars in the next 10 years, much more than the American people where told it would cost.[7] [8]

Chairman Ryan’s budget plan also puts a cap on government agencies’ fiscal budgets.[9] Currently, federal agency budgets go up on average 8% per year no matter what. This increase is not tied to taxes or GDP growth; federal agency budgets just go up automatically.[10] By forcing spending cuts, Ryan’s budget plan limits the amount of overspending Washington can do year after year.

Military Spending

President Obama’s budget tries to save money by cutting military spending. Chairman Ryan’s budget preserves necessary defense spending to protect America’s national interests.[11] Conflicts in the world have changed over the years. No longer are large-scale wars fought, rather small regional conflicts and terrorist attacks are the new norm today. The world must know that any country harboring terrorists faces the strength and firepower of the U.S. armed forces.

The reality in today’s world is that some of our enemies find it honorable to die in the fight against us. A weak Armed Forces only emboldens our enemies. The world must know and sense our might.

The effect of a terrorist attack on our GDP, as well as the human cost, is just too high. The U.S. must be safe. A strong military helps to ensure this safety. Balancing the budget should not be done on the backs of our troops. This sends the wrong message to the world.

Shrinking Government

Fundamentally president Obama believes that government is the answer to the problems we face, and if we just get government running more “efficiently” we could save money and solve our problems. The way Washington sees itself running more efficiently is it gets bigger with more oversight and regulation. This larger government takes money to run. A growing government takes more money and resources away from businesses.

Chairman Ryan’s budget will shrink government.[12] The simple act of freezing mandatory federal budget increases will, over time, shrink the federal workforce. A smaller more efficient government frees up more money for GDP growth. Doing away with ObamaCare will also help to shrink the size of our government.

Solutions

The Ryan Budget is a great first step in getting our country on the path to fiscal freedom.

This is the first in a series of articles American Citizens for Economic Freedom will be doing on the Ryan budget plan. We will dig deep into the facts on entitlements, healthcare and how responsible financial management will save America economically. We will expose the lies and hype that politicians in both parties use to help them keep their power and keep you in the dark.

Our very survival as a nation depends on making bold choices on growing jobs, growing our economy, and restoring our freedom from an Obama Administration that is playing with your very livelihood.

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