William B. Canfield III 

Attorney at Law 

Suite 600 

1900 M Street, N.W. 

Washington, D. C. 20036 

(202) 530-3332 

October 14,2011 

RECEIVED 

EEilERAL ELECTIOH 

CGMi'^ISSION 

ZOIIOCT2D AH 11:57 

OFFICE OF GENF.RAL 

COUIiSZL . 

Peter Reynolds, Esq. 

Office of the General Counsel 

Federal Election Commission 

999 E Street, N.W. 

Washington, D.C. 20463 

Re: MURs Number 6391 and 6471 

Commission on Hope, Growth & Opportunity 

Dear Mr. Reynolds: 

i am the pro-bono counsel to the above named Respondent and have served in that capacity 

since November, 2010. This letter is provided in response to our teiephone conversation, your e-mail to 

me of September 28,2011, and your follow-up letter to me of October 4,2011. 

As you will recall, I telephone you upon receipt of yoor e-moii of September 28,2011 and 

expressed my interest in providing the Federai Eiection Commission (the "FEC) with any additional 

information that might supplement the formal response, dated June 1,2011, by the Commission on 

Hope, Growth & Opportunity (the "CHGO") in the above captioned MURs. As you will also recall, I also 

expressed some puzzlement at the eight (8) newspaper articles that were attached to your e-mail of 

September 28,2011 and explained to you that i questioned the probative and evidentiary value to your 

inquiry of newspaper articies that were (a) not authored by anyone representing the CHGO, (b) did not 

contain any quoted material attributed to anyone representing the CHGO, and (c) were replete with 

factuai errors. As i expiained'hi our teiephone conversation, the views expressetl in the newspaper 

articles you provided were, without any contradiction, the views ef the aotborsof the articies and thus 

wore not the views of the CHGO. in that context, I must egain question the prebotive and evidentiary 

value to the FEC of newspaper reporting that is not directly attributable to the Respondent in the above 

captioned MURs. A.S the newfspappr articlesyqu provided contain both edfeorlalcamment (as 

opposed to jsubstantlatfld facts! AMP.contain material misstatements of fact, utlllzatton of these 

articies bv the FEC In Its inoufrv adversely jmnliriates the due process riehts of the CHGO to a fair and 

unbiased administrative review of the above captioned MURs. 

In addition, during our telephone conversation, you will necaii that you also indicated that your 

e-imail of September 28,2011 may have deficient in explaining the context in which the newspaper 

articles were sent to me and you stated that you would shortly draft a foilow-up letter indicating the 

content in which those newspaper articles were sent. That follow-up letter, which was dated October 4, 

2011, asserts that the FEC is "considering" whether the conduct alleged by the DCCC (in the original 

complaint) and CREW (in its copy-cat complaint) in the above captioned MURs, represented the activity 
of a "political committee" in violation of sections 432,433, and 434 of the Federal Election Campaign Act 

of 1971 (the "FECA"). Your letter of October 4,2011 further details that the FEC is "considering" 

whether the CHGO engaged In statutory violations based upon "information provided to the Federal 

Election Commission ("the Commission") in the complaints and responses in these mattbrs, as well as 

publicly avallabfe litfarmatioti..." [empliasis supplied). Since my telephone cenversatioo with you and 

your follow-up letter of October 4,2011 were focused, exclasivehf. on the potential une of these articles 

by the FEC, it would appear that the FEC has decided to place thresh-hold credence upon the truth of 

these articles aod intends to grant thesa articles probative and evidentiary value in reaching a 

conclusion as to the validity of the assertions made in the complaints which resulted in the above 

captioned MURs. If that is the case, the due-process rights of the CHGO to a fair and unbiased 

administrative hearing by the FEC will have been abridged. 

I. 

Your letter of October 4,2011 asserts that the FEC is now "providing CHGO with an opportunity 

to respond to these additional considerations" [emphasis supplied). Because I am unaware of any new 

information, beyond the original DCCC complaint and CHGO's formal response, coming before the FEC 

in this matter, I must assume that the "additional considerations" referred to in your letter of October 4, 

2011, are, in fact, the newspaper articles attached to your e-mail of September 28,2011. For purposes 

of this letter, and without waiving anv procedural rights that CHGO has to further challenge the 

probative and evidentiary value of these newspaper articles. I will comment on these articles under the 

assumption that the PEC has granted or intends to grant these articles probative and evidentiary value in 

its search for the factual basis underlying the DCCC complaint. 

Lake Wilev Piibt. Octtiber 14.2010. "Si Millian In Outside MonevTargofsS.C.'g Snratt." This 

article contains one (1) and only one (1) reference to the CHGO. In paragraph ten of the article, the 

author asserts that "the Commission on Hope, Growth, and Opportunity was founded by Scott Reed, a 

prominent GOP operative who ran then-Se. Bob Dole's 1996 presidential campaign. In South Carolina, 

the group has spent $236,715 on anti-Spratt ads." These assertions are materially false. First, whoever 

Mr. Reed might be in the world of politics, he was not a "founder" of the CHGO and was never a 

spokesman for or an official of the CHGO. The "founders" of the CHGO are three Individuals listed on 

the application for 5Blc4 status filed with the Internal Revenue Service In the Spring of 2010. None of 

these three CHGO "founders" is an "operative" or an official of any political parry or candidate 

committee. These three "founders" came together to create the CHGO out ef a common sense that the 

efforts of Congress to enact measores that would have some positive or negative impact on the nation's 

economy needed to be explored and elucidated for the American people. Second, thr> issue advertising 

sponsored In South Carolina by the CHGO did not contain any language that could reasonably be seen as 

comprising an "anti-Spratt" message in an electoral sense, if our issue advertising was viewed by the 

author of the article through his own partisan lens as being "anti-Spratt" it was simply and exclusively a 

comment on the indisputable fact that Congressman Spratt's voting record in Congress on economic 

policy issues was completely the obverse of his public rhetoric before his constituents. The sole 

purpose of the issue advertisements placed in South Carolina and other states was to infor m the public 

about the actual, not the mythical, voting record ef members of Congress on economic poiicy issues. 

Media Matters Network: Politicel Cerrectiop. October 13.2010. "Astroturfine The Airwavs: 

Rieht-Wina Groups Have Now Aired 60.0004 JV Ads Since Aug.l" This article, by a self-described 

leftwing or "progressive" media commentator, contains a single reference to the CHGO, in paragraph 5, 

to wit: The other big-bucks story is more complicated. The innocent-sounding Commission on Hope, 
Growth and Prosperity [sic] - a S01c4 founded by GOP operative Scott Reed - has posted a startling 

2,153 ads since September. We don't know how much money they spent doing it because Reed's group 

has yet te report a cent of spending to the FEC (a fact that led the DCCC to file a complaint last week; 

good Inck with that). Still, v/o know who's feeding Reed's tongue -twisting money machine. From the 

hoKse's mouth: 'Whiinc's the dough oorning from? The big three stepping into the batter's box are tbe 

finencial services industry, the energy iodustry, and the health insuraooe industry,' Reed said." This 

article is replete with editorial comme.nt and contains multiple factual inaccuracies. First, as stated 

above, the CHGO was not "founded by Mr. Reed nor did Mr. Reed have any official role with or serve as 

a press spokesman for the CHGO. In fact, the quote attributed to Mr. Reed by Media Matters Action 

Network was (a) apparently made in the context of the much broader issue of interest group funding of 

Congressional campaigns in 2010 and was thus taken out of all context by Media Matters and (b) the 

Reed quote was not made with reference to the specific activities of the CHGO. Second, Media Matters 

lists the exact number (2153) of issue advertisements placed by the CHGO end goes on assert that they 

cannot compute tiie money spent to place soch issue advertising since the "greop has yet to report a 

cent of spending to the FEC." As the FEC kr«ows from the formal CHGO response of June 1,2011, all 

advertising placements made by the CHGO were fully and contemporaneously disclosed, by source and 

amount, to the public, via the individual station manager's log books as is required by the Federal 

Communications Commission. Thus if Media Matters had accessed these station manager log books to 

ascertain that the CHGO had placed 2153 issue advertisements, the very same station manager's log 

books would have identified the exact amount that the CHGO paid to place each and every one of those 

issue advertisements. Contrary to the editorial commentary of Media matters that "{wl]e don't know 

how much money they spent doing it, because Reed's group has yet to report a cent to the FEC," the 

total amounts spent by the CHGO to purchase the time for the 2153 Issoe advertisements was fully 

disclosed to the public, as required by the Federal Communication tlonimission. Third, Media Matters 

seems to be bf the belief that a 601c4 organizatldo must disclose its activitios to tbe FEC. Qnito 

obviously, this is incorrect. A tax-exempt, social welfare organization operating under secb'on 501c4 of 

the Internal Revenue Code, such as the CHGO, annually reports Its donations received and expenditures 

made to the IRS on the Form 990. Lastly, Media Matters employs an out-of-context quote from Scott 

Reed to imply that funding for CHGO activities was derived from "the financial services industry, the 

energy industry, and the health insurance industry." As applied to donations received by the CHGO this 

assertion or implication is completely falSe. As the FEC knows from the formal response of the CHGO of 

June 1,2011, the sole source of funding for the CHGO came from individual United States citizens. 

CHGO received no funding frem corporations, labor organizations, political action committees, national 

party committees, candidata conimittoes, trado associations, other tax-exorapt entities oi from foreign 

nationals. In fact, CHGO sought dnnetrons from interestod individuals through wordi-of-mouth, oiodle 

attention and paid advertising. Attached, as Exhibit "A," are typical CHGO solicitations, as ploced in the 

Wall Street Journal and Investors Business Daily in September, 2010. While " the finanelal services 

industry, the energy industry and the health insurance industry" may have funded some overtly political 

groups, such as American Crossroads and Crossroads GPS, they did not donate one penny to CHGO. 

New York Times. October 13.2010. "Big Spending bv Reoublican-Friendlv Groups." This article 

contains a reference to the CHGO, in paragraph two. In it, the author asserts that "[o]n Wednesday, 

four Republican-friendly groups - American Crossroads, and its related advocacy group, Crossroads GPS, 

the American Action Network, and the Commission on Hope, Growth and Opportunity-began a 'Hoese 

surge strategy,' pouring $50 million into several dozen House races." As to the CHGO, this assertion is 

false and cannot be substantiated. The author and her editors clearly imply that four groaps, including 

the CHGO coordinated and agreed upon a common strategy, to wit: the so-called "house surge strategy" 

cited in the article, to "pour $50 million into several dozen House races." As to the CHGO, this assertion 
is false and has no basis in fact. At no time, did anyone associated with the CHGO taik to, meet with, 

discuss, coordinate, or strategize on any topic with anyone from American Crossroads, Crossroads GPS, 

or the American Action Network. The efforts of CHGO in airing issue advertisements were those of 

CHGO aione and no other group, committee, association, or entity coordinated atiy activities with 

CHGO. in airing its issue advertisements, the CHGO did not taik to, meet with, ditcuss, coordinate, or 

strategize with anyone associated, formaiiy or informally, with any political party committee, candidate 

committee, or political action committee. Any inference to the contrary is false and cannot be 

substantiated. 

I Watch News: "Campaign Cash: The independent Fundraisine Gold Rush since Citizens United." 

This article does not refer to the CHGO and thus the CHGO is unable to comment upon any of the 

assertions contained in this article. 

WBAL-TV: Groue Airine Ad Doesn't Have To Disclose Donors." This news report contains a 

concluding paragraph in which the CHGO is identified as a 501c4 tax-exempt organization. That 

assertion is correct. As the FEC knows, donations received and expenditures made by a tax-exempt 

S01c4 are reported annually to the IRS on Form 990. That report to the IRS also includes the name and 

address of all donors to the CHGO. As to the issue advertisements placed by the CHGO on station 

WBAL-TV, ail the WBAL-TV reporter assigned to this story had to do was access the WBAL-TV station 

manager's daily log book to identify the sponsor of these issue advertisements and how much the airing 

of each such issue advertisement cost the CHGO. CHGO's airing of issue advertising on WBAL-TV was a 

matter of pubKc record and fully disclosed, on a daily basis, as is required by the Federal Communication 

Commission. 

I Watcb News: "Republican Allies PounB/lonev Into Ads Targeting 50-60;House Races." This 

article is simply and quite literally a re-write of the New York Times article of October 13,2010 and, as 

such, the comments of the CHGO regarding the New York Times article of October 13,2010, above, are 

equally applicable to this article and need not be reiterated. This article does contain, however, at least 

one material misstatement of fact. In paragraph eight, this article asserts that the CHGO "is well on its 

way to raising $25 million for its operations since it was created this summer by GOP strategist and 

lobbyist Scott Reed." As stated above, Scott Reed did hot "create" the CHGO and neither was he a 

founder ef or spokesperson for the CHGO. The CHGO was "created' in March, 2010 and not during the 

summer of that year. As the IRS Form 090 for the fiscatyear 2010 filed by the CHGO will show, our total 

donations were less than $4 million and tho anioant of donations quoted in this article, $25 million, is so 

far off the mark as to appear to have boen the figment of the author's imaginotion. The author does not 

attribute the $25 million figure to any source and it simply is an invented number, used by the author to 

misinform his readers. 

Daiiv Herald. Mav 23. 2011: "Secret Donors Muitiolv with Finances.Dwarfing Watergate." This 

article-was'written by four Bloomberg News Service reportersendwas disiributed by the Bloomberg 

Wire Service. The article contains a number of references to the activities of the CHGO. In one such 

reference, the authors assert that the CHGO and "four other Republican-leaning groups spent at least 

$4.05 million attacking candidates in the run-up to the November voting, according to campaign media 

estimates and TV stotion records obtained by Bloomberg News. None of that spending can be found 

seaiching the public database of the Federal Election Commission, and the FEC spokeswoman Mary 

Brandenberger said the Commission has no record of it." I am confused as to thh specific assertion. 

First, the report cites a specific figure {"$4,05 million") for the amount spending done by the named 

organizations and informs the reader that this specific figure was obtained from "Campaign Media 
estimates and TV station records obtained by Bioomberg News." in the next sentence the reporters 

assert that this specific number cannot be found in the database of the FEC, leaving the dear impiication 

that the spending was done in secret and hidden from the FEC. Assuming, arguendo, that this latter 

assertion is true, how then did tiie Campaign Media organization (which, as the FEC knows, is in the 

busioess of researching poiiticai advertising expenditures) and Bioomberg News come te ascertain tho 

$4.05 figure cited by the authors? Where else but from the publically disciosed records of the station 

managers who wiiiingly soid air time to the CH60 for its issue advertising. Either spending on such 

activities was disclosed to the public or it wasn't, though Bioomberg appears to feel that both assertions 

are simultaneously true. The article asserts that i am the CHGO's General Counsel and that i did not 

comment to them on this report. That is correct, i am the only media contact for the CHGO and I have 

made it a practice, with respect to the activities of the CHGO, not to speak with the press about my 

client's activities. 

ii. 

The CHGO is a tax-exempt social welfare organization whose sole and stated purpose is to 

educate the public on matters of economic policy formulation at all levels of government. The efforts of 

CHGO in educating the public are funded by individual United States citizens and are not coordinated 

with any third party. When prospective donors are approached by the CHGO, such donors are 

completely and thoroughly informed of the CHGO mission and are specifically informed that the CHGO 

will make ail decisions, in its sole discretion, as to how those donations are expended in advancing the 

entit/s stated mission. As the FEC knows from the formal response of the CHGO on June 1,2011, 

donors to the CHGO were and are given no direction or contnil over the purposes for which their 

donations are expended by the CHGO and all dooations are deposited into the CHGO one and only bank 

account and are net segregated as to aoy specific perpese. in fact, tho CHGO oxpends such donations 

for a wide variety of purposes ail of which advance the entity's stated mission of informing the public on 

pending or proposed ecnnomic initiatives by governmental decision makers. Attached, as Exhibit "B," 

are "screen-shots" of each page of the CHGO publically available website. The CHGO website has been 

in place since the summer of 2010 and is up-dated on a weekly basis. The web-pages of interest would 

be those under the headings "MEDIA, "NEWS," and "POLLING." Oh these three web-pages, the CHGO 

provides interested citizens with an updated link to a number of news articles, opinion pieces, and 

public opinion polling, ail of which address pending or proposed economic policy matter: now before 

Congress and/or the Administration. In addition, some donations are used by the CHGO to odvertise for 

additional funding in newspapers of wide circulation in tbe business community (sne Exhibit "A" 

referenced above). Also, some of the donations made to the CHGO are used to finance independent 

macro-economic analysis by noted US academics and scholars, in that context, please see Exhibit "C," a 

study entitled "An Agenda to Restore American Prosperity" whose author, Daniel J. Mitchell was 

formerly the chief economist at the U.S. Senate Committee on Finance and is now the senior economist 

at the CATO institute in Washington, D.C. Mr. Mitchell's macro-economic analysis was copyrighted by 

the CHGO in early 2011 and was widely distributed on Capitol Hill in January, 2011 by the CHGO to 

newly elected Members or Congress. The Mitchell study was also posted on the CHGO website. 

III. 

V. 

Your letter of October 4,2011 offers the CHGO an opportunity to commont, not only on tbe 

newspaper articles that were attaehed to your .earlier e-maii to me, but also upon the FECs 

"consideration" of potential statutory violations. As cited in your letter, those statutory provisions 

include sections 432,433,434 of the FECA as regards the definition of a federal 'political Committee." I 
understood from our telephone conversation that while such "consideration" was being made by the 

Office of the General Counsel, no formal recommendation has been made on that matter to the FEC by 

the Office of the General Counsel. I would specifically ask to be notified if rny understanding of the 

curront preoedural position of these MURs is not correct. As noted above,- \ believe that t have made a 

compelling case that the articles yeu attached to your e-mail of September 28,2011 were so replete 

with factual inaccuraelos, devoid of factual analysis, and given to editorial comment and presumption 

that they cannot given any probative or evidentiary weight by the FEC in a determination as whether 

there have been any statutory violations. Notwithstanding that fact, should the FEC give these articles 

any probative or evidentiary weight in determining that there is reason to believe that a statutory 

violation has occurred, the CHGO reserves each and every due-process right it has with respect any such 

determination. 

As to the Office of General Counsel's "consideration" of the issue of whether any statutory 

violations occurred as a result of any of CHGCs myriad public policy activities, it is the position of the 

CHGO that it was not tiien, is not now, and does not intend to be a "political comroittee" as that term is 

defined: in the FECA. At the direction of the CHGO, I have reviewed the FEC's organic authorities with 

respect to the definition of a federal "political Committee." My analysis is as follows: 

The FECA (at 2 USC 431(4)(A) and 431(9)(A) and the Regulations promulgated by the FEC (11CFR 

100.5 and following) define a "political committee" as any committee, club, association, or other group 

of persons which receives contributions aggregating in excess of $1000 or which makes expenditures 

aggregating In excess of $1000 during a calendar year. The terms "coritribution" and "expenditure" are 

defined terms as well. 11 CFR 109.52 defines a "centribution" as a gift, sabscription...or deposit of 

money ...made by any person for tho purpose of influancing any election for federal office. 11 CFR 

100.111 defines an "expenditure" end tracks the larigoage of 11 CFR 100.52 in that the term 

"expenditure" requires an individual or group to make an expenditure for the purpose of influencing any 

election for federal office. As you weli know, federal courts have interpreted the phrase "for the 

purpose of influencing any election for federal office" so as to require something more than the drawing 

of an inference from facts or circumstances. These courts have held that to influence a federal election 

a person or entity must either employ language that expressly advocates the election or defeat of an 

Identified federal candidate or employs language which in context can have no other reasonable 

moaning than to urge the election or defeat of an identified federal candidate. The former standard 

(the use of the so-cailcd magic words) is objective (where one uses the wordS 'votefer* or 'vote against' 

or 'supporf or 'defeaf in • public communicatierr), while the latter standard is sobjective (as in "it 

appears to us" that there is no other reasonable interpretatton of the bogiiage used, thus it must be the 

equivalent of the so-called magic words.) In attempting to narrow the latter, subjective, standard and 

to give it some context in a real world setting, the courts have held that express advocacy might occur if, 

when taken as a whole and with limited reference to external events, such a proximity to the election, 

the language under review could only be interpreted by a reasonable person as containing advocacy of 

the election or defeat of one or more clearly identified candidates because the electoral portion of the 

communication is unmistakable, unambiguous, and suggestive of only one meaning and reasonable 

minds could not differ as to whether it encourages actions to elect or defeat one or more clearly 

identified candidates or encourages some cither kind of action. 

The issue advocacy advertising airod by the CHGO did not contain any words or express 

advocacy. As a consequence, the FEC must apply the less rigorous end mere subjective standard to 

determine whether the language used by the CHGO in this specific context can have no other 

"reasonable meaning" other than to encourage the election or defeat of an identified federal candidate. 
In employing the subjective standard, the FEC must take the issue advertisements as "a whole" and, in 

doing so, may make no more than limited reference to external events, such as proximity to an election. 

In addition, in examining the language complained of and in applying the less rigorous standard to that 

language, the FEC most view the language as a ""reesoRable person" (an ordinary citizen rather>than a 

government negulatorjmight and view die "electoral portidn" of the comoianication as being 

"unmistakable, unambiguous, and suggestive of only one meaning " and further, that "reaaonabie minds 

cannot differ" as to whether the language under review does, in fact, encourage action to elect or 

defeat a clearly identified candidate, or weather, the language encourages "some other kind of action" 

As with all its efforts, the CHGO's issue advocacy advertising had one and only one purpose...to 

educate the public on specific macro-economic issues such as tax policy, income redistribution 

proposals, federal government spending, budget issues and deficit reduction proposals being offered, 

deboted and voted upon in Washington. To prepare the text of these issue advertisements, the CH60 

(a) conducted resoamh into snch macro-economic Issues then pending before the committees of 

jurisdictien in the House and Senate and votes cast on those proposals within those committees; (b) 

conducted research into those macro-economic proposals that had been reported to the House and 

Senate by the committees of jurisdiction and the resultant floor votes on those proposals; (3) conducted 

research into the percentage of votes cast by Members of Congress that were aligned with or opposed 

to the previously-announced positions on those same legislative matters by the respective Democratic 

and Republican leadership organizations in the House and Senate; and (d) reviewed the public 

statements made by Members of Congress characterizing the floor votes they had cast on these macroeconomic proposals. Our purpose in conducting this research was to (1) determine how often a ' 

Member of Congress' public statements regarding his/her position on macro-economic issues was, in 

reality, at odds with that Member's actual voting record, and (2) to bring such obvious hypocrisy to the 

attention of the public. The review by the CH60 of public polling data over the last several decades 

Indicates that the public, more than any other fault, scorns Members of Congress who say ene thing at 

home and vote Just the opposite in Washington. Thus, our purpose was to expose such hypocrisy 

where it can be demonstrated from the public record. 

All research conducted by the CHGO was fact-based, unbiased, and non-partisan. The CHGO 

conducted research into the voting records and public statements of members of Congress from both 

political parties. While many of the newspaper articles referred to above asserted that the CHGO was 

little more than a shill for the Republican Party, where the research conducted by the CHGO suggested 

that a Democratic Member of Congress should be praised for the consistency of his/hur voting record 

and public statements, the CFiGO reacted accordingly. For example, the CHGO aired Jost such a positive 

advocacy advertisement in Idaho, specifically praising the fiscally-sound voting record .of Congressmen 

Walt Minnick (D - ID.). In the end, where a Member of Congress asserted that he/she was an 

"Independent voice" and not beholden to his/her part/s leadership on macro-economic votes, the 

CHGO deemed it appropriate to inform the public that such was not the case. 

These issue advocacy advertisements did use photographs of Members of Congress these were 

stock, publicaily-availabie photographs and were used only as a visual means (accompanied by text) of 

further identifying a particular Mem'ber of Congress. These issue advocacy advertisements contained 

the standard "call to action" in that the concemod viewer was esked make such concern felt by a 

Member of Congress by catling an identified telephone number in Washington, directly. All of these 

issue advertisements contained a citatien to a publicaily-availabie reference that nupported the voting 

analysis highlighted by the CHGO's research. These Issue advertisements contained a coniplete 

disclaimer (a) identifying the CHGO as the sponsor of the advertising, (b) describing the CHGO as a social 
welfare organization operating under section 501c4 of the internal Revenue Code, and (c) speciflcaiiy 

indicating that the CHGO was not a "political committee." It may be of interest to the FEC that no one in 

the broadcast chain of these advertisements (from the broadcaster to the viewer) expressed any 

coocern tc die CHGO that these advoctisoraents were not factual, misieading, untfue, or unfair, except 

that is for the DCCC and CREW. No stitlon manager refused to einthese messages aod no citizen 

accessed the CHGO website'er called the CHGO contact telephone number to express any concern 

about these issue advertisements, it appears that they only citizens troubled by the intent or content of 

these advertisements were the DCCC and CREW. 

Conciuson 

. The CHGO's varied and well-documented public policy activities did not and do not meet the 

definitional test of a "political committee." All activities undertaken by the CHGO were undertaken 

openly and the CHGO made no sh'oct to hide its enisionce. None of the activities of the CHGO were 

directed or controlled by its dnnnrs. None of the activities of the CHGO was coordinated with any tbird 

party. The decisions made by the CHGO as to the content or placement of its issue advertising were 

based upon a non-partisan, fact-based examination of the public record, uncoordinated with any third 

party. As a tax-exempt 501c4 organization, is required to file, with the Internal Revenue Service, an 

annual Form 990 return. That annual return discloses to the IRS all donations received and expenditure 

made, and lists, by name and address, the source of all donations received. The CHGO paid for and 

produced an informational website, a macro-economic analysis that was made available to the public 

and to Members of Congress, newspaper advertisements seeking support from the public, and 

broadcast issue advertising. All of these initiatives were fact-based and non-pertisan. All these ' 

initiatives were fully disclaimed to the public as to thnir sponsersbip anil the tax status of the CHGO. 

The issue advertisements aired by the CHGO did not indurle any words of "express advocac/ and the 

text of each advertisement was carefully drafted to insure that the viewer had a clear call to action 

based upon the explicit voting record and public statements of a specified Member of Congress. The 

intent of the CHGO in airing these issue advertisements was limited to one objective: to show citizens 

that the voting records and public statements of Members of Congress must not be taken at face value 

and that when Members of Congress make false assertions about their voting records or the absence of 

blind party loyalty, such misinformation can be ascertained and calied-out by citizens doing their own 

research. 

Should you have any additional questions, I would be happy to respond. Lastly, I ask that the 

FEC dismiss these two MUR's and take no further action against the Commission on Hope, Growth and 

Opportunity. 

Sincerely, 

William B. Canfield 
ESCAL ^T!NG 

UNFMPI.OVMENT 

MASSIVE 

NATLON/\L i-iEbr 

! 

BUDGET DEFICITS 

TIRED OF THE 

U.S. ECONOMY 

FALLING BEHIND? 

The Commfsslon on Hope, Growth and 

Opportunity is a public weif^e organization 

created to advance the principle that 

sustained and expanding economic growth is 

central to America's eoanomic tliture and the 

well-being of all American families. 

FIND OUT MORE. 

HopeGrowth Opportunity.com 

TO LEARN MORE OR CONTRIBUTE. CONTACT: 

Wiiilam Canfjeid, Esq. 

General Counsel 

Commission on Hope. Growth and Opportunity 

1900 M Street. Suite 600 

Washington. DC 20036 

202-530-3332 

infb@hopegrowthopportunity.com 

Bald for by the Goniinlsslon on Hope, QtowOi and Opportunity, a tax exempt, non-prpm, social welto 

organlxatlon, reolaterad under Section 501c(4) olthe IRS. Not afaderal polltltti committee. 

0 

\ 

J 
UNFMPI OYMENT^ 

MASSIVE 

NATION /-vL c>Ebr 

I 

1 I BUDGET DEFICITS 

TIRED OF THE 

U.S. ECONOMY 

FALLING BEHIND? 

The Commission on Hope, Growth and 

Opportunity is a public weif^e organization 

created to advance the principle that sustained 

and expanding economic growth is central to 

America's economic future and the well-being 

of all American families. 

FIND OUT MORE. 

HopeGrowthOpportuiiity.com 

TO LEARN MORE OR CONTRIBUTE, CONTACT: 

William Canfleld, Esq. 

General Counsel 

Commission on Hope, Growth and Opportunity 

1900 M Street, Suite 600 

Waahlngtaa, DC 20036 

202-530-3332 

lnfo@hopegrowthopportunlty.com 

Paid tor by du GommiBsion on Hops, Gmwoi and Opporainiiy, a tax sxempt, non-pipflt, aodai waitare 

erggnlxatlon, raslBlend under Section S01e(4) of tlio IRS, Not a (ederal polltiUI oommltleB. 

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Daniel J. Mitchell 

OS Hope Growth Si • 
in a slightly different way, explaining that government spending distorts the allocation of resources by 

steering capital and labor to comparatively unproductive uses. 

This is a general observation, though, and it is important to understand that not all forms of government 

spending are created equal. Some types of spending, such as.outlays for a well-fiiuctioning and honest 

court system, often are associated vnth bener economic performance. Spending on courts and other "public goods" helps create an environment that facilitates private sector activity.' That is why a modest leyel of 

govenunent spending is associated with better economic performance, as illustrated by the Rahn Curve. 

Figure 2: The Rahn Curve 

GOP growth 

Optimum she el gtM GoytouHaiyspclefGDP 

Other types of spending, for things such as highways, education, and sewer systems, can be good or bad, 

depending on whether politicians are making wise choices or engaging in pork-barrel vote-buying behavior. Some people say these outlays for physical capital and human capital also are examples of "public 

goods," but there are many examples of these services being produced privately. For purposes of this analysis, however, all that matters it that these types of spending can have a positive "rate of return" and boost 

economic performance, but money spent in these areas also can be inefficiently squandered. 

Public goods and capital spending, however, are relatively small parts of the federal budget. Most government outlays are hir purposes that unambiguously harm economic performance by misallocating resources without any offsetting benefits. Much of the federal budget is used for entitlements and 

redistribution - which public finance economists refer to as transfer spending and consumption spending. 

These are the types of outlays that represent the downward-sloping section of the Rahn Curve. More tangibly, these are the programs that have crippled so many European economies and brought nations such as 

Greece and Portugal to the brink of bankruptcy. 

2. Excessive government spending requires destructive taxation 

Taxes ate the main way of financing government, so an onerous tax system is an inevitable consequence of 

a bloated public sector. Simply stated, if government is small, it is very difficult to have a bad tax system. 

But if the government is large, it is very difficult to have a good tax system. 

As recently as 100 years ago, governments consumed a very small share of economic output, largely because they didn't impose entitlement and redistribution programs. Instead, governments limited their 

spending to genuine public goods such as national defense, and a few other activities. As a result, many nations did not need income taxes at all, and the general tax burden was very modest. 
Ths Federal Govemihent Used to Be Very Small 

goiiic«OMB. 

The imposition of income taxes, however, enabled politicians to engage in vote-buying behavior. This 

opened the door for widespread and pervasive entitlement and redistribution programs. Personal and corporate income taxes soon were augmented by payroll taxes. But even these revenue sources generally were 

not sufficient and the political class in most nations also has imposed a form of national sales tax known as 

the value-added tax. 

3. Excessive government spending causes deficits and debt 

Notwithstanding the huge increase in the tax burden, politicians routinely spend more money than they 

collect from taxpayers. This means that they have to finance a portion of their spending by borrowing- . 

from private credit markets (some nations finance excessive spending by printing money, but that is 

mostly a problem in the developing world). 

Government borrowing is not always a bad thing. Few people would argue, for instance, that deficits were 

a bad thing during World War II. Defeating Nazi Germany and Imperii Japan required enormous expenditures, and it is unlikely that any tax system could have raised that amount of money. 

As a general rule, however, deficits and debt are a sign that government is spending too much. And if 

deficits and debt are growing faster than overall economic output, this creates an ominous situation of 

ever-rising interest payments. At some point, as we have seen in European welfare states such as Greece, 

this spiral of debt, deficits, and interest payments becomes unsustainable. 
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It is not easy to say when debt becomes too large. The United States had a Greek-sized national debt after 

World War II. but that was not a barrier to growdi, largely because government spending fell after the war 

and the economy started expanding faster than the debt. Another example is Japan, which currently has a 

national debt much larger than Greece (measured as a share of GDP), yet investors have considerable faith 

in Japan's ability to avoid default, sO there is not a fiscal crisis - at least not yet. 

4. Excessive government spending creates dependenqr • 

The previous items looked at macro-economic problems caused by big government. These next two sections will consider adverse micro-economic consequences of too much government spending. 

A major problem in today's society is the erosion of self-reliance. Some of that problem may be cultural, 

but government programs almost certainly exacerbate this problem by subsidizing dependency. It is 

human nature ihat some people will follow the path of least resistance, even if that ultimately means they 

get mired in an unsatisfactory life of handouts and sloth. 

This is not meant to imply that people always should he hlamed if they wind up in dire circumstances. But 

it does mean that some people will coast through life and take advantage of taxpayer largesse. The challenge is figuring out a system that will help the truly downtrodden without luring able-bodied people into 

dependency. We know the federal government has failed in this regard, particularly when compared to the 

effectiveness of private charity. 

5. Excessive government spending prevents efficient markets in certain sectors 

Another micro-economic problem linked to big government is the tendency of government programs and 

activities to cause severe inefficiencies in various sectors of the economy. 

One example is health care, where nearly one-half of spending is financed by government. This means that 

almost 50 percent of health care is consumed by people who have little concern about cost because taxpayers are footing the bill - which is known as the third-party payer problem. And even in the supposedly private portion of the health care system, government intervention further exacerbates the third-party 

problem, to the point where only 12 cents out of every health care dollar is paid for directly by consumers. 
Higher education is another example showing how government intervention leads to higher cost and inefficiency. Federal programs to help finance college expenses made itipossiblefor universities to boost tuition prices. This then leads to further pressure for more subsidies. Yet it is the subsidies that are to blame 

for the rising prices. Colleges, meanwhile, have used the extra revenue to .idd lots of bureaucracy, diminishing the productivity of higher education. 

6. Excessive federal spending violates the Constitution 

The last two items will not focus on the size of government, but instead will deal with the disadvantages of 

spending by a central government. The first issue is the degree to which the current size and scope of the 

federal government is inconsistent with the system created by America's Founding Fathers. 

The US. Constitution was crafted to limit the power of the federal government. Indeed, Article I, Section 

VIII, of the Constitution lists the allowable powers of the federal government and most of the spending by 

the fiederal government is inconsistent with those enumerated powers. 

For the past 70-plus years, however, the Supreme Court has ruled that there basically is no limit on the 

power of the federal government, so this may be a moot point It will be interesting to see, though, what 

happens when the Court rules on Obamacare; That legislation, which is based on the notion that the federal government has the power to coerce Americans into buying health insurance, may fmally reawaken in 

the Court a desire to obey the Founders and begin to restrain the power of Washington. 

7. .Excesaive federal spending stifles diversity and inirovatimi 

Last but not least, there is a practical, non-constitutional argument for limiting the power of the federal 

government When Washington imposes one-size-fits-all policies on the nation, it is very difficult to assess 

whether a policy is working. It took several decades, for, instance, before policy makers realized that a federal welfare entitlement was bad news for both taxpayers and poor people. 

When welfare reform finally happened in the mid-1990s, the positive results were largely the result of 

shifting authority and responsibility to the state level. Lawmakers in the various states could try different 

approaches, and it was then possible for uther states to copy those policies and engage in further experimentation to see what worked best. 

This principle could be applied to a wide array of public policies. The decentralization of the federal government's health program for poor people. Medicaid, will be discussed in a later section of this paper. But 

the concept of decentralization also could be applied to transportation programs, education, and labor policy. Of course, there are some areas where it does not make sense for there to be any government involvement, such as housing, energy, and agriculture. 

The mains conclusion from this section is that excessive federal spending is bad for growth and competitiveness. 

Moreover, the federal government tends U> generate particularly poor results, snggesting that America's Fomiding 

Fathers were wise to create a system predicated on the idea that Washington would be in charge of only a limited 

number of tasks, such as national defense. 
2. Tax increases encourage more spending 

There is a debate in the academic literature about whether higher taxes lead to higher spending or whether 

higher spending leads to higher taxes. Tliis "causality" debate is interesting, and ^chard Vedder of the 

American Enterprise Institute recently estimated that every $1 of new taxes leads to $1.17 of new spend-, 

ing.* 

But it doesn't matter which way the causality runs. Higher taxes are bad if they cause more spending, and 

higher taxes are bad if they are the result of more spending. In either case, the spending is only feasible if 

taxes are increased. This is because there is a Unnil to how much red ink politicians are willing to accept, 

and it doesn't matter whether the Umit on deficits and debt is because of poKtical concerns or economic 

concerns. 

In other words, Milton Friedman was right in the 1990s when he warned that "In the long run government 

will spend whatever the tax system will raise, plus as much more as it can get away with." If the political 

system is willing to tolerate long-run deficits of, say, 5 percentof GDP, then higher taxes simply result in 

politicians spending more money and long-run deficits of the same amount. 

3. Tax increases harm economic performance. 

If taxes are increased, that almost surely will have a negative impact on economic performance. In part, 

this is because higher taxes facihtatie higher spending and divert resources from the productive sector of 

the economy. But higher taxes also discourage growth by penalizing productive behavior. 

Not all taxes, however, are created equal. Some types of taxes (just as is the case with spending, as discussed in the previous section) do more damage than others. The amount of harm is liurgely dependent on 

what is being taxed and the sensitivity of the taxpayer. Higher tax rates on production and wealth creation, 

for instance, presumably do more damage - per dollar raised - than higher tax rates on consumption. 

Likewise, higher tax rates on saving and investment probably do more damage than higher tax rales on 

working. This is because saving and (especially) investment are more sensitive to after-tax rates of return. 

In non-economic language, this simply means that people are more likely to reduce their saving and investment in response to higher tax rates than they are to reduce the amount that they work. 
But there are always exceptions. Some taxpayers, particularly those with higher incomes or small business 

owners, have considerable discretion over how much income they earn - and report - to the government. 

So they are more likely to change their behavior in response to tax rate changes than workers who get wage 

and salary income and presumably have less control over their income. 

4. Tax increases foment sodal discord 

Politicians use taxation to create enmity among different groups. In large part, this is a tactic they use to 

grab more money, not because they actually want to divide the American people. 

The most obvious example is the use of class warfare tax policy. When politicians want more money, they 

almost always publicize proposals to "soak the rich." The only problem (from the perspective of politicians) is that there are not nearly enough rich people to finance big government. Moreover, the top 10 percent of taxpayers already pay the lion's share of the tax burden, and further increases in the tax burden on 

these people would probably be futile since they would simply choose to earn less money or put more of 

their assets into tax shelters and other loopholes. 

10 
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This is why the middle class is the.ultimate target. That's where the big money is to finance more spending. 

But in order to weaken the opposition of average Americans, the politicians pretend that they will impose 

even bigger tax increases on upper-income taxpayers. 

The introduction of the income tax is a good example. When it was first implemented in 1913, the top rate 

was only 7 percent and it applied to less than 1 percent of the population. Politicians at the time said it was 

a way to tax the rich. Over time, of course, it became a way to tax everybody. 

5. Tax increases almost never raise as much revenue as projected 

Even if politicians were not prone to spend additional revenue, tax increases would not be an effective lyay 

of reducing deficits because they rarely raise as much money as politicians expect. Simply stated, taxpayers 

change their behavior in ways that reduce the amount of tax they pay. 

This is the "Laffer Curve" issue, though it is imporUnt to understand that this does not mean that "tax cuts 

pay for themselves" or that "higher tax rates lose revenue," as some politicians claim. The Laffer Curve is 

simply the insight that changes in tax rates lead to changes in behavior that increase or decrease the tax 

base. This affects the amount of tax paid, though it is only in very rare circumstances the tax base is altered 

by enough to completely offset the effect of the change in the tax rate. 

11 
Laffer Curve 

tax Rate 

In more straightforward, non-economic language, this simply means that if politicians double a tax rate 

and think they will get twice as much money, they are sorely mistaken. People will respond by using loopholes or changing the way they earn income (these are "microeconomic effects"). Or people will respond 

by choosing to working less, saving less, and/or investing less (what are called "macroeconomic effects"), 

lite crowd in Washington will still get more money, but not nearly as much as they expect. 

6. Tax increases encourage more loopholes. 

Whenever tax rates increase, that means that there is a corresponding increase in the demand for deductions, credits, exemptions, shelters, preferences, and other loopholes. This is because tax breaks are more . 

valuable when tax rates are high, and a simple example from the 1980s shows this one-to-one relationship. 

When Ronald Reagan was inaugurated, the top tax rate was an astronomical 70 percent. This meant that 

"rich" taxpayers saved 70 cents for every $1 of deductions they found. By 1980, however, the top tax rate 

was down to 28 percent, which meant that a $1 tax loophole was only wortli 28 cents. 

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12 
An alternative way of looking at this issue is to consider a taxpayer's incentives. If you only get to keep 30 

cents of every $1 you earn, then loopholes that reduce your taxable income are very valuable. But if you get 

to 72 cents of every $I you earn, then you have much less reason to soarch for special tax breaks. 

Another argument is that tax loopholes require taxpayers use at least some portion of their income in ways 

that are not efficient. This distorts the allocation of resources in the economy and undermines economic 

performance. This may sound like economic jargon, but even small differences in growth rates can have 

enormous implications for living standards after 20-30 years. 

7. Tax increases undermine competitiveness 

Globalization has changed the economic landscape. Jobs and investment now how much greater ability to 

move across borders and one of the determining factors is tax rates. Simply stated, investors, producers, 

and entrepreneurs care about both earning mon^ and being able to keep the fruits of their labor. As econr 

omists would say, they care sdiout the post-tax rate of return on their efforts more than the pie-tax rate of 

return. 

Globalization has led to dramatic tax competition around the world. Top personal income tax rates in the 

industrialized world averaged more than 67 percent back in 1980. But because nations now compete with 

each other, the average top tax rate is about 25 percentage points lower. The same is true of corporate tax 

rates, which have dropped from about 48 percent in 1980 to less than 25 percent today. 

Unfortunately, America is beginning to fall behind in the race to attract jobs, investment, and entrepre- • 

neurship. The Reagan tax rate reductions put the United States in a relatively strong position, but policy - . 

has moved in the wrong direction over the past 20 years. Income tax rates are higher, the corporate tax rate 

is higher, and the tax code certainly is more complex and burdensome. 

Raising tax rates would exacerbate the challenges of competing in a global economy. Class warfare taxes on 

1>ig business" and the "rich" are particularly destructive since it is much easier for companies and upperincome taxpayers to reorganize tiieir operations and investments to escape punitive taxation. 

The argument against higher taxes is powerful. Giving more money to government, in the words of humorist P.J. 

O'Rourke, would be Hke giving whisk^ and car keys to teenage boys. Politicians would increase spending and 

America would lose jobs and investment. That's a bad outcnme. 

13 
lei (Max cuts) 

InaFraaie 

-1% Spending 

-2% Spending 

As the chart illustrates, if spending is simply capped at the current level with a hard freeze, the budget is balanced 

by 2016. If we limit spending growth to 1 percent each year, the budget is balanced in 2017. And if we allow 2 percent annual spending growth - letting the budget keep pace with inflation, the budget balances in 2020. 

Let's look at a real example. From 1994-1998, total spending grew by an average of 2.9 poreeot annually, and this, 

modest bit of Hscal restraint led to a budget surplus. The deficit is much bigger today, so it would take a bit longer 

to reach fiscal balance, but the deficit would fall to just 1.3 percent of GDP by 2020 if politicians today were as prudent as they were in the mid-1990s. 

So here's the bottom line. Balancing the budget is not difficult. Getting rid of red ink is easily achievable with modest levels of fiscal restraint. Obviously, we can - and should - do much more than simply limit the growth of federal spending. But remember, we're simply debunking the assertion that it is impossible to balance the budget • 

without tax increases. Indeed, we're showing that the budget can be balanced while making all the tax cuts permanent and also indexing the alternative minimum tax. 

But if ifs so simple, why is there so much rhetoric in Washington about it being impossible? How many times have 

you seen stories - or heard politieians say - that we would need trillions of dollars of spending cuts to balance the 

budget? Yet we just looked at CBO numbers showing that we could balance the budget relatively quickly by limiting spending growth. 

This disconnect is the result of something called the "current services" or "baseline" budget. The politicians in 

Washington put together budgets by first assuming that alt previously planned spending increases should occur. 

Sort of like leaving fiscal policy on auto-pilot. And if somehow spending does not grow as fast as they planned, 

they get to say that spending has been cut. 

Thai's sort of like assuming you're going to get a 10 percent pay hike and when your boss gives you a 4 percent pay 

hike, you start crying and complaining because your pay was cut by 6 percent. Sounds absurd, but that's how the 

budget works in the strange world of Washington. 

The politicians set up this dishonest system so they could have their cake and eat it too. They get to give more 

money to the special interest groups while simultaneously telling voters that they're cutting spending. They love 

this scam, but this is one of the reasons why America is in a fiscal ditch. 

15 
Restoring fiscal discipline will not be easy. Interest groups that are used to big budget increases will be upset if 

spending growth is limited tu 1 percent of 2 percent each year. It means entitlements will nieed to be reformed. It 

means - at least hopefully - that we get rid of poograms and deportments that are not iegitimale functions of the 

fiederal government. You better believe that these changes will cause a let of squealing by the lobbyists and other 

insiders. But all that complaining will be a sign that fiscal policy is filially hea^iig in the right direction. 

The key thing to understand is that there is no need for tax increases. Politicians might not balance the budget if 

we say no to all tax increases. But the experience in Europe shows that oppressive tax burdens are not a recipe for 

fiscal bahmce either. Milton Friedman was correct many years ago, when he warned that, "In the long run government will spend whatever the tax system will raise, plus as much more as it can get away vrith." That's why spending restraint is the only effective and certainly the only pro-growth - way of balancing the budget. 

Federalism 

Recognizing that excessive spending and punitive taxation harm growth and undermine competitiveness provides 

a good foundation. It's also good to understand that a modest degree of spending restraint is a very effective way of 

reducing the burden of the public sector and that this also is a simple way to balance the budget. 

But it is important to take the next step and figure out an approach to actually impose that spending restraint. Federalism can play a key role in this effort. In the context of fiscal policy, this is the notion that a big share of the 

spending in Washington is for things that are not proper functions of the federal government. Simply stated, the. 

budget problem would disappear if politicians adopted a rule that the fiederal government would only fund things 

that codd not be accomplished by state government, local government, or the private sector. 

Fiscal federalism suggests a dramatic downsizing of the federal govenunent. This list shows some of the cabinet 

departments that would be eliminated. Some involve things that should be handled by state and local govermnents, 

such as the Department of Education and Department of Transportation. Some involve things that belong in the 

private sector, such as the Department of Agriculture and Department of Housing and Urban Development And 

some involve things that should be dramatically transformed, as willhe discussed in subsequent sections about Social Security, Medicare, and Medicaid. 

Department of Agriculture 

Department of Commerce 

Department of Labor 

Department of Health and Human Services 

Department of Housing and Urban Development 

Department of Transportation 

Department of Energy 

Department of Education 

This is just a partial list, and doesn't include agencies, bureaus, commissions, and other federal entities. And it 

doesn't mention departments that may include legitimate functions of the federal government, but easily could be 

merged, sueh as the Departments of Defense and Veterans Affairs, or Homeland Security and Justice. 

The potential savings can be seen in a study by a Scandinavian economist for the Center for Freedom and Prosperity.' As part of a study on the growth-maximizing level of the public sector. Dr. Sven Larson estimated that the federal government would be almost 75 percent smaller than it is today if politicians had not expanded the scope of 

the federal government over the past 100-plus years. 

Ronald Reagan actually tried to take a modest step in this direction a couple of decades ago. During his 1976 campaign for the Republican presidential nomination, he made a sweeping proposal to shift many programs to the 

16 
state and local level. He failed in that race, but once he became president in 1981, he had some success in shrinldng 

many programs that were not appropriate functions of the federal government But only a tiny handful of programs actually were abolished, and federalism arguments did not play a big tale in fiscal policy debates. 

There was an effort to resuscitate federalism when Jim Miller took over as Director of the Office of Management 

and Budget. The 1987 budget began with a "Budget Message of the President" making a strong case for fiederaJism.* 

For all intents and purposes. President Reagan set up an algorithm to determine whether federal spending was appropriate in a particular area. He asked lawmakers to make fiscal decisions based on several principles, including 

"The government should not compete with the private sector" and "Many services can be provided better by state 

and local governments." 

Congress didn't embrace Reagan's proposals, to put it mildly. But the President's commitment to good fiscal policy 

paid dividends. Government spending in 1987 wound up being only $14 billion higher than it was in 1986. Total 

outlays increased by only 1.4 percent (by comparison, spending grew by an average of 8.3 percent each year during 

the Busli Administration). Not surprisingly, fiscal restraint translated into less red inlc. The budget deficit dropped 

fiom more than $220 billion to less than $150 billion, a reduction of close to one-third in the deficit (akin to reducing last year's deficit by about $500 billion). A federalism agenda could yield similarly dramatic results today. 

But one thing that clearly should be stated is that federalism is not the same as stated rights. Simply stated, states 

have power, but people have rights. Indeed, some people (thankfiilly in the past) used states' rights as an argument 

for letting state governments oppress citizens. Federalism, by contrast, simply means a decentralization of activities 

from Washington, but does not dilute in any way the protection of individual rights guaranteed by the Conslitu-. 

tion. 

17 
But this probably has very little to do with the geographic proximity of voters and lawmakers. Instead, it is 

a matter of incentives. The "tragedy of the commons" problem is rather modest at the local level because 

even the politicians generally understand the consequences of harming tlisir own comnmiiitles. State 

politicians have moie ability to engage in misguided behavior, but even they are constrained by the knowltedge that people and businesses can escape to states with better policy. 

4. Monopoly vs diversity argument - When the federal government takes responsibility for something, 

this necessarily means a one-size-fits-all approach. But is there any reason to think that the politicians in 

Washington have the right ideas about local transit systems? Does the crowd in Washington have smarter 

ideas about running local schools? Do Washington insiders really have the best ideas about local healthcare issues? The answer to all these questions surely is a resotmding no, and this doesn't even address the 

issue of whether special interest groups will figure out how to divert money to their own pockets. 

With f^erallsm, by contrast, states get to choose difierent approaches. So why might tliis mean better policy? The answer has nothing to do with naive assumptions about state and local politicians being smarter 

or more honest Instead, we can expect better policies because the various states will try different approaches and this diversity will reveal what works best. And state and local governments that aren't doing 

the right thing will have an incentive to copy better policy. But this assertion doesn't depend on the overly 

optimistic assumption that lawmakers want to do the right thing. Instead, one of the good things about 

federalism is that people and businesses can cross borders, so jurisdictions have to compete with each 

other to retain jobs and investment. 

5. Welfare reform - A powerfiil example of why federalism is a good idea comes fixun the'field of welfare 

policy. The politicians in Washington adopted an entitlement program supposedly designed to protect 

poor people - particularly mothers and children - from poverty. Many of the sponsors probably had good 

intentions, but this entitlement eventually morphed into an expensive system of handouts thai trapped 

people in poverty and subsidized unwed motherhood. 

35 

30 

20 

IS 

10 

Unin lliji War Oh Povioify Begin 

llliy isSsHiiy llll 

SouiCKCeniui 

Fixing the program from Washington seemed impossible. Lawmakers were reluctant to cut benefits because they didn't want to appear heartless, yet many of them had begun to realize the old approach was 

hurting the people it was designed to help. This problem was solved, however, when policy makers in the 

1990s took a radically new approach and devolved the program back to the states. States were given funds 

(called "block grants"), but otherwise had fairly wide latitude to experiment with policies to reduce dependency. 

19 
of fiscal reform. But restraining the size of the federal government will only be possible unless lawmakers figure 

out how to curtail the entitlement state. 

Eiititlements technically are government programs that are "permanently appropriated," but the more relevant definition is that these programs automatically give money to people meeting certain eligibility requirements (over 

age .65, income below a certain level, etc). An entitlement gives the beneficiary a "right" to money taken from taxpayers, or to services financed by taxpayers. 

Entitlements now consume nearly 60 percent of the federal budget, which is about a 100 percent increase over the 

past 50 years.' But the really shocking number is that total entitlement spending has jumped in that period from 

$185 bUlion to more than $2 trillion.' And those are inflation-adjusted numbers! 

Those numbers are sobering, but the estimates of future spending show the problem will get even worse. The big 

problem is spending for healthcare entitlements. Here is a chart from the Congressional Budget Office's analysis of 

the long-run budgetary outlook." Both the optimistic and pessimistic estimates show that federal spending on 

Medicare, Medicaid, Obamacare, and other programs will consume twice as much of the nation's economic output 

in just 25 years. 

Mandatory Federal Spending on 

Health Care tinder GBO's 

Long-Term Budget Seenarios 

(Percentage of gross domestic pro'duct) 

Altemative nscal 

Scenario^**' 

'tS ^ Extended-Baseline 

Scenario 

X X X 

2000 2005 2010 2015 2020 2025 2030 2035 

Source: Congressional Budget Offloe. 

There's not enough space to analyze all of the entitlement programs, so the next three sections will discuss Social 

Security, Medicare, and Medicaid. Each section will briefly explain how and why these programs are unsustainable 

and also discuss reforms that will be good for taxpayers, good for recipients, and good for the economy.. 

21 
There's another equally unpalatable choice. As a candidate, President Obama proposed to extend the payroll tax to 

income above: $ 107,000. This choice would be equally debilitating, pasdcularly since it wonld mean a very laig;e 

marginal tax rate increase on investors, entrepreneurs, and smaH business owners. 

Spending Restraint 

The second approach is spending restraint, and there are three main choices within this category. Lawmakers can 

adjust the cost-of-living-adjustments (COLAs), either as a one-time measure or a permanent adjustment. This 

saves moiiey right away, and could generate long-term savings if there is a permanent change in the COLA. 

Anaiher choice is to :tinker with the fommla diat determines tlie beneflt people get when they retire. T'neie is a 

proposal to replace "wage indexing" with "price indexing." This sounds complicated, but it basically means that the 

initial benefit people receive in the fiitine not be as high as promised nnder current law. Fumre seniors, 

though, would get benefits at least equal to current seniors. Tliis save money in the fiitur& 

The final choice is some sort of means-testing, which would deny benefits to retirees with income above a certain 

level. This tends to be popular, and would save money today and in the future, but lawmakers should be aware that 

it would impose an implicit tax increase on people who save and invest during their working years. After all, any 

earning they get from their nest egg will result in a lower Social Security benefit. 

Personal Retirement Accounts 

The final approach is fundamental reform, and we'll spend more time on this option since it is a bit more complicated, at least with regards to some of the details. Advocates of personal accounts often point to the Catch-22 of • 

Social Security. Raising taxes and cutting benefits would help the program's finances, but only by making workers 

pay more to get less. Sort of like selling someone a hamburger but charging them for a steak. By contrast, cutting, 

taxes and raising benefits would make Social Security a belter dealibr workers but it would drive the program into 

the red that much quicker. 

Perhaps this is why so many countries around the world, facing the same demographic trends and fiscal problems 

as America, have responded by reforming dieir old-age prugrums witli personal retirement accounts. This moderfiization alluws policy-makers to escape the Catch-22. Younger workers forego the miserly benefits promised by 

government-run retirement schemes in exchange for the chance to invest a portion of their taxes privately. This 

saves the guvet-nment money in the long run while allo^ving workers to amass greater retiiuinent wealth. 

There are six things you need to know about Social Security and the case Cor personal accounts. 

1. Social Security is broke. This is a simple matter nf inatheaieties and demograpfaios. Ifs good news that were living huiger, but it meant that pond schemes are doomed to fail. Future deficits wiH make our current mess seem 

trivial by comparison. 

• In 1950,16 workers supported each Social Security recipient. Now there are barely three workers per recipient, and by 2030 the ratio wiil fail to two per beneficiary. 

23 
• Investment returns over a 40 to 45-year working life will be far higher than the paltry - or even negative - returns now promised by Social Security. 

• Current retirees and older workers would stay with the current system. 

5. Personal accounts would boost economic performance. The slide shows some of the reasons we'll get faster 

growth, which is exactly what one would expect if you replace a tax-and-transfer entitlement scheihe with private savings and wealth accumulation. 

• Replacing a tax with personal savings will increase incentives for employment. 

• Personal retirement accounts mean more national savings. 

• Reforms reduces the long-run burden of government spending, freeing up resources for the productive sector of the economy. 

6. Privatization is sweeping the globe. The slide on the screen shows nations with personal accounts. Chile and 

Australia deserve special attention because they have full privatization and their systems have been in place for 

20-30 years. Not surprisingly, they're getting great results. 

• Fully or partially privatized systems exist in more than 30 nations, including Great Britain, Chile, Australia, 

Singapore, Mexico, Peru, Italy, Colombia, Sweden, Hong Kong, Poland, Switzerland, and the Cayman Islands. 

• Chile's system has been in place about 30 years. When first created and workers were given an option, more 

than 90 percent of workers choose the private savings alternative. 

• Australia has had personal retirement accounts for more than 20 years. 

If all this sounds too good to be true, there is a catch. Social Security is a pay-as-you-go system, which means that 

taxes from today's workers are used to pay benefits to today's retirees. So if we allow younger workers to shift their 

payroll taxes to personal accounts, what do we use to pay benefits? Since nobody wants to pull out the rug from 

older workers or current.retirees, we need to come up with money - a lot of money - to fulfill those promises. 

We're talking trillions of dollars. 

But this isn't an argument against personal accounts. The transition cost of personal accounts is considerably less 

than the transition cost of fixing Social Security. In. other words, we're in a deep hole, but it's easier to get out of the 

hole if we move to personal retirement accounts. 

Privatization, however, is about more than numbers. Personal retirement accounts mean individual responsibility. 

They mean passing wealth from one generation to the next Individual accounts mean more economic vitality. 

They mean saving our children and grandchildren from a future of debt And they mean we can be free of depending on the crowd in Washington for onr retirement. 

ModerniEC Medicare with Vouchers 

Medicare is a federal government entitlement pcogram thai funds healthcare for the elderly. It has three large, separate parts for hospitals, physicians, and prescription drags. The annual budget for the program is now approaching 

$600 billion, and it is expected to continue rapidly growing to more than $900 billion by 2020." This represents a 

staggering increase for a program that didn't even begin imposing costs on taxpayers until 1967." 

Trailing only national defense and Social Security, Medicare is the third biggest program in the federal budget. The 

fiscal burden of the program is greater than the combined cost of federal spending on education, environment, 

transportation, veterans, commerce, employment, social services, and energy." This chart from the DomeniciRivlin Debt Reduction Task Force illustrates the problem." 

25 
Unfortunately, this is not a good description of the American health care system, both before and after Obamacare. 

Thanks to goveinmeitt policies, an overwhielming share of health care expenses in America are paid for by someone other than the consumer - what is known as the "third-pnty payer" problem. And when consmners are spending someone else's money, market forces are not very effective. 

It's worth noting that in the few areas of the American health care system where a free market forces still operate -

things such as cosmetic surgery and laser eye surgery, we find much better results. 

All of this means we have two Medicare problems. The first problem is the program's fiscal burden, and the second 

problem is that market forces are being short-circuited by the government. Fortunately, there is a single solution 

that addresses botJi problems. The go^ should be to replace tlie federal entitlement with a voncher that can be 

used to purchase insurance. Sometimes caHed a prieitiium-sapport plan, this approach could save money since the 

vnnchor could be set at an affordable level. And it would help lesfore a free market in healtii care by putting consumers back in charge of their healthcare spending and healthcare choices. 

The idea already is gaining attention among reformers and policy makers. Con^ssman Paul Ryan (R-WI), Chairman of the House Budget Committee, has produced a "Roadmap" plan including this reform. And this proposal 

also is part of a broader entitlement reform plan he put together with Alice Rivlin, who served as Director of the 

Office of Management and Budget during the Clinton Administration. Here's a brief description of their proposal 

from the Congrusional Budget Office. 

People who turn 65 in 2021 or later year s would not enroll in the current Medicare program but instead, 

would receive a .voucher with whidi to purchase private health insurance... .the amount of the voucher -. would be calculated by taking the average federal cost per Medicare enrollee in 2012 (net of enrollee prer 

miums) and growing that amonnt at the annual rate of growth in GDP per capita plus oirc percentage • 

point.'® 

There's a bit of jargon in that passage, but the key takeaway is that overall spending would be constrained by the 

GDP formula. John Goodman of the National Center for Policy Analysis has a more straightforward description 

that adds a few more details. 

Medicare wonld, for the first time, be transformed into rational insurance. Beghmingin 2013, aU enrollees 

would be protected by a $6,000 cap on out-of-pocket ejqrenses; in return they would pay for more smnll 

expenses on their own. After a decade, people newly eligible for Medicare would receive a voucher to purchase private insurance instead. The value of the voucher would grow at the rate of growth of GDP plus 1% 

(note: for the past four decades, health care spending per capita nationwide has been growing at about 

GDP growth plus 2%). " 

In the absence of reform. Medicare spending will drive America into a fiscal crisis. And even if some ma^cal 

source of tax revenue rained down firom Heaven, Medicare still would need to be reformed because of the detrimental impact it has on the functioning of healthcare markets. A premiUm-sapport plan, such as vouchers, would 

be good for taxpayers, good for seniors, and good for the healthcare system. 

Reap the Benefits of Federalism by Block Granting Medicaid 

Medicaid Is a federal government entitlement program that funds healthcare for the poor, though perhaps it would 

be more accurate to say that it funds healthcare for the poor as well as a substantial share of nursing home costs for 

the elderly. 

27 
Annual spending, which is split between Washington and the states, is now more than $450 billion, as seen in the 

chart from the Domenici-Rivlin Task Force report. This is a shocking figure considering Medicaid at first cost less 

than $1 biUion and snpposedly was never going to be a significant Hem in the budget." 

Grewih In Fcdml and Slaw Sprndlaa on MMllcald, 1966-2009 

, 

j 

PodoiBBl Matching 

Payments yr 

Sfate. 

-SpeH^flng 

fO -

But $450 billion is just the tip of the iceberg." The Department of Health and Human Services projects diat the annual budget for Medicaid will consume about $900 billion in less than 10 years, with $542 billion of that amount, 

coming out of the federal budget'" And the long-run numbers are even more frightening. 

But this is just the direct budgeury cost. There are several indirect costs that should be added to list, each of which . 

has important consequences. They are addressed in considerable detail in a comprehensive study by the Cato Institute's Michael Cannon, but here is an abbreviated description of some of those costs." 

Trapping people in poverty - Medicaid subsidies are very significant, but they are only available to people with income or assets below a certahi ievel. This creates a significant impediment, equivalent to a steep maipnal tax rate, 

for people who want, to climb the economic ladder. Taidng a job oi' earning more income may not be attractive, 

though, if they lose government-provided healthcare worth ^ousands of dollars. 

Reducing saving - The Medicaid program discouragies some people from accumulating assets because tbeie are 

some eligibility requirements based on people's wealth. This makes sense from a fiscal perspective because taxpayers shouldn't be paying for services when a recipient has a nest egg. But it does economic damage because many 

people deliberately reduce their savings or avoid building wealth in order to become eligible for the government 

largesse. 

Crowding out private charity and non-profit care - There have always been poor people. Indeed, a huge share of 

the population 50 years ago or 100 years ago lived below what would be considered the poverty line today. Yet 

many of them received health care through charities and non-profit ei-ganizations cieated specinoolly for those 

purposes. These genuinely noble efforts, though, have largely been pushed out of existence because of government 

intervention. 

Third-party payer - The biggest indirect cost is the impact of Medicaid on the functioning of the health care system. As discussed in the Medicare section, government intervention in the healthcare system has crippled the normal functioning of the price system. Third-party payer is pervasive, with consumers directly paying only 12 cents 

of every dollar of healthcare they consume. Much of the problem is driven by programs such as Medicaid, which 

cripple incentives for intelligent healthcare choices for entire segments of the population 

28 
I 

So what should be done? Is there a way to fix a program that is a growing burden for taxpayers and also has other 

negative effects? The answer is to copy the success of welfare reform and taun the Medicaid entitlement into a 

block grant As Michael Cannon succinctly explains: 

Congress should: (I) cap federal Medicaid spending, (2) block grant federal funds to the states, and (3) 

allow states full flexibility to define eligibility and benefits under their Medicaid programs. States should 

use that flexibility to target Medicaid assistance to the truly needy, reduce dependence, reduce crowd-out 

of private effort, and promdte competitive private markets for medical care and insurance.^' 

Medicaid reform would completely reverse the bizarre incentives that make the program, as currently structured, 

so dysfunctional. Under current law. Medicaid is a matching program so politicians at both the federal and state 

level have an incentive to expand benefits and beneficiaries sirrae they can dole out a $1 of benefits and only be responsible for a portion of the cost. A block grant system, by contrast, give state politicians the aulhority and responsibility of decicUng how best to allocate the health care dollars provided by the federal government. States 

could choose, of course, to spend even more. 

Consumers Pay Small Fraction of Healthcare Costs 

-nitrd-Paity 

Psfymanls 

88% 

Out«r.Pocket 

Paymanta 

12% 

Ssuice: CMMS 

The good news is that some lawmakers and some responsible left-leaning policy experts are embracing this kind of 

approach. Congressman Paul Ryan (R-WI), the Chairman of the House Budget Committee, has teamed up with 

Alice Rivlin, who served as Director of the Office of Management and Budget for BiU Clinton, to offer a block 

grant proposal. Here is a very simplified description of the plan's basic approach. 

Starting in 2013, the federal share of all Medicaid payments would be converted into a block grant to be allocated among the states. The total block grant would increase annually along with currently projected 

growth in the Medicaid popnlation and with growth in GDP per capita plus one percentage point." 

The Ryan-Rivlin formula is probably overly generous. Ideally, the block grant should be capped and then slowly 

phased out so that the program becomes solely a state responsibility. But compared to current law, which ahows 

spending to grow much faster, the Ryan-Rivlin proposal would generate significant budgetary savings. Equally important, it would begin the important process of restoring market forces to the healthcare system. 

29 
Cmadb.Restrialns Growth of. Spending/md... 

m 

.400.. 

m 

• 11 I I 

. SourM€c!Dmiw^Tifl»iliai^ 

•m 

Starting with Canada, our neighbors to the north were in deep fiscal trouble in the 1980s and early 1990s. But then, 

beginning about IS years ago; politicians decided to do the right thing and put the brakes on spending. For several 

years, government was on a diet. Between 1992 and 1997, Canada's budget rose from 374 billion to 391 billion, an 

average annual increase of less than 1 percent, and the fiscal bahince went from a deficit of 9.1 percent of GDP to a 

surplus of 0.2 percent of GDP. 

•V.*.' 

l': 

U: * 

I 

•2 

goiacff Ec 

BadsatDancH 

lasz ISSa 1994 1995 199E 1997 

B. 

B.I.-

weUnft 

This is not to say Canada, or any of the other nations we're going to discuss, is a role model. Government is still far 

too large. But remember, all we're showing is that nations can move in the right direction if they simply control 

spending so that it grows slower than tax revenue. 

Now let's shift to Ireland. The Emerald Isle was in a tailspin in the 1980s. The burden of government spending had 

skyrocketed to more than 50 percent of GDP and the nation's debt was enormous. Irish policy makers realized they 

needed to restrain the burden of government spending. For a period of time, there was genuine fiscal restraint. The 

Irish budget was 14.7 billion euro in 1985 and was only 14.7 billion euro in 1989, a four-year freeze resulting in a 

reduction in the budget deficit from 12.1 percent of GDP to 2.7 percent of GDP. 

31 
I^lwd JRes^ns Growth of Spending dnd... 

- 2D. 

lllll m.' ^—T—•••?•" . 

gv ;.• • .• rjWb , iwr--. • . •• : i«- m . 

Irish politicians also implemented other pro-growth policies such as the 12.5 percent corporate tax rate that helped 

boost GDP, which, combined with spending restraint, lowered the burden of government spending dramatically. 

Sadly, Ireland didn't handle prosperity well. A housing bubble and big spending increases have erased most of the 

gains and I'm rather pessimistic about the future. 

• 5^' 

\ '• s' 

h 

PQ 

w 

W' 

fib 

20 

. 19K 1SK 

gfliiic^ EcBiwmhltiiiWIIswftUBa 

W. 1988 

Let's cheer up with a better example. Slovakia, like many other nations that emerged from the collapse of the Soviet 

empire, was saddled with a bloated public sector. Once again, let's put the data up on the screen. As with our other 

examples, you can see a period of meaningful spending restraint starting about a decade ago. From 2000-2003, the 

Slovakian budget grew from 11.5 billion euro to 11.8 billion euro, an average increase of 1.3 percent, and the deficit 

feel from 8.7 percent of GDP to 2.0 percent of GDP. 

32 
.SIcfyadda Resins Growth Of Sptihdirig and.. 

Fiscal discipline has paid dividends for Slovakia, particularly since the nation's leaders also implemented progrowth policies such as the flat tax and personal retirement accounts that helped increase economic growth. 

• • '.I • 

r..,Bunien;OT uo 

2D0D-. 

g WK feMioinai rtiUgiiiw'UiiS 

an. 2002 an 

•I 

Last but not least, let's look at New Zealand. The burden of the public sector by the 1980s had climbed to more 

than one-half of economic output. Like all our examples, the Kiwis staged a turnaround by engaging in a period of 

fiscal discipline. Between 1990 and 1995, the New Zealand Budget actually dropped from 39.3 billion to 38.8 billion, and New Zealand went from a deficit of 4.5 percent of GOP to a surplus of 2.8 percent of GDP. 

33 
.New ZsalMd ResMns Growfli of Spehd|nR and... 

so 

•• •is 

ill IIII 

v;.} • ' iwgMmK:E;!anwrtj>W«Uig«nc.».Miia- • . ...• • • • . 

New Zealand lawmakers used common sense to restore fiscal sanity. They damped down on spending and let revenues close the gap. There were other pro-growth policies that booked economic performance, so the key variable 

- government spending as a share of GDP - showed big improvement. 

. I 

.IKj. 

i 

& 

.•4 

m iswV '®< isas 

BudgalS 

Hrnnrmliil lUialKaamaB gw»iy^ccwiQnBw iHiwiiHBiyB.unii 

This pattern should not be a surprise. Restraining government spending is the definition of good fiscal policy. And 

when the private sector is allowed to grow faster than the public sector, good things happen. No wonder the International Monetary Fun has found that redudng the burden of government spending is the key to redudng red 

ink." The European Central Bank also found that less spending - not more taxes - was the key to defidt reduction." 

34 
Conclusion 

America is at a crossroads. We can solve the fiscal policy mess in our respective countries, but only if we focus on 

the real issue of a public sector, that is too big and a budget that is too large. 

This paper looks at fiscal policy and provides an overview of the key economic issues, lays out a general strategy 

for restraint and federalism, and then provides specific recommendations for the big three entitlement programs. 

It's worked in other countries, and it would work in America. 

1 

35 
' Public goods are things such as court systems and national defense, without which a market economy couldn't 

function. It is generally assume that private markets cannot produce public goods because of the free rider pniblem (why "buy" national defense of public safety if your neighbors are picking up the tab). 

»httD:/yonline.wsi.com/artide/SB10Q01424052748704648604575620502560925156.html 

»http://www.freedomandprosperitv.org/PnDers/rahncurve/mhncurve.shtml ^ 

^http;//fraseii:.stlppisfcd,birB/pHblii<;ations/HsbH4BCt/i55H<?/56QQ/,doYff>to^f'/93?4^/BUS I?87.p4f 

»http;//vrvny.tffe^QmandptQspCTity.9rB/P»P"S/SVrass/s>ftSSiahttpl 

'http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNTPC.pdf 

^http://www.oecd.org/dataoecd/5/5I/2483816.xls 

'http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/asset5/hist08z3.xls 

'http://www.whitefaouse.gov/sites/default/files/omb/budget/fy2011/assets/hist08z2.xls 

"> http.//www.cbo.gov/ftpdocs/J 15xx/docllS79/06-30-LTBQ.pdf 

" http.//www.cbo.gov/ftpdocs/U7xx/docll7a5/08-ia-Update.pdf 

http;//ww,whitghQm 

" http://www.w^ 

"hnp?f/lypartlsgppplicy.Qtg/sites/default/files/FfflAI,%20PKTP%2QRfiPQRT%29U,l$4Q.pdf 

"http://www.downsizinggovemment.org/hhs/medicare-refbrms 

" http://www.cbo.pov/ftpdocs/l 19xx/docl 1966/11-17-Rivlin-Ryan Preliminary Analysis.pdf 

"http;//hi;rithblQg,Tiq>a,PtB/th9-!ryanriivlii)-plai)/ 

"http://ww.whitchQiisc.BOY/siites/dtfaHllT/Pic5/oinb^Hd6Ct/fr;?Qm/asspts/hist08z5.gls 

"http://www.downsizinggovemment.org/hhs/medicaid-reforms 

» http://www.cbo.gOv/ftpdocs/l 17xx/docl 1705/08-18-Update.pdf 

»http;/,VYyw.tatQ.Qirg/pubs/pas/paSft8,pdf 

"http://%vww.cato.org/pubs/pas/pa548.pdf 

" http://www.cho.gQv/ftpdocs/119xx/docll966/lJ-17-Rivlin.Ryan Preliminary Analysis.pdf 

M http://www.imf.org/extemal/puhi8/ft/wp/2010/wpl0232.pdf 

"http;//ww.pcb.int/ppb/pdf/?cp\yp.''/c(;bYYpli24I.pdf 

36 
RECEIVED 

FEPFRAL ELECTiQH 

COMMISSION 

o o 

nuo. IC BEFORE THE 

2010 NOV 30 Pfi 2- ^6 PEDERAL ELECTION COMMISSION 

ORiGIWAl 

OFFICE OF GENERAL WASHINGTON, D.C. 20463 

CO'JHSEL 

In The Matter Of ; ? i ' 

< m I 

Democratic Congressional Campaign Committee) p o ^ 

A Federal National Party Committee) o ••'I 5 ^ ini 

V.) Matter Under Review# 6391 'V O 

rsj 

Commission on Hope, Growth & Opportunity) 

A Tax-Exempt, S01c(4) Social Welfare Organization) 

MOTION TO DISMISS 

Now comes the Commission on Hope, Growth & Opportunity (the "CHGO"), a social welfare 

organization conducting its public education activities pursuant to section 501c{4) of the Internal 

Revenue Code of 1986, amended, by and through its General Counsel, and presents to the Federal 

Election Commission (the "Commission") this Motion to Dismiss the above captioned Matter Under 

Review for the reasons set forth below. 

The Law: The Federal Election Campaign Act of 1971, amended, at 2 United States Code 3 

437g(a), styled as "Enforcement - Administrative and Judicial Practice and Procedure", provides, in 

pertinent part, that "(Wjithin 5 days after receipt of a complaint, the Commission shall notify, in writing, 

any person alleged in the complaint to have committed such a violation." 

Similarly, the Regulations promulgated by the Commission at 11 C.F.R. P 111.5(a), styled as 

"Initial Complaint Processing; Notification", provides, at pertinent part, that "(U]pon receipt of a 

complaint, the General Counsel shall review the complaint for substantial compliance with the technical 

requirements of 11 C.F.R. 111.4, and, if it compiles with those requirements shall within five (S) days 

after receipt notify each respondent that the complaint has been filed, advise them of Commission 

compliance procedures, and enclose a copy of the complaint." 

The Regulations further provide, at 11 C.F.R. P 111.6(b), that the Commission is precluded from 

taking any action on the complaint and against a respondent until such time as the respondent has had 

an opportunity to demonstrate that no action should be taken, except that the respondent may move 

an action to dismiss the complaint for procedural reasons, before providing a formal response to the 

complaint. 
o o 

The Facts: On or about October 4,2010, the complainant, through its Executive Director, Jon 

Vogel, caused the complaint at issue in this Motion to be executed and notarized. On October 5,2010, 

the complaint at issue in this Motion was the subject of an extensive news report on the front page of 

the dally newspaper, the Politico. This article was written by John Bresnahan and Alex Vogel. On 

October 7,2010, the complaint at issue in this Motion was received at the Commission and timestamped at 10:52AM. On or about October 15,2010, the complaint at issue in this Motion was mailed 

to the respondent. Between the date of the receipt of the complaint by the Commission, on October 7, 

2010, and the date that the complaint was delivered to the U.S. Postal Service for delivery to the 

respondent, on or about October 15,2010, a full eight (8) calendar days or six (6) business days had 

elapsed. This time lapse was in excess of the mandated notification provision found at 11 C.F.R. p 

111.5lal and thus the Commission's notification dated October 15.2010 was, on Its face, defective. 

In fact, the Commission's notification dated October 15,2010 was NEVER received by the 

respondent. A review of the address to which the notification dated October 15,2010 was posted (see 

Exhibit "A") was incorrect, such error being a direct consequence of a mistake made by the office of the 

General Counsel. On or about November 16,2010, Ms. Kim Collins of the General Counsel's office called 

Counsel for the respondent to inquire when the Commission could expect respondent's reply to the 

complaint. At that point, Counsel informed Ms. Collins that the Commission's notification had never 

been received. Ms. Collins expressed surprise and indicated that the Commission would repost the 

notification dated October 15,2010. Thereafter, Counsel called Ms. Collins, on November 29,2010, to 

inform her that the Commission's notification dated October 15,2010 had finally been received at 

Counsel's and respondent's office of record. Ms. Collins Indicated her belief that the delay had been 

caused by the Commission's staff, in that they had empioyed an incorrect address for the notification of 

October 15,2010. 

The correct address for CHGO is a matter of public record. In fact, the complainant used the 

proper address in the heading of the complaint. In addition, the complainant also included, in the 

complaint (see Exhibit "B"), a link to the website currently maintained by the respondent. Had the 

Commission staff carefuliy reviewed the address for CHGO used by the complainant or accessed the 

website of the respondent (see Exhibit "C), the Commission could have determined the correct address 

to use in forwarding the notification dated October 15,2010. For whatever reasons, this fundamentai 

procedural step was not taken and the Commission's notification dated October 15,2010. As set forth 

above, the Commission's "due process" notification of October 15,2010 was not remailed by the 

Commission until November 16,2010 and was not received by the respondent until November 29,2010 

(see Exhibit "D"). Thus respondent was unable to even review the allegations contained in the 

complaint for a full six (6) weeks after it had been first received by the Commission. 

Discussion: It is inarguabie that the statutory and regulatory requirements for timely 

notification to a respondent of the existence of a complaint received by the Commission (referenced 

above and incorporated herein), is based both on the notion of fundamental fairness and on 

Constitutionally-protected "due process" considerations. Quite clearly, the framers of these two 

provisions were clear in their belief that any respondent to an allegation of a statutory violation must be 

(a) made aware of such an allegation in a very timely manner and (b) provided with the opportunity to 

provide a response to any such ailegation in an equally timely manner. Unfortunately, in this instance, 

CHGO was denied the required timely notice and opportunity to respond, to the material detriment of 

its reputation. 
Quite clearly, the complainant "leaked" the existence of this complaint to Politico prior to its 

filing with the Commission. The authors of the Politico article, which appeared on the morning of 

October 5, 2010, quite obviously were fully Informed of the allegation contained In the complaint. Upon 

information and belief, the co-author of the Politico article, Alex Vogel, and the Executive Director of the 

complainant, Jon Vogel, are related by blood. Upon Information and belief, Jon Vogel was the source of 

the advanced notification of the allegations contained In the complaint that became the Politico report 

of October 5,2010. 

The reputation of CHGO was materially Impacted by the leak of the complaint to Politico and by 

the Commission's failure to follow its own procedural rules regarding the timely notification to a 

respondent of a complaint received by the Office of General Counsel. Following the Politico article of 

October 5,2010, Counsel to the respondent was the recipient of Innumerable telephone calls from 

national and local media outlets regarding the complaint and the response of CHGO to the allegations. 

.Every single news story about CHGO following the Politico article of October 5,2010 referred to the 

complaint and asserted that because of the complaint, CHGO was under investigation by an agency of 

the federal government. Having never received the complaint from the Commission, Counsel to the 

respondent was unable to provide any response to such media Inquires. As a direct consequence, the 

ability to CHGO to carry out Its tax-exempt public education mission was materially and adversely 

Impacted. Arguendo, it appears quite likely that this was the exact impact sought by the complainant in 

leaking the existence of the complaint to Politico on or about October 4,2010. That the complainant 

cared little for the due process rights of the respondent Is evidenced by the feet that the complainant 

executed the complaint and leaked It to Politico on October 4,2010 but felled to actually file the 

complaint with the Commission until October 7,2010. 

Prayer for Relief: CHGO asks the Commission to grant this Motion to Dismiss the complaint for 

the reason that in falling to follow the statutory and regulatory-mandated timely notice requirements 

(referenced above and Incorporated herein), CHGO was denied its Constitutionally-protected "due 

process" rights and was denied procedural fundamental fairness by the Commission. 

In presenting this Motion to Dismiss, CHGO maintains all of the administrative and/or judicial 

procedural rights available to It under federal law and does not waive any such administrative and 

judicial rights. 

B,: 

William B. Canfleld III 

Counsel to the Commission on Hope, Growth & Opportunity 

Suite 600,1900 M Street, N.W. 

Washington, D.C. 20036 

Dated at Washington, D.C. on November 30,2010 
o Q/m».r "A" 

FEDERAL ELECTION COMMISSION 

WASHINGTON, D C 20463 

1 5 2010 

William B. Canfield 

Commission on Hope Growth & Opportunity 

1900 M Street, NW Suite 600 

Washington, DC 20003 

Re; MUR6391 

Dear Mr. Canfield: 

The Federal Election Commission received a complaint that indicates the 

Commission on Hope Growth & Opportunity may have violated the Federal Election 

Campaign Act of 1971, as amended ("the Act"). A copy of the complaint is enclosed. 

We have numbered this matter MUR 6391. Please refer to this number in ail future 

correspondence. 

Under the Act you have the opportunity to demonstrate in writing that no action 

should be taken against the Conunission on Hope Growth & Opportunity in this matter. 

Please submit any factual or legal materials that you believe are relevant to the 

Commission's analysis of this matter. Where appropriate, statements should be submitted 

under oath. Your response, which should be addressed to the General Counsel's Office, 

miist be submitted within IS days of receipt of this letter. If no response is received 

within IS days, the Commission may take further action based on the available 

information. 

This matter will remain confidential in accordance with 2 U.S.C. § 437g(a)(4)(B) 

and § 437g(a)(12XA) unless you notify the Commission in writing that you wish &e 

matter to be miade public. If you intend to be represented by counsel in this matter, 

please advise the Conunission by completing the enclosed form stating the name, address 

and telephone number of such counsel, and authorizing such counsel to receive any 

notifications and other communications fiom the Commission. Please note that you have 

a legal obligation to preserve all documents, records and materials relating to the subject 

matter of the complaint until such time as you are notified that the Commission has 

closed its file in this matter. See 18 U.S.C. § 1519. 
DCCC 

DemacaticCongiessianal 

Can^ign Committee 

HONORABLE CHRIS VAN HOLLEN 

CHAIRMAN 

RECEIVED 

FEDERAL ELECTION 

COMMiSGiON 

2010OCT-7 AM 10: 52 

OFFICE OF GENERAL 

COUNSEL 

BEFORE THE 

FEDERAL ELECTION COMMISSION 

Jon Vogel, 

Executive Director 

Democratic Congressional Campaign Committee 

430 South Capitol St., SB 

Washington, DC 20003, 

Complainant, 

V. 

MUK# 

V 

»% 

Comniissibn on Hope, Growth .& Opportunity 

1900 M. Street, NW Suite 600 

Washington, D.C. 200d36.. 

. (202) 530-33.32 • . 

Respondent. 

COMPLAINT 

Complainant files this complaint under 2 U.S.C. § 437g(a)(l) against the Commission on 

Hope. Growth & Opportunity ("Respondent") for violations of the Federal Election Campaign 

.Act ("Act"), as described below. 

A. FACTS 

Respondent is an organization that claims to be "registered under section 501(c)(4) of the 

IRS."' As of October 1, 2010, it was not a registered political committee. 

Based on information and belief, from September 24, 2010 through September 30, 2010, 

Respondent disseminated broadcast television advertisements attacking Congressman John 

' See h^lp:/•^^'ww.hQDegl^o^^^thopDortun^lv.com/ (last visited on October 1, 2010). 

P.-MU FOR 8V TFIE OEMOCRATIC CONORESSION.M CAMPAIGN COMMITTEE • -tJO SOUTH CAPITOL ST. SE • WASHING TON, DC 20003 

'202) 803-1 500 • WWW.DC.CC.ORG • NOT AUTHORIZED BY ANY CANDIDATE OR CANDIDAlE S COMMITTEE 

CUNTRIBunONS OR GIFTS TO THE DEMOCRATIC CONGRESSIONAI. CAMPAIGN CO.MMITTEE ARE NOT TAX DEDUCTIBLE 
o o 

DCCC 

Oemecntik Ceneessiaiia/ 

Camp^CamaaUee 

D. REQUESTED ACTION 

As we have shown, there is substantial evidence that Respondent has violated the Federal 

Election Campaign Act. We respectfully request the Commission to investigate these violations. 

Should the Commission determine that Respondents have violated FECA, we request that 

Respondents be enjoined from further violations and be fined the maximum amount permitted by 

law. 

a / 

SUBSCRIBED AND SWORN to before me this'y day of 

l^[j^^j^mission Expires: 

IftrtirySSS! 

Notary Public 

, 2010. 
BOB 

Commission on Hope, Growtl^id Oppottunity iwt^pd Page 1 of 1 

COMMISSION ON 

HOPe, crowTH & oppormiUTY 

Supporting Policies of Economic Growth and Five Enterprise 

MISSION NEWS/MEDIA ISSUE FOCUS LATEST 

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the IRS. Not a federal political committee. 

Commission on Hope, Growth & Opportunity 11900 M Street. NW| Suite 600 | Washington, I 

http;//hopegrowthopportunily .com/ mmio 
Commission on Hope, Gro Opportunity o Page 1 of 1 

(.OMMISSION ON 

HOpe, GTOWTK fk oppormniTY 

Supporting Pblicia<if Sconamie Growth and Pt'et Enterprise 

U- It. 

MISSION NEWS/MEDIA ISSUE FOCUS 

v.... _ i 

LATEST POLLING CONTACT 

Thank you for your interest.... 

By email; 

Info^hqpeafowthopportunitY. ( 

By mail: 

Commission on Hope, Growth & Opportunity 

William B. Canfield, General Counsel 

1900 M Street. NW Suite 600 

Washington, DC 20036 

202-53(K3332 

Due to high volume of contacts, we cannot guarantee a response 

to ail requests. Thanks. 

Paid for by the Commiasion on Hope, Growth and Opportunity, a tax exempt, non-profit, sociai weifere organization, registered under Section SQ1c(4) of 

the iRS. Not a federai poiifcai committee. 

Commission on Hops. Growth & Opportunity |1SOO M Street, NW j Suite 0001 Vt^shington. DC 20030 j 202-530-3332 

hap://hopeg!rowthopportunity.com/contact.aspx 11/30/2010 
06/01/2011 14:17 FAX 202 530 4411 AIN BANK - CURflN LAW imuuA/ 

COMMISSION ON 

HOPe, GrOWTH & OPPOITUmTKMMis#N 

5iipportifi0 l^olidts of EcofUfmk Crtrwth and Free Enfervrise 

2flllJUN-| PH2:I6 

June 1,2011 OFFICE OF GENERAL 

COUNSEL 

Mr. Jeff Jordan 

Office of the General Counsel 

Federal Election Commission 

999 E Street. N.W. 

Washington. D.C. 20463 

Re: Matter Under Revjyw « 6471 

Dear Mr. Jordan: 

Today, i received, by mail, the complaint in the above captioned matter. This letter is intended 

as the formal response of the Commission on Hope. Growth & Opportunity (the "CHGO") to this 

complaint. 

As the Federal Election Commission [the Commission"! knows, a substantially similar complaint 

was filed last year by the Democratic Congressional Campaign Committee, now known as Matter Under 

Review H 6391. Pursuant to an extension of the time to file granted by the Commission, the formal 

response of CftGO in MUR ff 6391. was filed iNith your office, via fax. today. 

I have carefully reviewed the allegations presented in MUR tt 6471. In my considered judgment, 

the allegations presented In MUR fi 6471 are substantially similar to. and thus duplicative of. the same 

allegations contained in MUR tt 6391. As a consequence,! ask the Commission to incorporate by specific 

reference the response in MUR U 6471 as the CHGO response in MUR A 6391. The complaints which 

initiated both MURs are identical and the complaint in MUR A 6471 provides not a single, new fectual 

pre'dicate to the assertions previously made in MUR A 6391. The complaint In MUR A 6471 simply and 

unashamedly restates the assertions made in MUR A 6391 and appears to have done so for no other 

reason than to further burden yoer agency and to seek additiunal media attention for the complainant. 

For the same reasons set for in the forma) response of CHGO to MUB A 6391. as filed today, we 

ask that the Commission find that the complaint in MUR A 6471 is substantially similar, if not Identical 

to. an on-going enforcement matter, dismiss the complaint in MUR A 6471. and take no further action 

against CHGO in MUR A 6471. Should the Commission desire any additional Information regarding the 

response of CHGO In MUR A 6471. i would be happy to address such a request. 

Hliam drtaofileld 

Counsel to CHGO 

Commission on Hope, Growth fiiOppoRunUy j 1900 M Sticet, NW j Suite 600 I Washington. DC 20036 j 202-330-3332 

Md br dir ComndBioi i on Haj». Crawih and Opponunliv, • w iitni|ii. mm-pmb, social UTUIIC oisanizaUoa iqlilaicd luidci Socdon S01c<4) ol du lltS. Noi a ((dnal polllica! uunmlure.