for 2015:

Setting the Stage
for the Next Session



Sometimes big ideas come from seemingly small irritations.

Blueprint for 2015: Setting the Stage for the Next Session was a big idea hatched
by American Encore’s Policy Director, Patrick Hedger. Throughout the course of
2013 and 2014, Americans watched as the Republican majority in the U.S. House of
Representatives passed common sense legislation that would go to the U.S. Senate
and die. Then-Majority Leader Harry Reid refused to put these bills to a vote on the
floor of the U.S. Senate, because he knew that they would either pass – forcing the
President to veto the legislation – or his vulnerable members would be casting votes
that could be used against them in the 2014 elections.
This process irritated Patrick, and thus the idea of putting forward a policy agenda that
could serve as a blueprint for how a majority should work was born. As you can see
from the length, it’s a tour de force.
This blueprint is a very useful tool for policy makers, Hill staff, think tanks, university
faculty, and students. But it is especially useful for every day hard working taxpayers
who want to better understand the problems we face, what policies are failing, and
what the solutions are.
For example, the first section covers one of the major concerns of most Americans:
jobs. It lays out the reasons this is still the primary problem in the minds of most
Americans, how the data has been gamed by Washington, and some common-sense
solutions to help job growth.
Next the blueprint tackles federal spending, debt, and deficits. Washington has a
spending problem. It’s a problem that is seemingly so big no one really knows where
to start. One recommendation provided in this document is what is called “the penny
plan.” It’s remarkable in its simplicity. In the first year, just freeze spending to the
previous year’s level – no real dollar cuts. The next year, find one penny out of every
dollar spent at the federal level that could be cut. One percent.
And guess what? You only have to do that for two years to reach a balanced budget.
Given that most American families have had to cut 5%, 10%, or even more of their
previous year’s spending, it seems a small sacrifice for the federal government to
Regulation plays a large role in American life and business. Frankly, there is too much
of it. Our blueprint lays out solid recommendations that would help streamline the
regulatory structure and make it more responsive to the modern era.

Remember the “all of the above” strategy to energy production promised by President
Obama? Well, it wasn’t so much of “all” as “what we prefer” – namely “green” energy
that “necessarily will cause energy prices to skyrocket,” to quote our President. With
Americans now enjoying some relief at the gas pump, the alternative energy subsidies
pushed by this Administration seem even more absurd than they did when Solyndra
was failing. We must get back to allowing the free market to determine what will
succeed and fail in the energy sector, not having the government pick winners and
And speaking of government injecting itself in a way that hurts every American, the
government takeover of health care has been terrible for doctors, patients, and
employers. After watching the failures of socialized health care in England and
Canada, you would be think the U.S. would be pushing toward more market-based
care. But, as a result of ObamaCare, we are headed in the direction of Canada. This
has a pinch of irony because if we become Canada, where will Canadians go to get
the care they need after being denied services? It is humorous, but actually deadly
true. Just ask the tens of thousands of Canadians who have come to the U.S. for lifesaving surgeries. We must replace ObamaCare, sooner rather than later.
Of course, what policy agenda would be complete with out a discussion about
taxes. Here is a sneak peek – we think tax rates are too high, the tax code is an
incomprehensible maze, there are too many special interest tax loopholes, and we’d
like to see a lower, flatter rate for everyone.
Our Blueprint for 2015: Setting the Stage for the Next Session is just the first of
what promises to be many other policy ideas and proposals that American Encore
promotes in the future.
Thanks for reading – welcome to the discussion.

Sean Noble
American Encore

for 2015:

Setting the Stage
for the Next Session
by Patrick Hedger

Table of Contents










In September 2014, the unemployment rate
fell below 6 percent for the first time since the
financial crisis and subsequent “Great Recession”
of the late 2000s. Normally this would be a good
sign. While not perfect, that is much closer to
pre-recession levels, following a steady decline
over the last four years. Yet when asked what
top issues leaders in Washington ought to focus
on, public opinion polls continue to show that
Americans put “jobs/unemployment” near the
top of the priorities list. Why is this the case if
the labor market has recovered as much as the
data suggests?
The answer is that the severity of the labor
market crisis is beyond what the “official”
unemployment rate actually reflects.
When the unemployment rate is discussed, 5.9
percent for example, that doesn’t mean that 94.1
percent of all Americans have jobs. This should
be fairly obvious. Some households only have a
single source of income, with children in school at
whatever level and some parents as homemakers.
Millions of Americans are retired as well. Therefore
it is useless to report the number of people without
jobs when millions simply don’t need one and
aren’t looking for one. Therefore the Bureau of
Labor Statistics (BLS), the government agency that
calculates and reports the unemployment rate,
attempts to only report the percentage of Americans
that want jobs but cannot find them as the “official”
unemployment rate. To accomplish this, the BLS
has narrowed the definition of unemployed to those
without a job that have actively sought one within
the last month. This certainly eliminates counting
those who have no desire for a job as unemployed,
which would paint a vastly different picture of the
economy. That being said, this calculation of the
“official” unemployment rate can also lead to a
gross misrepresentation of an excessively weak
labor market as one that is recovering. A more
comprehensive look at the BLS’s labor market data
reveals that, unfortunately, this is the present case.
A severely depressed labor market would likely
result in many thousands, even millions, of

for 2015:

Setting the Stage
for the Next Session

unemployed persons facing repeated rejection or
a total inability to find job openings even remotely
relevant to their experience and skills. Naturally, at
some point, such individuals would likely give up
looking for work. If this period of frustration lasts
longer than a single month, then these people who
tried so desperately to find a job before, only to fail,
are thus no longer unemployed in the eyes of the
BLS. The degree of such an issue is impossible to
precisely calculate. However, looking at trends in the
size of the raw labor force, that is the employed and
unemployed alike, can give us a general sense of
the extent of the problem of severe discouragement.
The labor force participation rate is the percentage
of Americans that are either employed or
unemployed and actively looking for a job
(meeting the BLS’s four week criteria). The “official”
unemployment rate can actually be quickly derived
from the labor force participation rate. The BLS
measures both the labor force participation rate and
the employment to population ratio, which is simply
the percentage of all Americans that have a job.
The employment to population ratio over the labor
force participation rate reveals the employment
rate, and the difference from 100 percent is the
unemployment rate. For example, in September
2014, the employment to population ratio was 59
percent. In other words, 59 percent of all Americans
BLUEPRINT for 2015: Setting the Stage for the Next Session | JOBS 1


Labor Force Statistics from the Current Population Survey
As of October 6, 2014, Seasonally adjusted
(Seas) Labor Force Participation Rate/Civilian labor force participation rate
Percent or rate: 16 years and over

exactly the case in September
2014, and, as the BLS’s data
shows, has been the case
over the last five years that
the unemployment rate has
In September 2014, the labor
force participation rate fell from
62.8 percent to 62.7 percent.
Since January of 2009, the rate
has fallen 3 percentage points
from 65.7 percent:

had a job. The labor force participation rate that
month was 62.7 percent.
59/62.7 =(roughly) .941
Thus the employment rate in September 2014
was 94.1 percent, meaning the unemployment
rate was 5.9 percent.
Yet the BLS’s data release for that month
says something interesting. At first the BLS
explains, “In September, the unemployment rate
declined by 0.2 percentage point to 5.9 percent.”
However, three paragraphs later the report says
the following:1
“The employment-population ratio was 59.0
percent for the fourth consecutive month.”
This doesn’t seem to make sense. How can the
unemployment rate go down if the percentage
of the population that was employed didn’t
change? The only answer is that fewer
Americans met the BLS’s qualification to
be counted as unemployed. This would be
reflected in a decrease in the labor force
participation rate, since the employment to
population ratio did not change. Indeed this was

Remembering that the
“official” unemployment rate
is simply the employment
to population ratio over the
labor force participation rate, what would the
unemployment rate be if 3 percent of Americans
had not stopped looking for work altogether?
59/65.7 = (roughly) .898
The employment rate would be 89.8 percent,
putting the unemployment rate at a dismal 10.2
What this tells us is that, while the labor market
may be improving slightly, the main reason that
unemployment is falling to pre-recession levels
is that only the percentage of people looking
for work, not the percentage of people that
are working, has fallen. Per economist Dr. Keith
Hall of the Mercatus Center at George Mason
“Certainly not all of the people exiting the labor
force are those discouraged by bleak prospects
in a job market that has yet to recover. The
Baby-Boomer generation has begun to retire,
which certainly plays some roll in a shrinking
labor force as a percentage of the populations.
However, to write off the entire decline in
the labor force participation rate, which is in


BLS News Release, The Employment Situation—September
2014, October 3, 2014.

2 JOBS | BLUEPRINT for 2015: Setting the Stage for the Next Session

Keith Hall, “More to Declining Labor Force Participation
Than Aging Population”, The Mercatus Center, February 7,

In fact, despite net decline in labor force
participation across the entire working-age
population, the only groups that have seen
increased participation are those aged 55 and
older. All other groups, from the middle-aged
to teenagers have seen a net decrease in
participation over the last several year.3

“The declining labor force participation was
particularly evident in 2013. Over the course of
that year, the working-age population grew by over
2.2 million people. However, the labor force fell by
660,000. To have kept pace with the population
growth, the labor force should have grown by 1.4
million over the year. This means that all of the
drop in the unemployment rate in 2013 (from 7.9
percent to 6.7 percent) was from falling labor force

In short, Americans of prime-working age are
leaving the labor force at an alarming rate
that cannot be explained away by an aging
population. Teenagers and young adults are
not getting jobs in high school or right out of
college. Some have argued that this may be a
good thing. To an extent it may be the case that
students are devoting more time to college

debt. Without the ability to enter the labor force
at a lower level and gain valuable skills and
experience that way, Americans are increasingly
reverting to taking on debt in order to gain those
skills from schools instead. In addition, the lower
levels of participation among middle-aged
adults, as well as the increased
participation by those over 55,
suggests that employers are
Labor Force Statistics from the Current Population Survey
nervous about hiring the young
As of October 5, 2014, Seasonally adjusted
and inexperienced, which in(Seas) Labor Force Participation Rate/Civilian labor force participation rate
Percent or rate: 16 years and over
and-of-itself signals pervasive
skepticism amongst businesses
about the health of the overall

and graduate school. However, this also signals
an increasingly competitive labor market,
which means that opportunities open to those
without advanced degrees are scarce. This also
explains the recent explosion in student loan

Source: BLS Table 3.3 Civilian labor force participation rates
by age, sex, race, and ethnicity, 1992, 2002, 2012, and projected 2022 (In percent), December 19, 2013. http://www.bls.

This is why Americans continue
to put jobs/unemployment at
the top of their priorities list for
Washington. They see what the
data obscures. They see more
and more young adults living
at home because of student
loan debt. They see friends and
relatives that have simply given
up. The falling unemployment
rate is giving off a false positive. Historically
a shrinking unemployment rate signals a
strengthening labor market. However the current
situation, with the labor force participation rate
falling in conjunction, only shows a labor market
in a drought of opportunity for younger workers
without advanced levels of education.

BLUEPRINT for 2015: Setting the Stage for the Next Session | JOBS 3


a historical tailspin since the recession, fails
to even come close to explaining the entire


Percentage Change in Labor Force

Participation by Age (1992-2012)




16 to 24

25 to 54


As far as legislative remedies go to directly
address jobs head on, there are few that pass
the economic smell test. Debunking the idea
of “stimulus” spending could take on an entire
publication of its own. For the sake of brevity,
the entire idea of stimulus spending and jobs
quickly falls victim to the classic anecdote of
when Nobel prize-winning economist Milton
Friedman went to Communist China, explained
by economist Stephen Moore:4
“Milton recalled traveling to [China] in the 1960s
and visiting a worksite where a new canal was


being built. He was shocked to see that, instead
of modern tractors and earth movers, the
workers had shovels. He asked why there were
so few machines. The government bureaucrat
explained: “You don’t understand. This is a jobs
program.” To which Milton replied: “Oh, I thought
you were trying to build a canal. If it’s jobs
you want, then you should give these workers
spoons, not shovels.”

Stephen Moore, “Missing Milton: Who Will Speak For Free
Markets?”, The Wall Street Journal, May 29, 2009.

4 JOBS | BLUEPRINT for 2015: Setting the Stage for the Next Session

Waste at the taxpayers’ expense erodes at a
sustainable demand for labor to briefly improve
our flawed measures of employment. It is an
expensive and purely cosmetic fix. The longterm legislative answers to the weak labor
market lay mostly elsewhere in this publication,
such as reducing the impact of frivolous
regulations across the economy or slowing
government spending and therefore easing the
tax burden. However, there is one important
measure that Congress can put into place to lay
a foundation that will expedite the emergence of
a healthy labor market from other vital reforms.

Setting aside arguments of ethics and principles
surrounding the entire idea of welfare programs
themselves, the point of a welfare system
is to provide not-so-much a safety net but
more of a trampoline to help catch those that
have fallen on hard times and propel them
back to a point of self sufficiency. Historically,
however, the benefits provided by the various
welfare programs put into place by the federal
government have failed to even create a net,
let alone a trampoline. Instead the government
has created a hammock out of the social
safety net. Combined benefits from the overone hundred5 different assistance programs
have actually created disincentives to pursue
employment. Economists call this phenomenon
the “poverty trap”. Quite simply, some individuals
can bring home more money for themselves
and their families by remaining outside of the
labor market instead of accepting entry-level
employment. The government is essentially
subsidizing people to remain poor.
Such a situation is so glaringly imprudent
that Congress has sought to rectify it before.
In 1996, Congress famously passed the
Personal Responsibility and Work Opportunity
Reconciliation Act. Among other reforms, for
the first time in the history of direct federal
cash assistance to needy families, work
requirements were put into place. The results
were nothing short of remarkable. According
to a meta-analysis by economist Robert Moffitt
of the Institute for Research on Poverty at the
University of Wisconsin, “The central tendency
of the findings suggests that [welfare] caseloads
fell by about 20 percent and employment
increased by about 4 percent.”6

The reforms passed in 1996, including the vital
work requirements, have been near universally
accepted as a major success. Even the political
left has unabashedly admitted so.7 Yet despite
the wild success, the progress made has since
been undermined and the gains of the mid-90s’
reforms have been erased.
The latest data shows welfare rolls have surged
to record highs. Almost 34 million households
received some form of welfare benefits by the
end of 2012.8 While some of this increase is
certainly due to the economic downturn caused
by the financial crisis and subsequent recession,
the data shows that the situation is not
correcting. In fact it is getting worse. Since 2009,
the percentage of the population receiving
welfare has increased, not fallen.
While the largest contributor to this problem of
increasing dependence on welfare programs
like the Temporary Assistance to Needy Families
(TANF) program and Supplemental Nutrition
Assistance Program (SNAP, or food stamps) has
been the overall poor economic record over the
last several years, the Obama administration has
quietly made changes that are exacerbating the
Under the 1996 welfare reforms, the SNAP food
stamp program was reformed to incentivize
work. A three-month time limit was placed on
able-bodied childless adults’ ability to receive
food stamps unless they worked at least 20
hours per week or spent an equal amount of
time in approved job training programs.9



Michael D. Tanner and Charles Hughes, “The Work versus
Welfare Trade-Off: 2013”, The Cato Institute, August 19,
Robert Moffitt, “A primer on U.S. welfare reform.” http://www.


Ron Haskins, “Welfare Reform, Success or Failure? It
Worked”, Brookings, March 15, 2006. http://www.brookings.
Charles Hughes, “Years After the Recession, Welfare Rolls
Hit New Highs”, The Cato Institute, August 26, 2014. http://
Jake Grovum, “More States Enforce Food Stamp Work
Requirements”, The Pew Charitable Trusts, September 15,

BLUEPRINT for 2015: Setting the Stage for the Next Session | JOBS 5




Yet in 2009, one of the countless provisions
of the massive American Recovery and
Reinvestment Act, better known as the Stimulus
Package, crippled these requirements. Based
on certain criteria, states could apply to the
federal government for waivers of the work
requirements. Almost every single state
pursued these waivers, a total of 47 in 2011 to
be precise. While certainly state policy makers
were, in part, seeking to alleviate some of the
worst consequences of the Great Recession
that followed the financial crisis of 2007 and
2008, the structure of the SNAP program
undercuts any argument that claims motives for
suspending work requirements were entirely
Unlike programs such as Medicaid, where states
and the federal government split the cost of
the raw benefits dispensed to individuals and
families, the benefits of the SNAP program are
entirely financed by the federal government, with
states only sharing the cost of the associated
bureaucracy necessary in the dispersion of
said benefits. Thus, no short-term disincentive
existed in the consideration of pursuing the work
requirement waivers for able-bodied childless
adults. Turning down such an opportunity would
mean missing out on billions of dollars worth
of federal tax dollars composed primarily of
new federal debt and tax garnishments from
49 other states and the various territories.
This is a perfect example of the problem of
concentrated benefits and dispersed costs,
an economic policy phenomenon described
by the public choice theory of economics and
political science, pioneered by economists
James Buchanan and Gordon Tullock. The late
Professor Buchanan received the Nobel Prize in
Economics for his work on the development of
public choice theory.
A concentrated costs and dispersed benefits
situation occurs when a policy or policies exact
a small toll, perhaps even an unnoticeable one,
on a large group or the population as a whole
in order to provide a discrete benefit to one

6 JOBS | BLUEPRINT for 2015: Setting the Stage for the Next Session

individual, group, or industry. Essentially, it is the
idea of taking one dollar from a million people
to make one person a millionaire. The person
getting a million dollars is thus predisposed to
notice the policy or program and work, and vote,
more towards its defense than any single one of
the million people losing just one dollar.
Suspending the work requirement for SNAP
is essentially a more intricate version of such
a situation. State policy makers, operating in a
political window of no more than 4-6 years, were
able to doll out benefits to thousands of people
in their states without any real consequences to
worry about within that time frame. The costs
were both dispersed and delayed, with the
economic impact of higher federal debt loads
and fewer able-bodied adults in the workforce
being virtually impossible to realize within such a
short time period.
Yet now we can see what is happening. Years
have passed and the economic recovery
Americans deserve barely even registers on
paper, and certainly isn’t being felt in the plurality
of the nation’s communities. Participation in the
labor force is at 40-year lows. What was the cost
of suspending the work requirement for ablebodied adults without dependents? According
to a 2012 memo from the Congressional
Research Service, an additional 2 million of these
individuals on food stamps.10
According to the memo, in 2008 1.9 million
work-capable adults without children at home
to worry about were collecting food stamps. By
2010, that number had grown to 3.9 million.
This is a significant issue that damages the path
back to a healthy labor market. According to a
study released by the Cato Institute, combined
welfare benefits exceed the minimum wage
in 35 states. In a handful of states, welfare
10 Philip Klein, “CRS report: number of able-bodied adults on
food stamps doubled after Obama suspended work requirement”, The Washington Examiner, September 19, 2012.

Heading into 2015, some states no longer meet
the federal criteria for able-bodied childless
adult waivers. A few states that do have pledged
to enforce the work requirement. That being
said, according to the US Department of
Agriculture, which oversees the SNAP program,
42 states and the District of Columbia will waive
the able-bodied work requirements in certain
areas of their state or statewide in 2015. Most
waivers will be statewide.13
Over half-a-decade removed from the
recession, these waivers can no longer claim a
legitimate purpose. Undoubtedly, most people
in this position who can work want to work,
however they are effectively penalized for doing
so if they can collect more money by staying
on the various programs available to them. This
is one pole holding up the safety-net-turned
hammock. The other is the fact that the longer
beneficiaries are not in job training programs or
even employed in minimum wage positions, the
less marketable they are to potential employers
at higher levels of the economic ladder. This
makes them increasingly dependent in the longterm on welfare programs.

11 Michael D. Tanner and Charles Hughes, “The Work versus
Welfare Trade-Off: 2013”.
12 Ibid.
13 USDA: FY 2015 Status of the State Able-bodied Adult without
Dependents Waivers.

The Obama administration has pursued
similar waivers for the TANF program, which is
another substantial source of welfare benefits
provided exclusively by federal dollars. TANF
benefits vary more greatly from state to state,
from just over $2,000 per year on the low end
(Mississippi) to $11,000 per year on the high end
(Alaska), however benefits average about $5,200
nationwide. Due to the fact that TANF’s purpose
is explicitly aimed at reducing the number
of children in poverty conditions, the work
requirements put in to place in 1996 are not on
a case-by-case basis. States are required to
ensure that 50 percent of the families receiving
TANF assistance in their state have someone
working or actively looking for work. States can
be fined for not meeting this goal.
Yet in July of 2012, through unilateral executive
action, the Department of Health and Human
Services (HHS), the department in charge on the
federal side of TANF, made room for a relaxing
of this important standard. 14
Under the new rule, HHS would allow states
to develop plans to increase transitions from
welfare to work. The creation of such a plan
could trigger a waiver of the work requirement.
Such a rule seems counterintuitive as the
current work requirement already does
encourage welfare-to-work transitions, plus
sets a minimum acceptable standard for those
working and those not on the program. The rule
seems better suited to allow states to have an
increased number of beneficiaries outside of
the workforce without penalty so long as they
promise to eventually do something about it,
whether their plan works or not. According to the
GAO, at least eight states began the process of
pursuing waivers by September of 2012.15

14 Pete Kasperowicz, “House votes 246-181 to block Obama’s
welfare-work waiver rule”, The Hill, March 13, 2013. http://
15 Kay E. Brown, “Testimony Before the Subcommittee on Human Resources, Committee on Ways and Means, House of
Representatives: TANF-Workforce Participation Requirement
Waivers”, GAO, February 28, 2013.

BLUEPRINT for 2015: Setting the Stage for the Next Session | JOBS 7


benefits even exceed starting pay in professions
like teaching and computer programming.11
Food stamps play no small part in this poverty
trap, which essentially incentivizes continued
dependence on government programs in the
absence of work requirements. SNAP benefits
average nearly $6,000 annually in the 50 states
plus the District of Columbia, but range from
$4,856 in New Hampshire to $8,832 in Hawaii.
Benefits exceed $6,300 per year in 36 states.12
Using these figures, in addition to the growth in
SNAP enrollment following the suspension of
work requirements, it is easy to estimate that
waiving the work requirement for food stamps
cost the federal government an additional $12
billion in 2010.


It is difficult to point out major legislative
initiatives that have gone on to become such
a clear success, but the reforms of 1996 to the
federal welfare state have been widely praised
and near universally accepted as hitting their
intended target. Yet at the first sight of trouble,
the most important reforms have unfortunately
been tossed out both by Congress and the
Obama administration. There was no need for
this. While the economy has been weak and
labor market prospects dim, eliminating the work
requirements only exacerbated the situation
under the guise of trying to provide emergency
relief. Without a work requirement, the poverty
trap widens and becomes harder to escape.
Little incentive exists to get back to work at
the first available opportunity when welfare
pays something comparable to or in excess
of available wages. This subsidized stagnation
may keep people out of dire straits in the near

8 JOBS | BLUEPRINT for 2015: Setting the Stage for the Next Session

term, however it prevents them from gaining
vital skills through employment or job training
that will ensure their long-term ability to sustain
themselves and their families.
The labor market isn’t where it should be,
despite what the unemployment rate may
suggest. Labor force participation is unnaturally
low even when considering the aging national
population. A lot of various and disparate
factors that require attention are undoubtedly
contributing to this problem. Regardless,
Congress ought to reassert the popular and
common-sense welfare reforms of 1996,
reinstitute the work requirements for SNAP and
TANF without exception, and rule out as much
of the poverty trap as a contributing factor to
uncharacteristically low labor participation as


Most Americans are aware that the federal
government is living well beyond its means. For
most years on record, the government has spent
more money than it collected in taxes, resulting
in the government having to borrow money from
investors and foreign governments. The amount
borrowed annually is known as a deficit. These
deficits have compounded into our total national
debt. Despite the insistence by some economists,
particularly of the Keynesian school of thought, on
more and more government spending, there is near
unanimous agreement amongst economists and
policy experts that current debt levels now threaten
our economy. Thus, addressing this issue should be
an immediate priority of leaders in government.

for 2015:

Setting the Stage
for the Next Session


Let’s put the problem in the appropriate perspective.
According to the White House Office of Management
and Budget (OMB) the total national debt is projected
to hit a staggering $18.7 trillion by the end of 2015.1 This
growing debt liability is a major problem for the simple
reason that it must, somehow, be paid back. Not paying
this money back is not an option, as it would have the
impact of a worldwide bank robbery to the tune of
dozens of trillions of dollars. Further, it would make
it virtually impossible for the US government to ever
borrow money again, at least at an affordable rate, to
pay for unexpected emergency spending in the event
of things like war, natural disasters, or terrorist attacks.
However, we’ve come to a point where additional
borrowing poses a substantial risk as well.
Increasing debt liability puts upward pressure on
interest rates, or the cost to borrow money, as the
risk of lending to such an indebted entity as the US
government rises. Interest payments also increase
in nominal terms, where simply repaying investors
begins to consume an ever-greater share of the federal
budget. This has the cyclical effect of forcing even
more borrowing.
Net interest payments on the national debt are
projected to cost $550.7 billion in 2019. Combined
federal spending on education, training, employment,
and social services, transportation, international

OMB Historical Table 7.1- Federal Debt at the End of the Year: 19402019.

affairs, science, space, and technology, agriculture,
administration of justice, and other general government
operating expenditures are projected to cost $463.3
billion that same year. That’s a difference of $87.4
The simple truth is that the current path is totally
unsustainable. While some like to point out that under
President Obama deficits have been “cut in half”, they
conveniently omit the fact that the deficit has been cut
from record levels that the Obama administration itself
set. Additionally, cutting deficits does not reduce debt; it
simply slows the growth of debt. Surpluses are required
to reduce debt and, according to OMB projections,
deficits never become surpluses under current law. In
fact, deficits remain above $400 billion annually before
resuming growth to above $500 billion in 2019 and
This is an unacceptable and perilous situation. It
threatens our entire way of life by enslaving future
generations to the cost of todays’ wasteful policies. That
means impactful, not symbolic, corrective action must
be taken as soon as possible. Here are a few things that
Congress can do immediately to reverse course and
get the government’s finances under control.

OMB Historical Table Table 3.1- Outlays by Superfunction and
Function: 1940-2019.
OMB Historical Table 1.1- Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2019.

BLUEPRINT for 2015: Setting the Stage for the Next Session | FEDERAL SPENDING, DEBT & DEFICITS 9



( T he I N FO R M A ct)
The first step in fixing a problem is properly
identifying it. Unfortunately the widely reported
“official” national debt, which presently
stands somewhere above $18 trillion, grossly
misrepresents the extent of America’s fiscal
The “official” debt figure only records what are
considered official liabilities—debt that has
been issued and recorded. Thus reported debt,
while still exploding out of control, has been
effectively capped by the chosen vocabulary of
the Treasury Department.
The truth is that the US government has made
promises under law to spend money in the
future, primarily under autopilot programs like
Social Security, Medicare, and Medicaid, which
spend money according to formulas with the
force of law. Therefore, future-spending levels
can be estimated with accuracy by using those
formulas. Revenue can also be predicted as tax
revenue is also determined by formulas set in
law. The difference between future spending
and revenue required under current law is called
the fiscal gap. Using this approach, the true size
of the problem is revealed
A recent study by Dr. Laurence Kotlikoff, a former
member of the President’s Council of Economic
Advisors and a professor of economics at Boston
University, estimates that our current fiscal
gap exceeds $200 trillion.1 To be precise, the
United States, under current law, must spend
just above $200 trillion dollars more than it will

collect in taxes over the next several decades.
Consequently, the national debt will climb into
the hundreds of trillions if current spending and
revenue formulas are not drastically changed.
The only hope for those changes to occur is for
the actual enormity of the situation to be put
front-and-center before the American people
and leaders in Washington.
This can be accomplished by passing the
Intergenerational Financial Obligations
Reform (INFORM) Act. This bi-partisan piece
of legislation, sponsored in the past by both
Republican and Democratic representatives
and senators, would require the Government
Accountability Office (GAO), Congressional
Budget Office (CBO), and the OMB to publish
annual reports, made available to the public, that
assess the fiscal gap and any changes to the
long-term projections created by the events or
laws passed in the previous year.
The INFORM Act would also require these three
agencies to analyze the impact on the fiscal gap
of specific pieces of major legislation proposed
by Congress throughout the year. By constantly
reminding the public and Congress that the
fiscal gap is a real problem that is directly
impacted by the actions of today’s government,
the INFORM Act will go a long way in restoring
fiscal accountability in Washington and will
dramatically increase the urgency behind critical
efforts to slow, and eventually reverse, the
growth of the federal government.

Kotlikoff, Laurence, “Assessing Fiscal Sustainability,” Mercatus Center, December 12, 2013.

10 FEDERAL SPENDING, DEBT & DEFICITS | BLUEPRINT for 2015: Setting the Stage for the Next Session

for the year. The next year, it would force
the government to find one penny for every
dollar it spent the year before and eliminate
that spending. The government would still be
able to spend the equivalent to 99 percent of
the amount it spent the year before, but no
more. Certainly, in times of hardship, American
businesses and families have proven capable of
much greater frugality. Is it so much to ask that
our government do the same?

What will it take to bring balance back to
the budget? The severity of the federal
government’s budget situation lends naturally
to the idea that balancing the budget would
require severe cuts which would eliminate
the services and protections expected from
government. So how much would have to be
What if the answer was one penny?

Current Budget Projections (2014 in Trillions of $)
Source: Congressional Budget Office August 2014 Baseline





4.197 4.391














2015 2016 2017 2018 2019 2020 2021 2022
Spending (Projected)






This would continue until
government spending finally falls
below growing revenue. Yet with
such modest cuts, how many years
would it take before government
officials would have to stop hunting
for inefficient pennies in their
agencies? What if the answer was


Due to slow, but continued, economic growth,
tax revenues have been increasing each year
since the economic downturn of 2007-2008.
The problem is that the growth in government
spending has outpaced the growth in tax
revenue, leading to continuous deficits.
But what if government spending growth
stopped for a moment and then reversed? That’s
how the Penny Plan works to balance the federal
The Penny Plan, upon implementation,
would freeze government spending growth

According to simple calculations
made with projected revenue
and spending figures from the
CBO’s August 2014 Baseline, if the
Penny Plan was implemented in
2023 2024
2014, and 2015 spending fell by
one percent followed by another
one percent cut in 2016, federal
revenue would actually exceed expenditures in
2016 by about $57 billion. 1
At this point of balance, the Penny Plan ends
annual cuts by capping federal spending as
a percentage of the Gross Domestic Product
(GDP). Under the plan, 2016 spending would be
equivalent to just above 17.9 percent of GDP,
which is quite close to the observed average
between 1946 and 2008 of 19 percent.2


CBO August 2014 Update to the Budget and Economic Outlook: 2014 to 2024.
OMB Historical Table 1.2 Summary of Receipts, Outlays, and
Surpluses or Deficits (-) as Percentages of GDP: 1930–2019

BLUEPRINT for 2015: Setting the Stage for the Next Session | FEDERAL SPENDING, DEBT & DEFICITS 11




Projected Revenue vs. Spending under Penny Plan
(2014 in Trillions of $)
Source: Calculations based on CBO August 2014 Baseline



face cuts above one percent
due to the fact that mandatory
spending programs are largely
inflexible unless legislative
changes are made.

3.488 3.453



3.305 3.419



3.927 4.099



4.084 4.255



2014 2015 2016

2017 2018

PP/GDP Cap Spending

2019 2020 2021 2022

At this point, government spending could
grow at a sustainable pace with the rest of
the economy, while mild surpluses could be
used towards paying down the principal on the
nation’s debt.

Indeed without changes to
entitlement programs, capped
spending would drive down
discretionary spending in the
long-run as Social Security,
Medicare, and Medicaid continue
to consume more and more of
the federal budget. However the
Penny Plan isn’t necessarily a
long-term solution and it doesn’t
have to be. This is about stopping
the bleeding and proving that
modest cuts to government combined with zero
leeway for waste, fraud, and abuse is the most
expeditious route to budget stability in the near
term in order to build a foundation for fiscal
responsibility in the long term.

Of course there would be some give and
take with these figures because of economic
changes. Further, some programs would likely

12 FEDERAL SPENDING, DEBT & DEFICITS | BLUEPRINT for 2015: Setting the Stage for the Next Session

Prior to the last couple of years, it would
probably have surprised most Americans that
the federal government has a self-imposed
credit limit, better known as the debt ceiling.
That is probably because, historically, almost
every time the government gets close to hitting
its borrowing limit, Congress simply raises it
with little or no debate. In fact, the debt ceiling
has been raised or suspended around 80 times
since the 1960s.3 That does not mean that such a
mechanism is completely useless.
Of late, the debt ceiling has helped concerned
members of Congress raise the profile of
America’s debt problem. It has also served as a
tool to break the stubborn ambivalence of some
of our elected officials on the growing debt
problem and forced them to the negotiating
table in order to figure out ways to reduce
government spending. With sweeping changes
needed to fix America’s long-term finances, the
debt ceiling debate serves as an opening for
advancing those critical reforms. That being said,
prolonged debate carries a substantial risk.
Under current policy, failing to raise the
debt ceiling in time would result in the US
government defaulting on its obligations to
lenders, an event that would devastate both
the American and global economy because US
debt is largely seen as a safe haven for assets
at present time. It would also undermine the
value of the American dollar, which essentially
only derives value from the credit of the US
government. The details of the extent of the
economic cataclysm go on and on.
The pertinent point is that while it is important
to retain the debt ceiling as a genesis point
for important debates about America’s fiscal
policy, defaulting on the national debt is not an
option. The Full Faith and Credit act ensures that

US Department of the Treasury, Initiatives: Debt Limit. http://

both the debt ceiling and the trust of America’s
creditors can be retained going forward.
If the debt ceiling is reached and not raised by
Congress, the Treasury Department becomes
unable to borrow money to finance the
operations of government on a day-to-day basis.
This is where the fear of defaulting on debt
obligations comes from, as the government
currently borrows money to pay interest on the
money it has already borrowed. What this also
entails is that certain functions of government
would run out of funds and shut down pending
an agreement on the debt ceiling. Yet, as the
events of Fall 2013 prove, a disagreement within
Congress resulting in the temporary closure
of government operations would not be an
unprecedented event.
Most of the agencies and departments in the
federal government operate on funding that
must be appropriated by Congress on an
annual basis. If the powers and factions within
Congress cannot come to an agreement on
new funding before the previous year’s funds
run out, then a government shutdown occurs.
This is what happened in Fall 2013 because of
a disagreement surrounding funding for the
Patient Protection and Affordable Care Act,
better known as ObamaCare. During this time,
the non-emergency or non-essential operations
of government requiring annual appropriations
ground to a halt. This is a vital distinction to
note. Only non-essential agencies funded by
discretionary spending shut down during a
government “shutdown.”
Several other major agencies and departments
that are funded automatically as mandatory
programs and/or conduct emergency or
essential safety and security functions remain
open. While discretionary spending funds
most government agencies and departments,
mandatory programs form the bulk of the

BLUEPRINT for 2015: Setting the Stage for the Next Session | FEDERAL SPENDING, DEBT & DEFICITS 13




federal government in terms of spending.
According to the CBO, at the end of 2014,
mandatory spending accounted for roughly 66
percent of the entire federal budget, naturally
leaving discretionary spending at 34 percent.4
A budget-related shutdown does not necessarily
fall along these exact lines. In fact, it is likely
closer to 70-75 percent of the government
that remains open during the shutdown since
most of the dozen-or-so specific categories of
functions required to remain open by law fall
under discretionary spending.5
In short, because of the need to debate
spending in Congress and due to the nature
of our democratic society, structures exist to
ensure that during a “government shutdown”
relatively few functions of government cease
and therefore the sky does not coming crashing
down on civilized society. The problem is that
no such structure exists to ensure that the vital
and mandatory payments are made if, and
arguably when, the debt ceiling is not increased
in the nick of time.
In the case of a debt ceiling impasse, even
mandatory spending programs are not immune.
The way that the Treasury Department’s systems
are currently set up means that bills are paid as
they come due, without any special preferences
for mandatory programs like Social Security and
Medicare, or departments that ensure the safety
of the nation like air traffic controllers, food
inspectors, or even the military. If Congressional
salaries are submitted into the payment queue
before a VA hospital’s electric bill, the salaries
get paid first with available funds. This all can,
and must, change.
While the nation still operates at a budget
deficit, borrowing does not finance the majority
of government operations. In fact, the deficit
will only account for 14 percent of government

CBO August 2014 Update to the Budget and Economic Outlook: 2014 to 2024.
Brass, Clinton T., “Shutdown of the Federal Government:
Causes, Processes, and Effects,” CRS Report for Congress,
September 8, 2014.

Functions That Remain Open During
a Goverment Shutdown per an
Official OMB Memo
Beginning [on the first day of the appropriations
hiatus], agencies may continue activities otherwise
authorized by law, those that protect life and
property and those necessary to begin phasedown of
other activities. Primary examples of activities agencies
may continue are those which may be found under
applicable statutes to:
1. Provide for the national security, including the
conduct of foreign relations essential to the national
security or the safety of life and property.
2. Provide for benefit payments and the performance
of contract obligations under no-year or multiyear or other funds remaining available for those
3. Conduct essential activities to the extent that they
protect life and property, including:
a. Medical care of inpatients and emergency
outpatient care;
b. Activities essential to ensure continued public
health and safety, including safe use of food and
drugs and safe use of hazardous materials;
c. The continuance of air traffic control and other
transportation safety functions and the protection of transport property;
d. Border and coastal protection and surveillance;
e. Protection of Federal lands, buildings, waterways, equipment and other property owned by
the United States;
f. Care of prisoners and other persons in the
custody of the United States;
g. Law enforcement and criminal investigations;
h. Emergency and disaster assistance;
i. Activities essential to the preservation of the
essential elements of the money and banking
system of the United States, including borrowing and tax collection activities of the Treasury;
j. Activities that ensure production of power and
maintenance of the power distribution system;
k. Activities necessary to maintain protection of
research property.
You should maintain the staff and support services
necessary to continue these essential functions.

14 FEDERAL SPENDING, DEBT & DEFICITS | BLUEPRINT for 2015: Setting the Stage for the Next Session

The Treasury Department, as a cabinet-level
department of the Executive Office of the US
President, could theoretically act on its own
to prioritize payments. However, experts have
raised concerns that such an action could
run afoul with the Impoundment Control Act.7
This law largely prevents the president from
picking and choosing which funds to issue that
have been appropriated by Congress. This is
a valuable protection to keep in place. Even
beyond the Impoundment Control Act, the
Constitution explicitly grants Congress, and
Congress alone, ultimate discretion over the

CBO August 2014 Update to the Budget and Economic Outlook: 2014 to 2024.
Levit, Mindy R., Clinton T. Brass, Thomas J. Nicola, and
Dawn Nuschler, “Reaching the Debt Limit: Background and
Potential Effects on Government Operations,” CRS Report for
Congress, November 21, 2013.

federal purse. Therefore, it falls to Congress
to inform the president, and thus the Treasury,
which bills should be prioritized and paid with
available funds from revenue in the event that
borrowing can no longer occur. The Full Faith
and Credit Act sets forth such a structure.
A version of the Full Faith and Credit Act already
passed the House of Representatives in May of
2013.8 Prominent Senators have championed
the cause as well. The version that passed the
House only prioritizes debt obligations and
Social Security payments, in that order, while
forbidding payment of Congressional salaries.
Other proposed iterations have gone further.
The Prioritize Spending Act would prioritize debt
service, military pay, national security, Social
Security, and Medicare payments, in that order.9
Future iterations of the bill could expand the
payment hierarchy to more closely resemble the
rules for what programs and departments stay
operational during a budget-related shutdown.
However, any legislation that puts debt service
payments first, and thus eliminates the threat
of the United States reneging on its promise
to honor its debts, is a crucial step towards
securing long-term fiscal stability for the nation.


H.R.807 - Full Faith and Credit Act, 113th Congress.
H.R. 2402 – Prioritize Spending Act of 2011, 112th Congress.

BLUEPRINT for 2015: Setting the Stage for the Next Session | FEDERAL SPENDING, DEBT & DEFICITS 15


spending this year. Over the next decade, this
figure grows slightly to about a 16 percent
deficit on average.6 The translation is that
the government can still pay for about 84-86
percent of its operations in the event of a failure
to raise the debt ceiling; significantly larger than
the 70-75 percent that stays open during rather
routine budget-related shutdowns. This means
that all obligations to Social Security, Medicare,
Medicaid, and interest on the national debt could
be paid with plenty of room to spare to keep
air traffic control, prisons, hospitals, and other
important federal functions going. Therefore
the risk of these functions being forgone clearly
does not stem from a lack of resources. Instead
the problem rests on a legal technicality.


One need not be a member of a Jewish or a
Christian faith to be familiar with the Ten
Commandments. According to scripture, Moses
descended from Mount Sinai with two stone
tablets that were given to him by God. Inscribed
on them were God’s rules for man. Ten was good
enough for God. In 2013 alone, the federal
government handed down 3,659.

for 2015:

Setting the Stage
for the Next Session

How is this possible? Hasn’t one of the key
criticisms of the 2013-2014 Congress been that
it was a “do-nothing” Congress? Without getting
too far into the details of that question, indeed
the 113th Congress passed a substantially lower
number of bills into law than every Congress
before it dating back to the early 1970s.

The distinction is that the new rules being imposed
on the American people and their businesses are
generally not coming from new laws passed by
Congress. Instead, these rules are being thought-up,
designed, implemented, and enforced by executive
branch agencies and departments, like the
Environmental Protection Agency and the Internal
Revenue Service, with very loose authority derived
from laws already on the books, from the Clean Air
Act to ObamaCare.
Just like the annual budget deficits lead to a growing
national debt, the thousands of federal regulations
being passed each year are compounding
into something so large that it is bordering on
unintelligible to the human mind. Our best scientists
likely have a better understanding of the workings
of the entire universe than our lawyers, politicians,
and bureaucrats have of the entire code of federal
New federal regulations are published in a
document called the Federal Register. It is a unified
document of all federal rules and regulations,
and other miscellaneous agency information and
announcements, updated daily until the end of the
year. At the end of 1936, the Federal Register was
a healthy 2,620 pages long. That’s a little bit longer

than an Atlas Shrugged plus a War and Peace. At the
end of 2013, it was over 79,000 pages long.1 Once
proposed rules go into effect, they are filed into
the Code of Federal Regulations. That document,
currently, is about 175,000 pages long. Imagine a
book as thick as a two-story house is tall and you’re
getting close. 2
It is hard to get an exact figure on how many unique
rules and regulations there are in a document that
size. However, a recent effort by the Mercatus
Center at George Mason University estimates that
at the end of 2012, the Code of Federal Regulations
contained at least 1,040,940 different restrictions.3
While all these rules aren’t laws in the traditional
sense of being passed by both chambers of
Congress and then signed by the president,
regulations carry the full weight of laws. Violating
federal regulations can result in enormous fines
and even imprisonment. Thus regulations greatly
alter behavior and economic decisions and greatly


Clyde Wayne Crews Jr., “Ten Thousand Commandments 2014”,
CEI, April 29, 2014.
Patrick McLaughlin, “Introducing RegData 2.0: A New Way of
Measuring the Size and Scope of Federal Regulation”, The
Mercatus Center, August 18, 2014.
Mercatus Center RegData. Accessed at

BLUEPRINT for 2015: Setting the Stage for the Next Session | REGULATION 17


expand government’s influence on the economy
beyond taxing and spending.
Clyde Wayne Crews of the Competitive
Enterprise Institute conducts an annual review
of federal regulations in a report entitled 10,000
Commandments. In his 2014 publication,
Crews estimates that the combined economic
impact of all federal regulations is on the
order of nearly $1.9 trillion. When you add that
figure to total federal spending, the size of the
federal government’s impact on the economy
grows from just shy of 20 percent of GDP to
over 30 percent of GDP. 4 This is an undeniably
enormous impact on the economy, and not all of
it for the better.
Everyone, at some point or another, has probably
thought of one or two, or maybe even 10-15,
good rules that everyone ought to follow that
are thoughtful and make a lot of sense. But
when you approach and surpass one million
things that everyone must do, the most likely
scenario is that a lot of those ideas aren’t very
good at all. That is certainly the case with federal
regulations. There are countless examples.
Back in 2009, the federal government released
the Manual of Uniform Traffic Control Devices,
a daunting document itself at over 800 pages.
Within the Manual, which is actually a series
of requirements rather than helpful tips, there
were new standards for traffic signs. Amongst
the various requirements for letter height and
case you were unable to read that last sentence,
which the government apparently believes you
indeed cannot, there was a requirement that no
street identification sign be printed in all capital
letters by 2018.


Clyde Wayne Crews Jr., “Ten Thousand Commandments
Jonathan Karl, “Ray LaHood: Street Sign Regulations
‘Make No Sense’”, ABC News, December 1, 2010. http://

This rule would have required thousands of
cities and towns across America to replace
countless numbers of perfectly legible street
signs with brand new ones for no reason
other than to comply with an arbitrary federal
mandate. New York City estimated that the
regulation would cost them $27.6 million.6
Extrapolated out to all the big and little cities
alike across America, that’s hundreds of
millions of dollars not going to necessary road
maintenance, or schools, or health programs
because the federal government outlawed THIS
for This.
In 2011, the Department of Transportation
walked back this regulation after the outcry from
municipal leaders across the country. While the
core of the regulation remains in place, the 2018
timeline has been set aside. This case, however,
is the exception, not the rule, to overly specific
and burdensome regulation. Thousands of them
are being enforced right now, with penalties
that include tens-of-thousands of dollars in
fines and even jail-time. A perfect example
comes from the Occupational Safety and Health
Administration, better known as OSHA.
Buried deep within OSHA’s code of standards
(standard number 1910.23 for reference), are
rules for “Walking-Working Surfaces”. Within
these several dozen rules for various surfaces
you’d find around any common office or factory
are at least 18 separate rules governing stairs
alone. This is one of the regulations governing a
stairway’s railing:
“A standard railing shall consist of top rail,
intermediate rail, and posts, and shall have a
vertical height of 42 inches nominal from upper
surface of top rail to floor, platform, runway,
or ramp level. The top rail shall be smoothsurfaced throughout the length of the railing.
The intermediate rail shall be approximately

Ashley Halsey III,“U.S. government backs off mandate for new
street signs”, The Washington Post, August 30, 2011. http://

18 REGULATION | BLUEPRINT for 2015: Setting the Stage for the Next Session

The code goes on to make even more specific
rules for railings depending on what type of
material they are made out of, from wood, to
pipe, to steel.

intellect to create jobs and drive our economy,
they also directly impede economic growth.
When business owners are too busy measuring
stairway railings, they aren’t focused on meeting
the demands of their customers, expanding their
businesses, and creating jobs.
Thus, if we’re going to restart the American
economic engine, the sludge of excessive
regulation must first be cleaned out.

Not only are such minute regulations insulting
to millions of business owners with the skills and

BLUEPRINT for 2015: Setting the Stage for the Next Session | REGULATION 19


halfway between the top rail and the floor,
platform, runway, or ramp. The ends of the rails
shall not overhang the terminal posts except
where such overhang does not constitute a
projection hazard.”




While some regulations are indeed silly and can
be laughed off, others are far from a laughing
matter. Some regulations, in fact a great many
that are proposed and finalized each year, have
economic costs in excess of $100 million a year.
These are defined as “major” or “economically
significant” rules. According to the latest 10,000
Commandments study, 191 rules determined
to have an economic impact greater than $100
million annually were proposed and/or finalized
in 2013. The year before, 2012, this figure was 224
rules. In 2011, 212 economically significant rules
were proposed. In 2010, 224 rules. In 2009,184
rules. In fact, each year since 2001, there have
been no fewer than 127 major rules in the
government’s rule-making agenda. These rules
all compound on one another, year after year.
They also do not include rules that have been
determined to have an impact of less than $100
million per year, including those estimated to
cost as much as $99 million. These highlighted
major rules may also cost well in excess of
$100 million per year. In short, we only have a
minimum estimate of how much each year’s
major regulations are growing the government’s
impact on the economy.
For our economy to be efficient, there needs
to be a greater benefit for each cost. This is far
from the case with executive branch regulations,
which often face little scrutiny or debate prior to
their implementation. A quintessential example
of this crisis is the recently announced power
plant carbon emission standards from the EPA.
Dubbed the Clean Power Plan, or CPP, the rule
requires states to reduce their carbon emissions
from the electric power sector by a combined
nationwide total of 30 percent by 2030.
Essentially the plan would force states to move
away from more affordable, yet more carbonintensive coal power, towards more expensive
renewables and natural gas. While the EPA itself
pegs the cost of the plan between $7 billion and
$8 billion, well beyond qualifying it as a major

regulation, independent analysis shows that this
is a gross underestimate of the impact.
Anticipating the announcement of some sort of
carbon emissions rule of the type, the Chamber
of Commerce commissioned a study to look at
a 40 percent reduction in carbon emissions from
the electric power sector. The study concluded
that such a regulation would cost on average
$50 billion in lost GDP growth annually with a
cumulative loss of $586 billion in disposable
income through 2030.7 That is an enormous cost,
resulting primarily from largely unnecessary new
infrastructure and power plant construction. So
what’s the climate benefit?
Unfortunately, the EPA failed to mention how
much the plan would lower global temperatures
in the 600+ page CPP. Luckily researchers at
the Cato Institute, using one of the EPA’s own
climate models, ran the numbers. They found
that the CPP, as proposed, would lower global
temperatures by .018 degrees Celsius… by 2100.
Per the Cato report:
“We’re not even sure how to put such a small
number into practical terms, because, basically,
the number is so small as to be undetectable.”8
Putting aside the entire debate about Global
Warming, or Climate Change, or whatever it is
being called this week, this cost-benefit balance
should alarm all Americans, be the true cost
closer to either $8 billion or $500 billion. Such a
plan deserves further debate and ought to have
its day to be questioned by the American people
via Congress, as does certainly any other piece


IER, “EPA’s Power Plant Rule: All Economic Costs; No Climate
Benefits”, June 17, 2014. http://instituteforenergyresearch.
Paul C. Knappenberger and Patrick J. Michaels, “0.02°C
Temperature Rise Averted: The Vital Number Missing from
the EPA’s ‘By the Numbers’ Fact Sheet”, The Cato Institute,
June 11, 2014.

20 REGULATION | BLUEPRINT for 2015: Setting the Stage for the Next Session

The Regulations from the Executive in Need
of Scrutiny (REINS) Act requires that agencies
classify all proposed rules as major and nonmajor in order to submit major rules to Congress
for review. Congress must then pass a joint
resolution of approval for major rules within 70
days of submission. Joint resolutions, which
must be passed by both chambers, under
the REINS Act will not be permitted to carry
amendments. It is an up or down vote on the
proposed regulation alone. If the rule is not
approved within 70 days, it may not go into
effect. Emergency rules necessary for public
health, safety, and national security may go

into temporary effect for 90 days should the
president deem it necessary.
The power to make law is granted exclusively
to the Congress under the Constitution. The
Executive Branch is only to enforce those laws,
not create their own. Yet executive regulations
carry the full weight of federal law without the
direct blessings of Congress. While most of the
blame does lie with Congress and its negligence
towards this growing trend, the REINS Act is a
simple solution to begin reversing the trend. If
a rule or regulation is such a good idea, then it
ought to be able to withstand scrutiny and be
proven in front of the chosen representatives
of the people it will impact. Not only will the
REINS Act go a long way in ending expensive
and inefficient regulation, but this needed
check against Executive Branch agencies and
departments will also force them to craft better
regulation in the future.

BLUEPRINT for 2015: Setting the Stage for the Next Session | REGULATION 21


of major regulation that could cost Americans
in excess of $100 million a year. Unfortunately,
under current law, the hundreds of rules set
to do so this year, including the CPP, will likely
never reach Congress for a debate and vote.
There is a common sense bill that proposes a
simple fix to change all that.



( AL E RT A CT )
Federal regulations impose strict standards of
conduct on American businesses, organizations,
and individuals be they for important or frivolous
purposes. Compliance with many of these
rules can be costly and time consuming, as we
know from the estimated $1.9 trillion in annual
compliance costs. Failure to meet certain
onerous standards carries the threat of crippling
fines and even jail time. The point is that federal
regulations hold Americans and their businesses
to very high standards. If that is to be the case,
then the regulators ought to be held to stringent
standards themselves.
Instead, evidence suggests that the regulatory
process is rather capricious. The Environmental
Protection Agency (EPA) is a perfect example of
this problem, and not only because it is one of
the more prolific regulators. The EPA has come
under much criticism recently because of its
lack of transparency in the regulatory process.
In regards to one particular new rule, with an
estimated annual compliance cost of over
$10 billion a year, Congressman Lamar Smith,
Chairman of the House Committee on Science,
Space, and Technology, chastised the EPA
claiming, “more than 99% of the EPA’s healthbased justifications for the rule are derived from
scientific research that the EPA won’t reveal.”9
The agency has also been criticized for its
inability to release regulatory guidelines,
including those that are essential for businesses
to comply with federal law, in a timely manner.
For example, according to a Government
Accountability Office (GAO) report, the EPA has
failed to release standards necessary for the fuel
industry to comply with the federal Renewable
Fuels Standard by the legal deadline each

Lamar Smith, “The EPA’s Game of Secret Science”, The Wall
Street Journal, July 29, 2013.

year since 2009.10 The EPA is required to issue
standards for the upcoming calendar year by
November 30th. Yet the 2013 standards due on
November 30th of 2012 weren’t released until
August of 2013, eight months late.
This kind of lackadaisical approach to regulation
is unacceptable and creates an undue burden
on businesses that compounds on the burden
already imposed by the regulation itself. The
GAO report goes on to say how the EPA’s
inability to release its RFS regulations on time
inhibits the ability of stakeholders in the fuel
industry to effectively budget and plan longterm. This is just a snapshot of the economic
inefficiency created entirely by an absence
of sufficient accountability and oversight
throughout the various Executive Branch
agencies and departments. If the American
people are expected to live by specific rules
and standards handed down by Washington,
then its time that the rule makers abide by new
standards of accountability themselves.
The All Economic Regulations are Transparent
Act (ALERT) would impose desperately
needed structure to a regulatory process
gone awry. First, the ALERT Act creates a
schedule of responsibilities for the heads of
regulatory agencies in order to improve active
accountability and public transparency. Under
the terms of the ALERT Act, agency heads
must submit to the OMB’s Office of Information
and Regulatory Affairs (OIRA) monthly reports
detailing the expected rule-making agenda of
that agency for the next year. The reports are
to include summaries of all new regulations to
be proposed and finalized, including the nature
10 Frank Rusco, “Report to Conressional Requesters: Petroleum
Refining—Industry’s Outlook Depends on Market Changes
and Key Environmental Regulations”, GAO, March 2014.

22 REGULATION | BLUEPRINT for 2015: Setting the Stage for the Next Session

These reports will serve a dual purpose. The
first is increased transparency for the public.
Not only will this help outside organizations,
the press, and individuals better report on and
scrutinize the regulatory process, it will also
increase awareness for stakeholders, granting
them more time to contribute their input to the
process and better prepare for if/when the
rule is finalized. The second function is internal
accountability. The process of having to produce
the reports themselves adds a layer of constant
self-evaluation, a valuable step in improving the
regulatory process.

The provisions of the ALERT Act then turn to
the White House and OIRA itself. Each year, by
October 1, the OIRA administrator must publish
a summary of all the rules submitted by the
various agencies throughout the year. This
summary will include the total estimated cost
of all proposed/finalized rules, a list of the rules
issued for which a resolution of disapproval
was introduced in Congress, and all actions
that have repealed, curbed the scope of, or
expedited the expiration of existing rules. There
is no excuse for why this information as such is
currently only available due to the diligent work
of private researchers. Just as with the INFORM
Act, the government ought to be forthright about
the extent and cost of the regulatory state it

BLUEPRINT for 2015: Setting the Stage for the Next Session | REGULATION 23


of the rule, the objective and legal basis for the
rule, what stage of the development process
the rule currently is in, whether or not the rule is
projected to have a significant economic impact,
and whether or not the rule shall be subject to
periodic review. These monthly reports are to be
made publicly available by OIRA online.



The REINS Act will certainly help curb the
economic impact of major regulations in the
future by ensuring that their premises can
withstand open debate in the halls of Congress
prior to the American people paying their price.
However, as mentioned at the beginning of the
chapter, the federal government handed down
almost 3,700 rules last year, of which only a
relative handful would be deemed “major” and
thus face scrutiny under the REINS Act.
What about rules that cost less? What about
rules already on the books? All the silly and
expensive rules, or those that qualify as both,
that are already in place would still evade
the necessary oversight. While various rules
are challenged before specific committees
in both chambers in Congress from time to
time, that process is reactive, not proactive.
Only regulations that generate headlines and
widespread frustration face review. The little
regulations, no matter how dumb, inefficient,
or outdated stay buried. While each one, on
its own, may not be registering a measurable
impact on the economy, when compounded into
the 1 million+ and counting currently on record,
their effect is undoubtedly beyond marginal.
Nature has many mechanisms to control
excessive growth and imbalances in the
ecosystem. Predators keep populations in check
while forest fires clear out overgrowth and dead

wood. No such mechanism exists in the jungle
that is the Code of Federal Regulations. It is high
time for a forest fire.
Congress should move to create a full time joint
committee, of Senators and Representatives,
Democrats and Republicans, to begin evaluating
the Code of Federal Regulation, word for word,
line by line. Each one of the million different
rules that Americans must follow ought to
be carefully reviewed and proven worthy to
live on. Logical and efficient regulation can be
left in place, while the pesky and prohibitively
expensive can be dealt with accordingly.
There need not be a time limit on the process.
This should be a permanent body in order to
ensure thorough evaluation of each rule, proper
weighing of the costs and benefits, and ample
time for input from stakeholders.
Not only would the formation of such a body be
able to weed out bad regulations holding back
economic growth, but it would also generate
knowledge of what good regulation looks like.
This would be an enormous boon to Congress,
Executive Branch agencies, and ultimately the
American people, as it would help ensure the
crafting of better laws and associated rules in
the future.

24 REGULATION | BLUEPRINT for 2015: Setting the Stage for the Next Session

The importance of energy to the health of an
economy is undeniable. The price of energy
factors into the price of every single good and
service provided in our current market. From
production, to transportation, to sales, the cost
of the energy required to do business is built into
the value of everything. Thus a sound energy
policy, while often overlooked, is just as critical
to economic viability as sound tax, monetary,
and budgetary policies. It is important that
energy policy receive considerable attention
however. There is the obvious reason of energy’s
importance to the economy; but also there are
the lessons to be learned when considering future
energy policy and, more broadly, the role of
government as a whole.

As access to affordable and reliable energy is such
an important part of ensuring a healthy economy,
government has found tremendous political stake in
answering this call.
However, what many fail to realize is that this
has been the worst possible scenario for those
concerned with energy sustainability and
affordability. While many expect that government
intermediation can keep prices low while keeping
supply plentiful, government has proven time and
again that its policies are incapable of ensuring
market stability. In fact recent prices, which only now
are easing off of historical highs, were a direct result
of the interference of government and its regulation
of the market, not a lack thereof.
Unfortunately, government in the energy market
is nothing new. For much of the past century, the
government intervened on behalf of the fossil fuel
industry. For nearly seven decades, federal subsidies
and tax credits were exclusively used to lower
overhead costs and mitigate risk for oil and gas
producers in an effort to keep prices artificially low.

for 2015:

Setting the Stage
for the Next Session

This set a dangerous precedent for government
and expectations from consumers leading into
major changes in the energy market and political
climate. Beginning in the 1950’s, the US became
a net-importer of energy. Two decades later, the
government’s market meddling came to a head that
has yet to be entirely reversed.
Domestic price controls imposed to keep prices
low in the wake of rampant inflation across the
economy lead to fuel shortages in the 1970s. Prices
subsequently skyrocketed, exacerbated by shocks
to global supply by the Organization of Petroleum
Exporting Countries (OPEC) Embargo and the Iranian
With its own policies rapidly failing, government
attempted a massive re-direction of the American
energy market. The peak-oil scapegoat emerged.
With the pain of fuel shortages and high prices fresh,
Washington peddled the theory fossil fuels were
running out. To this day, policy still reflects this view.
Yet, are we actually running out of fossil fuel?
Not quite.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 25


These new technologies are dropping the cost
of accessing resources. Falling costs allow
movement down the pyramid towards a greater
volume of resources in the lower
concentration areas. In the 1970s,
when the fear of running out of
oil was pervasive in politics and
the media, hardly anyone likely
realized just how much larger the
bottom of the pyramid was.

The fossil fuel supply can best be explained by
what is called the Resource Pyramid Concept,
seen below:

The Resource Pyramid Concept
All resources are not equal.
Highly Concentrated
Easy Extraction/access


g ion
sin ct
ea tra
cr f ex

tte rce
Be sou


Low Concentrated
Difficult Extraction/access

The available data suggests that
America’s resource base is vast
and production has yet to peak.
Total discovered and estimated
resources that have yet to be
exploited that are economically
viable to access with current
technology are called technically
recoverable resources (TRR). Oil,
natural gas, and coal all boast
impressive TRR bases.

Chart Source: Gene Whitney, Carl E. Behrens, Carol Glover, U.S. Fossil Fuel
Resources: Terminology, Reporting, and Summary, CRS Report for Congress,
Nov. 30, 2010.

What the pyramid shows is a smaller amount of
resources available at costs that are affordable
for use. In the case of fossil fuels, these are
highly concentrated deposits that sit right below
relatively soft parts of the Earth’s crust. Due
to technological limitations, it was either too
expensive or impossible to access other types of
fossil fuels trapped deep beneath layers of crust
made from tougher materials, like granite, for
many years.
Yet over just the past decade, the oil and gas
industry has experienced nothing short of a
technological renaissance. New equipment is
allowing surveyors to look deeper and detect
previously hidden pockets of oil and gas.
Further new technology and techniques are
allowing drillers to both penetrate and break
up the hard rock formations trapping reserves
through hydraulic fracturing (fracking) or simply
circumnavigate these barriers entirely with
horizontal drilling and flexible piping.

26 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

As of September 2012, the Energy
Information Agency (EIA) shows
that domestic TRR bases for
natural gas total 2,203.3 trillion
cubic feet1. Crude oil TRR are estimated at 220.2
billion barrels2. The demonstrated coal reserve
base is 484.5 billion short tons3. When drawn into
perspective with annual consumption of each of
these resources, the truly impressive extent of
US fossil fuels reserves is revealed.

In March 2013, the US consumed 2.5 trillion
cubic feet of natural gas4, indicating that the TRR
reserve of 2,203.3 trillion cubic feet is enough
natural gas to satisfy current demand for another
73 and half years.
In 2011, the US consumed the equivalent of 6.79
billion barrels of crude oil in petroleum products

EIA Annual Energy Review, Table 4.1, September 27, 2012.
EIA Annual Energy Review, Table 4.8, January 2011. http://
EIA, Natural Gas, Natural Gas Consumption by End Use Table,
June 28, 2013.

these resources, the supply base for fossil fuels
increases dramatically. Consider the fuel closest
to exhaustion for example: crude oil. Below
is the Resource Pyramid for domestic crude
oil, compiled from multiple government data

Most impressive is the coal reserve base. At
consumption levels of roughly 1 billion short
tons a year in 20116, it is large enough to meet
demand for another 435 years.

Sub-economic resources for crude oil alone
form a reserve base of 2 trillion-plus barrels in
the US. These resources could fuel the entire
2011 oil-based fuel fleet for almost 300 years or

The TRR available doesn’t tell the whole story,
however. Beyond the economically viable
resources that the TRR figure captures, there
are sub-economic resources. These are
known and estimated resources that exist at
depths or in places where extracting them with
current technology would not make sense
financially for suppliers. When incorporating

With new resources, drilling technologies, and
methods of fuel efficiency being discovered
every day, it is only logical to assume that the
capability of these conventional fuels to power
the US grid and fleet and satisfy demand will
only expand, as it has since the mid-to-late

Resource Pyramid for Domestic Crude Oil

Historical Production:


205 Billion Barrels

22.3 Billion Barrels

Unproved Technically
Recoverable Resources:

220.2 Billion Barrels

197.9 Billion Barrels
Discovered and Unproved
Subeconomic Resources:

2+ Trillion Barrels

Chart Sources: Historical production: EIA U.S. Field Production of Crude Oil, March 15, 2013.
Reserves and Unproved TRR: EIA Annual Energy Review, Table 4.1, September 27, 2012.
Discovered and unproved sub-economic resources: Birdwell, J.E., Mercier, T.J., Johnson, R.C., and Brownfield, M.E., 2013, In-place oil shale
resources examined by grade in the major basins of the Green River Formation, Colorado, Utah, and Wyoming: U.S. Geological Survey
Fact Sheet 2012–3145, 4 p., available at


EIA, Petroleum & Other Liquids, Product Supplied Table,
March 15, 2013.
EIA Annual Energy Review, Table 7.3, September 27, 2012.

20th century. These fuel sources provide the
overwhelming majority of the energy supply
in the United States and do so while receiving
next-to-none of the support from a government

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 27


like gasoline and jet fuel.5 With a TRR reserve
of 220.2 billion barrels, there is enough oil in
the United States alone to satisfy 2011 levels
of domestic demand for another 32 and a half


bent on dictating the terms of the energy
Recently, however, prices have begun to
collapse. This is a basic product of supply and
demand. High prices allowed for sub-economic
resources, which are more plentiful, to become
economically accessible. This created a
boom in supply. Large supply, however, eases
demand and reduces prices. This has put the
entire supply boom creating the low prices in
the first place at risk. Only two things allow for
producers to move down pyramid and access
more plentiful resources for production: 1. new
technology and 2. profits.
Technologies like fracking and horizontal
drilling have been widely dispersed. Their broad
dispersion has significantly reduced prices for
energy consumers because they reduce prices
for producers to access supply. This trend
should continue, however it has indeed slowed,
leading producers to pause some operations.
This is because prices are no longer high and
thus it is no longer possible to turn a profit with

28 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

some operations, as the costs of deploying the
technology have not fallen significantly enough.
If this reduces supply enough, high prices will
immediately resume. Congress can potentially
stem this problem through creation of an energy
policy and regulatory environment that allows
producers to earn more profits, not necessarily
through higher prices but through lower costs.
Energy policy currently antagonizes fuel
production and oil and gas exploration because
it is largely premised on a false-reality of fossil
fuel reserves drying up. This is, as demonstrated,
far from the case. These policies create
inefficiencies for oil producers that keep their
break-even point much higher than it otherwise
would be. Further, they complicate the entire
fossil fuel market. Congress needs to correct
these inefficiencies and allow the energy market
to reach equilibrium where energy producers
can continue to provide supply at low prices so
that American consumers and businesses aren’t
faced with the economic drag of exorbitant
energy prices again.

While the perceived realities behind the energy
policies of the 1970s have not come to pass, the
policies based on those incorrect suppositions
are indeed very real and having a negative
impact on the economy. The most clear-cut
example of this is the federal ban on exporting
crude oil.
In 1975, Congress passed the Energy Policy
and Conservation Act, part of which banned
virtually all American crude oil exports. Again,
the motivating factor was the perceived
problem of global instability being the primary
contributor to US fuel shortages. The theory
was that the supply of crude oil produced in the
United States had begun an irreversible decline.
Thus, in order to shield the domestic consumer
fuel market from instability abroad, as much
US crude supply needed to be hoarded as
Nearly forty years later, two major flaws in that
theory have finally been widely realized. First,
obviously, is the fact that new technologies have
lead to unprecedented increases in domestic
crude oil reserves and production. The second
is the simple fact that trying to control the price
of finished fuel products such as gasoline with
a ban on crude oil exports is sort of like trying
to build a dam made of chicken wire. Robert
P. Murphy, a Senior Economist at the Institute
for Energy Research explains the situation
“American motorists don’t actually buy crude
oil, however: No, they buy gasoline, which
is a product made from crude oil. It’s not
actually American motorists who are directly
helped by the ban on crude exports, but


Brad Plumer, “U.S. oil exports have been banned for 40 years.
Is it time for that to change?”, The Washington Post, January
8, 2014.
Robert P. Murphy, “Oil Export Ban is Bad Economics”, IER, August 15, 2014.

rather American refiners. They are the ones
who directly buy crude oil, and so they’re the
ones who benefit if the ban on exports forces
domestic oil production to go into their hands,
without having to compete with an entire world
market of refiners bidding on that American oil.
Although the U.S. government has in place
a (partial) ban on crude oil exports, there
is no similar restriction on the export of
petroleum products, in particular gasoline.
Therefore, it is theoretically possible that
the government ban on crude exports
paradoxically makes gasoline more
expensive for American motorists.”
As Murphy goes on to explain, the lack of
restrictions on the trade of gasoline means that
US consumers are still paying what is essentially
the world price for gas, barring different tax
and subsidy structures throughout the world
of course. Further, this price is somewhat
artificially high because the crude oil export ban
suppresses the total supply of crude oil to the
global market. The export ban limits the number
of buyers of the US supply of crude oil to US
refineries. Further limiting the market for US
crude supply is the fact that most of the refining
capacity in the United States is actually better
suited for processing heavier oils found abroad
versus the lighter oils generally produced
domestically.9 This issue itself stems, in part,
from the policy of the last 40 years, which has
suppressed exploitation of domestic supply.
The result is that domestic crude oil producers
have to lower their prices below global market
prices in order to sell their product. This lower
price creates a disincentive against additional
production. So what would happen if the export
ban were lifted?


Robert L. Bradley, Jr., “Exporting U.S. Crude Oil: A Triple Win”,
IER, August 4, 2014.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 29




Again, Murphy explains the economics with
unmatchable clarity:
“The immediate response is that U.S. oil
producers begin shipping crude abroad, to fetch
the higher world price… In the new equilibrium,
with more total crude oil being produced on
Earth each day, it stands to reason that refiners
across the globe will end up producing more
total gallons of gasoline each day... the increased
quantity brought to market can only be sold at a
lower price per gallon at the pump. The freeflow of gasoline across borders ensures that the
price of gas in the U.S. is always the world price,
meaning that a lower world price for gasoline
translates into lower prices at the pump for
Americans, too.”
How much lower? A recent study by IHS
estimates a drop in retail gasoline prices by 8
cents per gallon through 2030. While this may
not sound substantial at first, when you consider
that millions of American motorists are buying on
the order of a dozen gallons or more each time
they fill up, which may be multiple times each

30 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

month, the savings really add up. Per the IHS
report: “The combined savings for US motorists
during the 2016-2030 period would translate to
$265 billion compared to a situation where the
restrictive trade policy remains in place.”
Additionally, as mentioned, these savings result
from lower prices brought on by increased
domestic production. This inevitably also means
that even more valuable jobs will be created in
the domestic oil and gas industry. The IHS study
pegs this at an average of nearly 400,000 new
jobs each year through 2030, peaking at nearly
one million new jobs in 2018 alone.10
In effect, the four-decade-old crude oil export
ban serves absolutely no beneficial purpose
for the average American. The economics
clearly prove that this policy is having the exact
opposite of its intended effect on the market. It
would be senseless to let this backwards policy
live on for another day, let alone another decade.

10 IHS: US Crude Oil Export Decision.

The Renewable Fuel Standard (RFS) is a federal
government mandate designed to incorporate
an increasing amount of fuels derived from
non-fossil fuels sources, primarily biofuels, into
the fuel supply of the United States. The RFS
was born at a time when the nation’s increasing
reliance on foreign energy sources was creating
painful foreign policy quandaries. Without
realizing the massive changes to the domestic
energy market, and economy as whole lying
right around the corner, Congress created a
guaranteed market for these biofuels through the
However, the program is now creating a major
strain between both the biofuels and fossil
fuels industry and the Environmental Protection
Agency (EPA), the chief governmental entity
designated with the task of implementing and
enforcing the program. Barring any changes, the
program’s structural failures are set to wreak
havoc on the US energy market, in one way or
another. While the EPA has moved to mitigate
these issues, the failure of the program stems
from the work of Congress, and therefore the
solutions rest there as well.
For all the difficulty that the RFS is creating today
for both the government and private industry, the
program has valiant origins. Congress created the
program in 2005 through the Energy Policy Act,
also known as the EPAct. At the time, the United
States was heavily reliant on foreign sources
of fossil fuels for transportation fuel, reflecting
a several decade long trend of decreasing
domestic resource production coupled with
growing demand.11 In addition, the country was
also at the height of its involvement in the Iraq
War, a conflict still widely seen as waged in the
interest of securing oil resources.12 Congress
11 Renewable Fuel Standard Assessment White Paper, House
Committee on Energy and Commerce, 2013.
12 Antonia Juhasz, “Why the war in Iraq was fought for Big Oil”,
CNN, April 15, 2013.

clearly perceived a need to not only move away
from a dependence on foreign sources of oil for
transportation fuel, but potentially entirely away
from oil itself.
Washington set its sights on biofuels, or fuels
produced from non-fossil biological material
such as corn, which is used to make the biofuel
ethanol. EPAct amended the extant Clean Air
Act (CAA) by adding the first iteration of the RFS,
known as RFS1. RFS1 created a guaranteed
market for the biofuels it sought to bolster
by mandating that producers of finished fuel
products, mainly refineries and importers, blend
specific and increasing gallon amounts of
renewable biofuels in the nation’s fuel supply
each year through 2012. For example, in 2006,
RFS mandated that a minimum of 4 billion
gallons of biofuels be blended into the refined
products sold on the American fuel market.13
In 2007, the RFS1 program was enhanced and
expanded into the RFS2 program. Congress
did so through the passage of the Energy
Independence and Security Act (EISA), a name
that leaves little doubt about Congress’s
intentions with the RFS. New standards for the
amount of gallons of biofuels to be incorporated
into the national fuel supply were set for each
year through 2022. The standards increased
dramatically, calling for 36 billion gallons of
various biofuels to be blended into the supply by
Under the reforms to RFS put in place by the
EISA, Congress tasked the Environmental
Protection Agency (EPA) to create the necessary
regulations each year to enforce the mandated
minimum gallon requirements set out by the
law. Under the guidelines set out by EISA, EPA is

13 Randy Schnepf and Brent D. Yacobucci, “Renewable Fuel
Standard (RFS): Overview and Issues”, CRS Report for Congress, March 14, 2013.
14 Ibid.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 31




to determine annual percentage standards that
reflect the minimum gallon standard as a ratio of
expected fuel consumption in the United States
each year. The annual percentage standards
are effectively a signal to the fuel producers and
importers in the United States as to how much
biofuel must be incorporated into the supply.
EPA determines these annual percentage
standards based on predictions made by Energy
Information Administration (EIA), a federal
agency nested within the Department of Energy
tasked with collecting and reporting data in
relation to the US energy market.15
On paper, the process for determining the
necessary annual percentage standard was
fairly straightforward. The EPA had explicit gallon
targets handed down by Congress through the
EISA for it to achieve each year. Once the EIA
had projected the raw national fuel consumption
totals in gallons for the upcoming year, it was
only a matter of a simple percentage calculation
to determine the necessary RFS regulations. Yet,
this process has proven to be easier said than
These explicit minimum gallon targets
written in the EISA were supposed to make
the enforcement of RFS easier. However, the
EPA currently finds itself at odds with major
stakeholders in the US fuels industry and
internal government watchdogs over the RFS
and annual percentage standards. As it turns out,
Congress’s decision to set specific gallon targets
for biofuels in the US supply through the next
two decades back in 2007 is the primary reason
Since Congress, through the EISA, forces the
EPA to use EIA data to structure RFS regulation,
it’s safe to assume that Congress also looked to
EIA data when determining the minimum gallon
standards it was writing into law back in 2007.
That year, based on EIA projections, Congress
anticipated that total fuel consumption in the
United States would grow by 30 percent by
15 Ibid.

32 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

2030.16 What they did not anticipate, however,
were the events that would befall the nation the
very next year.
In 2008, the worst financial and economic crisis
since the Great Depression struck. This massive
recession had a prodigious depressing force
on economic activity and therefore energy
and fuel consumption.17 According to the EIA,
in 2007, the United States consumed roughly
7.58 billion barrels of crude oil and refined
petroleum products. Just two years later, instead
of consumption increasing as Congress and
the EIA had predicted, annual consumption
fell to roughly 6.852 billion barrels.18 Annual
consumption is now projected by the EIA to
remain relatively stagnant well into the next
several decades, sliding by a negative tenth of a
percent by 2040.19
However, while total fuel consumption began
its fall, the mandated volumes of biofuels to
be blended into the nation’s fuel supply, as
set out by the RFS under the EISA, continue to
increase. Since these congressionally mandated
minimums are static gallon amounts, and not
actual percentages, they cannot automatically
adjust with changing economic and energy
market conditions. This has resulted in the ratio
of biofuels to petroleum-based products in the
US fuel supply growing at a rate that is markedly
more aggressive than industry stakeholders,
particular fuel and engine producers, anticipated.
In short, the country’s fuel infrastructure and
vehicles are simply not ready for the additional
volumes of biofuels required by law.
Industry experts have described this
16 Frank Rusco, “Petroleum Refining: Industry’s Outlook
Depends on Market Changes and Key Environmental
Regulations”, GAO, March 2014.
17 Global Automakers Responses to House Energy and Commerce Committee’s Stakeholder Questions Regarding the
Renewable Fuel Standard, Testimony Before House Committee on Energy and Commerce, April 5,2013.
18 See Energy Information Administration Data at: http://www. Updated: April 29, 2014.
19 “Annual Energy Outlook 2014”, Energy Information Administration, April 2014.

However, stakeholders in the renewable biofuels
industry, who unquestionably benefit from
the guaranteed and growing market for their
products provided by the RFS, have denied the
existence of this “Blend Wall”. The Renewable
Fuels Association for example, an industry trade
group that represents producers of biofuels
such as ethanol, claims that the Blend Wall issue
could be completely resolved if the producers of
finished fuel products simply marketed higherblend fuels such as E-15.22 Additional sales of
E-15, which is gasoline with 15 percent ethanol
content, would of course raise the raw amount
of biofuel gallons sold per-year potentially into
compliance with the existing RFS mandates set
out by the EISA. Some have even suggested the
increased usage of fuels with ethanol contents
as high as 85 percent, or E-85 fuel, which would
dramatically increase the number of gallons of
biofuels blended into the national fuel supply.23
Automakers and the producers of finished
fuel products insist that such solutions are not
20 Harry Foster, Robert Baron and Paul Bernstein, “Impact of
the Blend Wall Constraint in Complying with the Renewable
Fuel Standard”, Charles River Associates, November 2, 2011.
21 Ibid.
22 Ryan Tracy, U.S. Ethanol Mandate Puts Squeeze on Oil Refiners, The Wall Street Journal, March 10, 2013. http://online.wsj.
23 Bruce A. Babcock and Sebastien Pouliot, Price It and They
Will Buy: How E85 Can Break the Blend Wall, CARD Policy
Briefs, August 2013.

feasible. Beyond the previously mentioned
fact that only E-10 blended fuels have been
approved by the EPA for conventional use
in all engines, there are a number of basic
infrastructure and marketplace issues that
are obstructing increased sales and usage of
these higher-blend fuels. E-85, for instance,
has market forces stacked against its increased
usage. According the American Fuel and
Petrochemical Manufacturers (AFPM), an
industry trade group that represents refineries
and other finished fuel product manufacturers,
the only vehicles on the road currently capable
of using E-85 blended fuel are flex-fuel vehicles
(FFVs), which are cars with engines designed
to run on either pure or low-blend gasoline or
high-blend mixed fuels like E-85. The problem
in the immediate term in dealing with the RFS
is that FFVs make up an insignificant portion
of the domestic vehicle fleet, with little sign of
any real growth.24 Further, E-85 contains lower
energy content than regular, low or unblended
gasoline. Essentially this means that one gallon
of E-85 will not power a vehicle for as many
miles as one gallon of regular gas. Adjusting
for this difference, AFPM determined that E-85
costs consumers 58 cents more per gallon than
regular gas.25 Considering that Americans are
just now recovering from historically high prices
at the pump in both nominal and real terms for
all fuels, even FFV owners have no incentive to
purchase the more expensive product.26
Yet even before considering policy alternatives
to circumvent these market-based issues
with higher-blend fuels like E-85, industry
stakeholders have raised concerns about
even lower-blend fuels like E-15 and their
potential impact on engines. Refineries and
other finished fuel product manufacturers say
there is little market demand for E-15 fuel as a
24 Comments Of The American Fuel & Petrochemical Manufacturers On the Energy & Commerce Committee’s Renewable
Fuel Standard Assessment White Paper, Testimony before
the House Committee on Energy and Commerce. http://
25 Ibid.
26 Annual Energy Review, Energy Information Administration,
September 27, 2012.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 33


phenomenon as “the Blend Wall”. This
term describes the where “the maximum
concentration of ethanol that can be blended
in gasoline and used by conventional gasolinepowered motor vehicles” is reached.20 The
Blend Wall is considered to be struck when the
mandated gallon amount of biofuels required
in the gasoline supply reaches a volume in
excess of 10 percent. This 10 percent limit exists
because E-10, or gasoline where 10 percent
of its content is the biofuel ethanol, is the only
blended fuel approved by the EPA for use in
conventional engines at this point in time.21


result.27 According to the Association of Global
Automakers, E-15 has the propensity to degrade
engine and emission control components at a
more accelerated rate than E-10 and regular
gasoline. This occurs to such an extent that the
automakers are concerned that their vehicles
will be brought out of attainment with other
EPA regulations on air pollution required under
the CAA.28 Although the EPA has issued a
waiver for E-15 fuel use in cars of the model
year 2001 and later, most car makers refuse
to cover any vehicle filled with anything above
E-10 under warranty, potentially exposing
millions of consumers to thousands of dollars in
unnecessary repair costs.29
Yet, despite the insistence of the biofuels
industry that their higher-blend products are
safe and that the Blend Wall is a fantasy of the
finished fuel product manufacturers, the EPA
decided early last year that, for the reasons
stated, the Blend Wall is real and a major
problem in RFS enforcement.30 In addition, the
EPA has also announced that as of late 2013, the
Blend Wall had been struck.31
With the Blend Wall being an indisputable reality
in the eyes of the EPA, the agency currently finds
itself in a precarious situation. Doing nothing and
still enforcing the mandates as set out in 2007
by Congress in the EISA is projected to have
devastating economic effects.
A study by NERA Economic Consulting in 2012,
commissioned by the American Petroleum
Institute, estimated that running unabated up
against the Blend Wall through 2015 could
impact the national Gross Domestic Product by

27 Tracy, “U.S. Ethanol Mandate Puts Squeeze on Oil Refiners.”
28 Global Automakers, Testimony.
29 Cezary Podkul, “Analysis: Lawsuits likely as EPA declares
US ethanol blend wall a ‘reality’”, Reuters, October 11, 2013.
30 Ibid.
31 Julian Hattem, “EPA: Ethanol limit ‘has been reached’”,
The Hill, December 11, 2013.

34 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

as much as $770 billion.32 While this is certainly
a high-end estimate, their theory indicates that
scarcity in the fuel market will occur as individual
finished product manufacturers will scramble to
comply with their RFS requirements. Since RFS
regulations are issued as a percentage standard
by the EPA, individual producers are incentivized
to reduce their overall amount of product
supplied in order to increase the percentage that
the gallons of biofuels they do sell comprise of
total sales.33 Scarcity necessarily drives prices
higher, and higher fuel prices will suppress
economic activity.
On the other hand, organizations like the
Renewable Fuels Association insist that because
the minimum gallon standards were written
explicitly into law by the EISA, that the EPA
has no authority to change the requirements
unilaterally. The President of the Renewable
Fuels Association even went so far as to exclaim
that “any plan to roll back the targets ... under
the guise of addressing the blend wall would be
patently unlawful.”34
Despite the aggressive assertions of the biofuels
fuels industry and its allies, the EPA has chosen
to act unilaterally to stave off the approach of
the Blend Wall. While Congress may not have
been able to accurately predict the future
of the nation’s fuel market, they may have
anticipated the need for EPA to eventually alter
the minimum gallon standards to some degree.
A study commissioned by the Bipartisan Policy
Center found that under the EISA amendments
to the CAA, which created the RFS program to
begin with, the EPA has general waiver authority
over the gallon standards given certain criteria.
The report states that “EPA may fully or partially
waive any of the statutory renewable fuel
32 Paul Bernstein, Bob Baron, W. David Montgomery, Shirley
Xiong, and Mei Yuan, “Economic Impacts Resulting from Implementation of RFS2 Program”, NERA Economic Consulting,
October 2012.
33 Ibid.
34 Podkul, “Analysis: Lawsuits likely as EPA declares US ethanol
blend wall a ‘reality’”.

by November 30 of the preceding year for the
upcoming calendar year. Yet the EPA’s inability
to finalize these regulations in a timely manner
resulted in the 2013 requirements not being
published until mid-August of 2013.37

The EPA has chosen to exercise this waiver
authority under the inadequate domestic supply
clause. They have proposed that RFS regulations
for the year 2014 lower the mandated biofuel
gallon standard to 15.2 billion gallons, a full
3 billion below the level set out in the 2007
EISA legislation.36 Assuming that it survives the
inevitable legal challenges from those that have
asserted that such action is unlawful, this partial
waiver of the statutory gallon standard should
eliminate the issue of the Blend Wall for 2014.

The delays stem from the way the EPA is
forced by law to develop and enforce the RFS
gallon and subsequent percentage standards.
According to the GAO, “EPA must publish a
proposed standard in the Federal Register,
provide the public with the opportunity to review
and comment on the proposal, and address
comments received before finalizing the
regulation.” The regulations are also subject to
the inter-agency review process. This process
ensures “regulations are consistent with the
President’s priorities, among other things, and
that decisions made by one agency do not
conflict with the policies or actions taken or
planned by another.” The report continues by
explaining that the review process for the RFS
is particularly cumbersome because, “the RFS
standards involve complex and controversial
issues and balance competing agricultural,
energy, and environmental policy interests.”38

Again, however, RFS standards are set through
2022. Given the projection that overall fuel
consumption is to drop in the near term and
remain relatively stagnant in the long run,
instead of grow as it was projected in 2007 by
the EIA and Congress, for the foreseeable future,
2015 and beyond, the Blend Wall will continue
to be an issue requiring address. Complicating
matters even further is a recent report from the
Government Accountability Office (GAO) that
suggests that simply allowing the EPA to exert
its waiver authority each year to mitigate the
issue is not a viable option.
The GAO report found that the EPA is not only
habitually, but also excessively late in issuing
RFS regulations that stipulate the biofuel blend
percentages that fuel producers and importers
are subject to. The report shows that the EPA
has missed its statutory deadlines, as outlined
in the EISA, to issue the percentage standards
each year and every year since 2009. The EPA
is required to issue these percentage standards
35 Lisa M. Jaeger and Sandra Y. Snyder, “The Environmental
Protection Agency’s Authority to Amend the Renewable Fuel
Standard”, Bracewell & Giuliani LLP, March 2014.
36 Christopher Doering, “GAO chides EPA for late release of
renewable fuels standard”, The Des Moines Register, April
17, 2014.

This report also briefly explains why such delays
in the finalization process of the RFS percentage
standards are particularly concerning to industry
stakeholders and the economy at large. The GAO
found that delayed releases of the percentage
standards that are derived from the gallon
standards set out in EISA inhibit the fuel supply
industry’s ability to plan and budget effectively. It
has also been found to stall capital investments
that these companies would otherwise be able to
make.39 Just like the Blend Wall itself, this inability
to plan compliance with federal regulations set
out under the RFS could force fuel suppliers to
either reduce supply or ramp up exports.40 Either
way, scarcity results, leading to higher fuel prices
across the national economy.
37 Rusco, “Petroleum Refining: Industry’s Outlook Depends on
Market Changes and Key Environmental Regulations”.
38 Ibid.
39 Ibid.
40 Bernstein, “Economic Impacts Resulting from Implementation of RFS2 Program”.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 35


volumes, in whole or in part, if EPA determines
the requirement would (1) ‘severely harm’ the
economy or environment of a region, state, or
the nation or (2) there is ‘inadequate domestic


Now the threat of the Blend Wall adds
another major step to this already protracted
process, increasing the burden on the EPA
and subsequently the fuels industry. The
inevitable conclusion is that the RFS program
requires immediate reconsideration by the only
organization that can affect meaningful changes
to the program outside of the EPA’s authority.
That organization is Congress.
To avoid the lingering uncertainty created by the
Blend Wall problem, which is now a structural
issue with the RFS given the projections of
the domestic fuel market and statutory gallon
standards imposed in the EISA, Congress must
act. At this point, two options exist. Congress can
either repeal the RFS or restructure the program.
Calls do exist to repeal the program in its
entirety.41 Considering changes in the energy
market, outside of the mentioned issues with
depressed consumption, there is a legitimate
argument to be made that the program is no
longer necessary. One of the core original intents
of the program was to decrease American
reliance on imported petroleum products.
However, advancements in drilling technology
41 Robert Bradley Jr., “It’s Time To Repeal The Renewable Fuel
Standard”, Forbes, April 17, 2013.

36 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

have made oil reserves trapped in shale rock
formations in America accessible. As a result,
the United States is set to become the world’s
largest oil and gas producer, over taking
even Saudi Arabia, and will be nearly energy
independent by 2015.42 The question is thus
begged: are biofuels even necessary today?
Some will argue there are inherent
environmental benefits to using biofuels, but
even those claims are now in dispute. A recent
study commissioned and funded by the federal
government and published in the Nature Climate
Change journal found that biofuel usage may
actually increase greenhouse gas emissions
compared to conventional fuel usage.43 Given
this potentially major realization and the fact that
biofuels are more expensive based on energy
content than conventional fuels, the federal
government mandating their increased usage
doesn’t make sense.
The RFS should be repealed in its entirety.

42 Grant Smith, “U.S. to Be Top Oil Producer by 2015 on Shale,
IEA Says”, Bloomberg, November 12, 2013. http://www.
43 Mike Emanuel, “Gasoline greener than biofuels?”, Fox
News, April 22, 2014.

The Sixth Amendment to the Constitution
guarantees a number of rights for those accused
of a crime when it comes to the terms of their
trial. One of the guarantees, among the right
of the trial to be public, before a jury of peers,
and with the assistance of legal counsel, is
the explicit right to a “speedy” trial. Judicial
precedent explains that a speedy trial is “an
important safeguard to prevent undue and
oppressive incarceration prior to trial”.44 Like
the rest of the Bill of Rights, this provision is to
prevent powers in government from stifling
freedom in pursuit of their own agenda. Thus
the Constitution grants the right of a speedy
trial even to those accused of the most heinous
crimes imaginable. Yet, of late, it seems that
this principle of expeditious due process of law
has been lost on the Obama administration,
especially when it comes to the government’s
dealings with perfectly lawful actors in the
energy industry.
Federal law requires that most of the more
crucial activities in the energy resource
production and trade industry receive the
blessings of the government before they
commence. Examples are things like oil and gas
drilling permits and leases for federal lands and
export licenses for liquefied natural gas (LNG).
Requiring some initial level of oversight and
review of these projects makes sense given the
inherent dangers. This is an appropriate function
of government. What is not appropriate, nor
makes sense, is how long various permitting
processes are taking under the Obama
administration. The most publicized example of
this is the ongoing indecision on the Keystone
XL oil pipeline. The proposed project of the
TransCanada Corporation to deliver reliable
44 Congressional Research Service Annotated Constitution,
Accessed at:

supplies of Canadian oil to American refineries
in the Midwest and Gulf Coast region requires
approval from the White House under current
law because it crosses the international border.
As of this writing, TransCanada has waited just
over six years for final approval since submitting
their application to the State Department.
While a major policy issue in its own right, the
Keystone XL is also a symbol of a far more
widespread problem that seems to indicate the
Executive Branch is using its power much in the
way that the Sixth Amendment aims to prevent
in the Judicial Branch.
According to an April 2014 report by the
Congressional Research Service (CRS), a widegap has opened between oil and gas production
on non-federal lands versus federal lands.
From 2009 to 2013, crude oil production on
non-federal lands increased by 61 percent and
natural gas production increased by 33 percent.
By contrast, crude oil and natural gas production
on federal lands, areas that require government
leases and permits, fell by 6 percent and 28
percent, respectively. This is a major disparity if
the United States wishes to continue growing
as an energy producing power as a significant
portion, of proven US fossil fuel reserves, 43
percent of crude oil reserves, exist underneath
federal lands.45
This problem seems to be stemming from
an increasingly lengthy wait period for permit
approvals by the Bureau of Land Management
(BLM), the federal agency charged with
reviewing drilling permits. The CRS report found
45 Marc Humphries, “U.S. Crude Oil and Natural Gas Production
in Federal and Non-Federal Areas,” CRS Report for Congress, April 10, 2014.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 37




that wait times for review averaged 307 days
in 2011 versus 218 in 2006. That’s a 41 percent
increase.46 And that’s for the permits that are
finally approved. A recent report released by
the inspector general’s office of the Interior
Department found that the BLM has a current
backlog of over 3,500 permits. The report also
notes that current law sets no time limit on the
review process, thus “oil and gas permits can be
delayed indefinitely.”47
Meanwhile, permit review periods at the statelevel are generally below 80 days. In Texas, the
average is about five days.48
The end result of the longer review periods isn’t
added safety. The real impact is hesitation by
businesses to make the long-term investments
that result in jobs and resource output.49
Again, proving the need for strong Congressional
action on permitting reform throughout the
energy regulatory sector, the energy trade
sector is facing similar problems with its federal
government regulators.
A November 2013 report published by the
National Association of Manufacturers (NAM)
highlights problems facing industries attempting
to export US LNG and coal, since crude oil
exports are banned of course.
The report mentions that relatively few of the
LNG export licenses that have been submitted
to the government have been reviewed and
approved.50 The total as of September 2014 was
nine approvals with 22 pending applications.51
46 Ibid.
47 Michael Bastasch, “BLM Has Backlog Of 3,500 Oil And GaS
Drilling Permits Awaiting Approval”, The Daily Caller, July 1,
48 Ibid.
49 Mark Green, “Fed Red Tape = Lost Production and Royalties”,
Energy Tomorrow, July 2, 2014. http://www.energytomorrow.
50 James Bacchus and Rosa Jeong, “LNG and Coal, Unreasonable Delays in Approving Exports Likely Violate International
Treaty Obligations”, NAM, November 2013.
51 LNG Export Facilities, Compiled by the American Petroleum

38 ENERGY | BLUEPRINT for 2015: Setting the Stage for the Next Session

While this may not seem like a particularly
startling statistic, the NAM reminds us that
most of these approved applications have been
waiting in the hands of the federal government
for two years or more.
Coal exports are also facing federal roadblocks.
The NAM report explains:
“Federal law does not restrict the export of coal
to overseas markets. However, to export coal
mined in the Powder River Basin area of Montana
and Wyoming to Asian markets, additional port
facilities must be constructed. The siting and
construction of these facilities must be reviewed
and permitted by the Army Corps of Engineers
under the authority provided in the Rivers and
Harbors Act, the Clean Water Act and the National
Environmental Policy Act (NEPA)… Various
environmental advocacy groups, which oppose
the marine terminal projects specifically and coal
exports generally, have pushed for regulators
to study the cumulative effect of all pending
projects… In particular, opponents argue that the
impact of burning coal in other parts of the world
must be considered as part of environmental
impact reviews.”
This is a vastly expansive additional step in
the review process that is unwarranted by the
applicable law. It creates an impossible standard
that jeopardizes an industry that supported over
140,000 jobs and added $16 billion to the US
economy in 2011.52
With these burgeoning industries capable of
contributing so much to our ailing economy,
this status quo is unacceptable. While certainly
these government reviews exist as a service
to the people of the United States, to ensure
environmental and general safety, it should not
be forgotten that the federal government also
serves the people employed by oil and gas
drilling and LNG and coal exporting.
52 “U.S. Coal Exports: National and State” National Mining Association, May 2013. Economic Contributions http://www.nma.

AERA first addresses LNG and coal exports.
The legislation would bind the Army Corps of
Engineers, in its review of coal export terminals,
to only consider domestic environmental
effects in assessment. This is a far more realistic
standard not only in terms of practicality but also
in legality as it stretches the imagination as to
how and why American government regulatory
agencies would concern themselves with the
affairs of other sovereign nations.
The legislation also expands approval to all
pending LNG export permit applications, with
exceptions exclusively for national security and
foreign policy purposes.
In regards to major energy transportation
infrastructure like pipelines and electric lines,
AERA seeks to streamline the approval process
by dividing responsibilities and instituting time
requirements on the process. The approval
process for oil pipelines, natural gas pipelines,
and electric transmission lines that cross our
international borders with Canada and Mexico
are each entrusted to separate federal agencies.
Further, permits are required to be reviewed
and have a decision rendered within 120 days.

This would further eliminate the need for such
approvals to climb all the way to the Oval office,
where politics has proven to be a barrier to
Finally, AERA, finding that oil and gas exploration
on federal lands are inherently in the national
interest, begins immediate leasing programs that
make leases available for sale on a regular basis.
Further, AERA addresses the major problem
of the inability of the federal government to
process permits on time. It first gives states,
which as mentioned have much better
performance records on regulatory review, the
option to be the first and final authority for oil
and gas exploration regulation on federal lands
within their state, barring National Parks and
Wildlife Refuges. Should states defer, AERA
would require that drilling permit applications be
reviewed and either approved or denied by the
federal government within 20 days for offshore
drilling and 30 for onshore. These review periods
can be extended in some circumstances,
however if permits are not addressed within 60
days, they are deemed automatically approved.
We cannot expect the energy resource industry,
with all its newfound potential, to flourish in
an environment where the only thing that
industry leaders can count on with certainty is
uncertainty. Accountability ought to be a twoway street. There are rules and regulations that
industry must follow that serve an important
purpose. These permitting reforms in the AERA
put rules on government that emphasize the
equal importance of the energy industry as well.

BLUEPRINT for 2015: Setting the Stage for the Next Session | ENERGY 39


Congress needs to establish a more rigid
regulatory review process to grant these vital
industries the certainty they need. As part of
their comprehensive energy reform legislation,
entitled the American Energy Renaissance Act
(AERA), Senator Ted Cruz and Representative Jim
Bridenstine have proposed a series of regulatory
reforms that do just that.

Health care policy debates in America have
been around as long as modern medicine itself
and the disagreements have been deep. The
debate surrounding the Patient Protection
and Affordable Care Act, better known as
ObamaCare, has been absolutely no different.
Yet despite the gulf in opinion over the
theory, politics, mechanics, and now efficacy
of ObamaCare, there is one area of broad
agreement between Democrats and Republicans
and all sub sects alike: the prior status-quo
in American health care is not an acceptable

In early 2009, the Congressional Research Service
(CRS), anticipating that the next major effort on
health care reform was looming given the election
of Barack Obama, published a primer paper on
health care reform in general. It does an excellent
job in summarizing the three main issues that had
perennially driven health care to the top of the
political priority list. The issues highlighted were
coverage, cost, and outcomes.
In 2007, Census data showed that some 45.7
million Americans were without a form of health
care coverage at some point during the year.1 A
factor behind this problem was certainly the cost
of health care itself. Over the last four decades,
health care spending in America has outpaced
economic growth. This has led to Americans
paying substantially more for health care than
their counterparts in the rest of the industrialized
world. In 2009, health care spending in America
was roughly 90 percent higher per-capita than
in most other OECD nations.2 Making that matter
worse, it has been found that the extra spending is
not necessarily translating into better health care
outcomes. Per the CRS report:

Bob Lyke, “Health Care Reform: An Introduction”, CRS Report
to Congress, April 14, 2009.
“Health Care Costs: A Primer”, Kaiser Family Foundation, May 2012.

for 2015:

Setting the Stage
for the Next Session

“Despite spending more on health care than other
industrialized countries, the United States scores
only average or somewhat worse on many quality of
care indicators. It is near the top for some measures,
such as survival rates for breast and colorectal
cancer, but near the bottom for others, such as
mortality and hospitalization rates for asthma. A
recent Centers for Disease Control and Prevention
(CDC) report found that the United States ranked
29th in the world in infant mortality in 2004. The
U.S. position in rankings on this measure has been
declining. Notwithstanding difficulties of crossnational comparisons, these indicators show that
Americans do not receive the best value for their
health care spending and that there is room for
These are all problems that desperately needed to
be addressed. However some proposed solutions
would throw out the good with the bad. Popular
ideas on the left range from single-payer systems to
totally nationalized systems where the government
runs all of the nation’s medical facilities, such as
those found in Canada (single-payer) or Britain
(national health systems). These systems have an
inherent problem with basic economics, however.
They have a propensity for shortages because
they eliminate market forces. Supply is fixed to
government budgets, not demand. If demand

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 41


surpasses what the government allocates,
then care is not provided at some level, be
it a shortage of basic medical equipment to
doctors and nurses themselves. Shortages
are universally problematic, however they are
particularly troublesome when it comes to
people’s health. People become needlessly
more ill and some die. While this may sound like
a dramatic theory, we need not look any further
than our own shores for evidence of it.
While much of the American health care sector
exists outside of the type of direct government
control called for by liberals advocating for
single-payer or national health systems, both
single-payer and government-run hospitals
exist in America. The Medicare and Medicaid
programs are quintessential single-payer
systems while the Department of Veterans
Affairs runs a network of hospitals and other
medical facilities across the country. All of their
track records’ on care paint a picture far less
utopian than advertised. Michael Tanner, a Senior
Fellow at the Cato Institute, summarized the
disturbing trends with these types of programs
in a brilliant column published in May of 2014:3
“The news is shocking: Patients dying on the
waiting list for government-provided health
care. But this is not a report from Canada or the
British National Health Service. It’s right here
in America, in the health system administered
by the Department of Veterans Affairs. The
problems first surfaced in Phoenix, where the
wait to receive care at VA facilities had grown
so long that 1,400 to 1,600 sick veterans were
forced to wait months to see a doctor. As many
as 40 veterans reportedly died because they
couldn’t get the care they needed… The same
issues beset other government-run healthcare programs. Take Medicaid. A study in the
New England Journal of Medicine found that
Medicaid recipients were six times more likely
to be denied an appointment than people with
private insurance. And according to a second

Michael D. Tanner, “How VA Hospitals Are a Government-run
Disaster”, The Cato Institute, May 16, 2014. http://www.cato.

study, when they do get an appointment, they
wait an average of 42 days to see a doctor, twice
as long as the privately insured… Even Medicare,
by far the most popular government-run health
care program, has problems with access and
quality. Studies have long shown that there is
little correlation between Medicare spending
and healthy outcomes.”
In short, Medicare and Medicaid enrollees
and veterans are all technically considered
“covered”. Thus, nationalized programs only
count as a solution if Americans are willing
to accept a continuously degrading concept
of what it is to be considered covered. For
countless reasons, which include every man,
woman, and child with diseases and conditions
curable and treatable by modern medicine, this
is an unacceptable premise.
Again, however, equally unacceptable are the
problems of coverage, cost, and outcomes
with the status quo, which all impart their
own forms of misery on Americans. Those are
questions that deserve an answer. Unfortunately,
ObamaCare doesn’t appear to be that answer

As the CBO report on health care noted, prior
to the implementation of the Affordable Care
Act, over 40 million Americans were without
some form of health care coverage. Without
question, that is a lot of people without health
care coverage and an issue that most certainly
deserved the attention of policy makers. Yet
with a narrow focus on the tens of millions
without insurance, it is easy to forget that the
US population is over 300 million, which means
that hundreds of millions of people already had
coverage in the pre-ACA system. According
to the Census, in 2012, two years prior to the
implementation of the bulk of the ACA, roughly
85 percent of the American population had
some form of health care coverage.4 What’s

Carmen DeNavas-Walt, Bernadette D. Proctor, Jessica C.
Smith, “Income, Poverty, and Health Insurance Coverage in

42 HEALTHCARE & OBAMACARE | BLUEPRINT for 2015: Setting the Stage for the Next Session

Still, that one-third is millions of people that
found the cost of health care coverage to be
prohibitive. However, in trying to help those
people, those pushing health care reform and
ultimately ObamaCare should have been careful
to not jeopardize the existing coverage enjoyed
by the plurality of the population. This concern
was obviously present, signaled by the repeated
promise by President Obama and his allies in
Congress that “if you like your plan, you can keep
your plan.”
Yet in fall of 2013, that promise was shattered
into millions of pieces: 4.7 million and counting
to be exact. That’s the minimum number of
cancellation notices known to have been sent
out by insurance companies in late 2013 leading
up to the implementation of ObamaCare’s new
insurance regulations in 2014.
There are two regulations that drove the
cancellations. The first is the Essential Health
Benefits (EHBs) provision. Under the ACA, all
health insurance plans in the individual and small
group markets must cover 10 specific categories
of treatment:


Ambulatory patient services
Emergency services
Laboratory services
Maternity and newborn care
Mental health and substance abuse services,
including behavioral health treatment
the United States: 2012” US Census, September 2013. http://
“Key Facts about the Uninsured Population”, The Kaiser
Family Foundation, September 2013.

• Prescription drugs
• Rehabilitative and habilitative services and
• Preventive and wellness services and chronic
disease management
• Pediatric services, including oral and vision
Plans sold in the individual or small group
markets that did not cover one or more of
these EHBs became illegal under ObamaCare.
Some of these EHBs reveal why so many
plans were cancelled. It doesn’t make much
sense for adults without children or with grown
children to have pediatric oral and vision care.
Or, why would any single young male request
maternity and newborn care? Indeed, per a
2011 HHS report, 62 percent of individuals and
families that purchased their own health care
coverage did not choose to purchase maternity
coverage, 34 percent forewent substance
abuse coverage, and 18 percent passed on
mental health coverage.6 ObamaCare not only
deprived these people of their existing coverage,
it also eliminated their freedom to not have to
purchase coverage for health care services they
will likely never need.
The other main driver behind cancellations is
ObamaCare’s new standards for actuarial value.
According to America’s Health Insurance Plans
(AHIP), the industry trade group representing the
health insurance industry, the actuarial value of
an insurance plan is defined as follows:7
“Actuarial value is a summary measure of
a health insurance plan’s benefit levels—
measuring the relative percentage paid by
a health benefits plan and its enrollees for a
standard/average population.  For example, a
plan with an actuarial value of 70% means that
the insurance plan would pay 70% of covered
health care expenses—while the enrollee


ASPE Issue Brief, “Essential Health Benefits:  Individual Market Coverage” Department of Health and Human
Services, December 16, 2011.
AHIP Brief of Essential Benefits, Accessed here: http://www.

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 43


more is that of the remaining 15 percent, the
vast majority listed reasons unrelated to the
cost of insurance as the reason why they were
uninsured. According to a September 2013
Kaiser Family Foundation Survey. Less than
one-third of those without insurance listed
“Insurance not Affordable” as the reason for
being uninsured.5


would pay 30% out-of-pocket in the form of copayments, co-insurance, and deductibles.”
One of the chief complaints about the Affordable
Care Act is the fact that it forces Americans
to buy health insurance under the terms of
the individual mandate. Many Americans,
mostly young and healthy, have expressed
their frustration with such a provision given
the fact they largely have no need for the kind
of comprehensive coverage that ObamaCare
mandates. These people have, in the past,
either gone without insurance entirely or
only purchased catastrophic plans designed
to protect the otherwise healthy from the
unimaginable. These catastrophic plans thus
have a very low actuarial value.
The Affordable Care Act sets completely new
standards for what constitutes an acceptable
insurance plan based on actuarial value. The
minimum actuarial value allowed under the law
is about 60 percent.8 Any plans that do not reach
this actuarial value threshold face cancellation.
According to the American Action Forum,
over half of the plans offered on the individual
health care insurance market did not meet this
standard in 2013.9
Thus, to be brief, despite the distinction between
the EHBs and actuarial value regulations, the
primary reason that at least 4.7 million people
had their insurance cancelled is because
ObamaCare eliminated categories of insurance
coverage that people voluntarily purchased.
We say “at least” because the actual number of
cancellations that were sent out is undoubtedly
much higher and still climbing.
Only 32 states were actively tracking the number
of cancellations in their states. Major population
centers like Texas, Ohio, and Virginia are
included in the 18 states that did not precisely


Sam Cappellanti, “Health Insurance Cancellation Notices:
Coming Soon to a Mailbox Near You?”, American Action
Forum, October 22, 2013.

track cancellations.10 Thus it’s hard to get an
exact figure on how extensive the problem of
cancellations has been. Further, a few factors
temporarily forestalled even more cancellations.
Small businesses and organizations that
provided health insurance coverage to their
employees through plans available in the small
group market were able to renew plans early for
2014 and avoid having to comply with new ACA
standards that would have caused their policies
to be cancelled.11
Further, in response to the political firestorm that
resulted from the onslaught of cancellations, the
Obama administration, through the Department
of Health and Human Services, proposed a fix
essentially by executive fiat. In November 2013,
the administration gave insurance companies
the option to continue offering coverage on
plans that did not meet the ACA’s new standards
through October of 2014, pending the decisions
of the insurance commissioner in each state. By
spring of 2014, the administration had extended
this grace period to October 2016.12 A total of 27
states, including large states like Texas, Florida,
Illinois, Pennsylvania, Ohio, and Michigan, took
the administration up on the offer, protecting
some plans through 2016.13
For these reasons, the wave of cancellations
in fall of 2013 avoided becoming a tsunami,
spreading the impact of ObamaCare’s
regulations that are driving the cancellations
out over a several year period –making it difficult
10 AP, “Policy notifications and current status, by state” Yahoo!
Finance, December 26, 2013.
11 Scott Gottlieb, Thousands Of Small Businesses Will Also
Start Losing Their Current Health Policies Under Obamacare.
Here’s Why”, Forbes, November 6, 2013. http://www.forbes.
12 Philip Klein, “HHS extends ‘fix’ for plans cancelled due to
Obamacare through October 2016, alters bailout to insurers”,
The Washington Examiner, March 5, 2014.
13 Kevin Lucia, Katie Keith and Sabrina Corlette, “Update: State
Decisions on the Health Insurance Policy Cancellations Fix”,
The Commonwealth Fund, January 8, 2014. http://www.

44 HEALTHCARE & OBAMACARE | BLUEPRINT for 2015: Setting the Stage for the Next Session

Back in 2010, the Obama administration posted
in the Federal Register estimations of how
many plans would likely be cancelled upon
the implementation of the Affordable Care Act.
Putting aside the outrage generated by the fact
that the administration knew cancellations were
going to occur in 2010 but still promised during
the 2012 campaign that if people liked their plans
they could keep them, the ranges provided by
the administration give us an idea of exactly how
many cancellations of previously held policies will
occur when all is said and done, accounting for all
the loopholes, temporary exemptions, and state
governments not tracking cancellations.
The individual insurance market comprises over
14 million people.14 The Obama administration
estimated that 67 percent of these plans would
be subject to cancellation.15 That’s just about
9.4 million plans cancelled in that market. It is
estimated that 18 to 24 million Americans have
coverage in the small group market.16 The Obama
administration estimated that 66 percent of these
small group plans would face cancellation.17 That
is at least 11.9 million plans set to be cancelled.
On the high end, the small group market could
see just over 15.4 million cancellations. Either
way, the combined cancellations between the
individual and small group markets puts the total
number of cancellations, by the administration’s
own estimates, at the very least above 20 million
14 Julie Appleby and Anna Gorman, “Thousands Of Consumers Get Insurance Cancellation Notices Due To Health Law
Changes”, Kaiser Health News, October 21, 2013.
15 Avik Roy. “Obama Officials In 2010: 93 Million Americans Will
Be Unable To Keep Their Health Plans Under Obamacare”,
Forbes, October 31, 2013.
16 Arianna Eunjung Cha. “Second wave of health-insurance
disruption affects small businesses.” Washington Post,
January 11, 2014.
17 Avik Roy, “Obama Officials In 2010: 93 Million Americans Will
Be Unable To Keep Their Health Plans Under Obamacare”.

The main promise of the Affordable Care Act is
right in its name. It’s also where the law seems to
fall flat on its own face the hardest.
At the outset, the fundamental problem with
ObamaCare is that it really is not a health care
reform bill. It is a health care insurance reform bill.
None of the major provisions of the law, from the
exchanges, to the subsidies, to the mandates, to
the regulations on what constitutes a health care
plan, actually go after the root of the problem.
The Affordable Care Act really doesn’t attempt to
make the cost of health care administration and
delivery more affordable. Instead it works entirely
around trying to hide or divert the cost of health
insurance from the policyholder. Again, AHIP does
an excellent job at briefly explaining the issue:18
“The ACA provides premium and costsharing subsidies to help low- and moderateincome Americans purchase insurance. Subsidies
will clearly help many families pay for health
care coverage, but subsidies will do nothing to
bring down the actual cost of that coverage.
Suggesting that they will is comparable to saying
that Pell Grants reduce the cost of college tuition.
Pell Grants enormously help families afford the
high cost of education, but they do not lower
tuition levels. Meanwhile, tuition prices soar.
Importantly, according to the CBO, millions of
people are not eligible for subsidies and the
amount of the subsidy declines significantly as
incomes rise. The CBO states that more than 40
percent of people purchasing coverage in the
individual market today would be ineligible for
premium subsidies. Individuals with incomes
between 250-300 percent of the federal poverty
line (FPL) would receive subsidies sufficient
to cover 42 percent of the cost of the second
lowest-cost ‘silver’ plan while those with
incomes between 350-400 percent of the FPL
would receive subsidies sufficient to cover just
13 percent of the premium. Moreover, due to
how the subsidies are indexed, CBO states that
18 AHIP, “Time for Affordability”, Accessed here:

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 45


to tally exactly how many plans have been
cancelled. Fortunately, the Obama administration
has provided us with an answer.


over time ‘the shares of the premiums that the
subsidies cover will decline.’”

conducted by the health care technology firm
HealthPocket, found premium increases due to
ObamaCare ranging from 22.7 percent to 78.2
percent depending on age and gender. 21

While the subsidies decline, or disappear
altogether in some states pending the final

Average Monthly Premium Costs Before and After the Affordable Care Act

















Age 23

Age 23

Age 30

Age 30

Age 63

Age 63

outcome of the court case Halbig v. Burwell19,
premiums are on the rise. A comprehensive
study, released in June 2014 and conducted by
Paul Howard, Avik Roy, and Yevgeniy Feyman
at the Manhattan Institute, looked at premiums
across age groups and genders in 3,137 counties
in the United States, which is just about all of
them. The study compared the average cost of
the five cheapest premiums available in the preACA individual market versus the five cheapest
plans available on the ObamaCare exchange.
The study found that the Affordable Care Act has
increased premiums across the country by an
average of 49 percent.20 A separate and slightly
more recent study of a similar nature found
average premium increases consistent with the
Manhattan Institute’s findings. The second study,
19 Michael F. Cannon, “A Reference Guide To The ‘Halbig’ Cases:
Can The IRS Issue ACA Subsidies Through Federal Exchanges?”, Forbes, December 31, 2013.
20 Avik Roy, “3,137-County Analysis: Obamacare Increased 2014
Individual-Market Premiums By Average Of 49%”, Forbes,
June 18, 2014.


The Affordable Care Act’s problems with
coverage and costs are actually intertwined.
The minimum benefits and value that the
Affordable Care Act dictates for plans offered
in the exchanges are primarily responsible for
the upward pressure on premiums.22 These are
costs that insurance customers and companies
alike cannot avoid, as law mandates them to
be incurred. Thus the insurance companies, in
the competitive exchange model that the law
sets them up in, must look elsewhere to reduce
The volume of complaints from ObamaCare
exchange-based insurance plan customers has
been steadily growing, as patients have found
it difficult to find health care providers of their
preference that actually accept their plans. “It’s
a policy conundrum. Narrow networks help
contain health care costs. If state or federal
21 Kevin Coleman, “Without Subsidies Women & Men, Old &
Young Average Higher Monthly Premiums with Obamacare”,
HealthPocket, October 29, 2014. http://www.healthpocket.
com/health care-research/infostat/obamacare-2014-premiums-higher-than-pre-reform-market
22 AHIP Brief of Essential Benefits

46 HEALTHCARE & OBAMACARE | BLUEPRINT for 2015: Setting the Stage for the Next Session

The data confirms that patients’ complaints
are well founded. A study by Avalere Health,
commissioned by the American Heart
Association, looked at specialists associated with
the treatment of strokes through comprehensive
stroke centers in nine major urban areas:
cardiologists, neurologists, and diagnostic
radiologists. What the study found is startling.
Per the National Center for Policy Analysis and
their summary of the report:24
“In seven of the nine urban areas, fewer than
half of specialists sampled belonged to provider
networks in Obamacare exchanges”.
The problem isn’t just on the insurance side.
Health care providers are balking at the
insurance plans being offered through the
ObamaCare exchanges. A survey conducted by
the Medical Group Management Association,
a health care provider trade group, found that
roughly 214,000 doctors will not be participating
in insurance plans offered under the ObamaCare
exchanges. For reference, that’s roughly a
quarter of all practicing physicians in the United
Doctors are refusing to take on new patients
with the ACA exchange-based plans because
of another cost-cutting measure: low
reimbursements. For example, the Medical
23 Brett Norman, “Obamacare: Anger over narrow networks”, Politico, July 22, 2014.
24 John R. Graham, “Research Suggests Los Angeles Has
No Cardiologists in Obamacare Networks; Chicago
No Diagnostic Radiologists”, National Center for Policy
Analysis, September 26, 2014. http://healthblog.ncpa.
25 Barbara Boland, “Over 214,000 Doctors Opt Out of
Obamacare Exchanges”, CNS News, October 28, 2014. http://

Society of the State of New York reports that
some of its members are complaining about
reimbursement rates that are less-than-half of
what they receive from other, more traditional,
commercial plans.26
This trend is particularly troubling. Not only will
limited access exacerbate the existing problems
with outcomes that prompted the push for
health care reform in the first place, the lack
of access to specialists sacrifices one of the
key areas where America excels in comparison
to other industrialized nations. Prior to the
implementation of ObamaCare, Americans
enjoyed some of the shortest wait times to
see specialists and obtain elective surgery
compared to other industrialized nations.27
Yes, the Affordable Care Act is the most
substantial health care-reform related legislation
to pass into law since the creation of Medicare
and Medicaid in 1965. However, despite all of
the trouble with America’s health care system
that prompted the ACA, this does not mean
that the law is necessarily the correct answer
to the country’s problems. Just looking at the
criteria outlined by the CRS, its abundantly clear
that despite the law’s “progressiveness”, the
country seems to be stalled and even moving
backwards when it comes to coverage, cost, and
The hard truth, following years of headaches,
glitches and patches, and billions of dollars
spent, is that ObamaCare will have to be
replaced. Even without all of the data showing
the lack of progress on coverage, cost, and
outcomes, the fact is that health care reform
never became law. The ACA is an insurance
law masquerading as a health care law. It
tries, and fails, to make health care insurance

26 Jayne O’Donnell, “Some doctors wary of taking insurance
exchange patients”, USA Today, October 28, 2014. http://
27 Source for Tables: 2010 Commonwealth Fund International
Health Policy Survey in Eleven Countries.

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 47


regulators — or politicians — force insurers to
expand the range of providers, premiums could
spike. And that could create a whole new wave
of political and affordability problems that can
shape perceptions of Obamacare,” explains Brett
Norman of Politico.23


Wait Times for
Specialist Appointments (2010)

than 4

Wait Times for
Elective Surgery (2010)

2 months
or more


Less than
4 weeks

2 months
or more































New Zealand



New Zealand





















United Kingdom



United Kingdom



United States



United States



less expensive and more widely available by
changing the insurance market. That was never
going to work to the extent that Americans
expected. You aren’t going to get much cheaper
car insurance by switching in between GEICO,
Progressive, or State Farm if you are still driving a
really expensive car with a poor safety rating that
breaks down all the time! To make health care
insurance more affordable, health care itself
has to become more affordable. What’s more,
ObamaCare fails because it accepts the need of
health care insurance as a foregone conclusion.
That’s counterproductive. Apologies ahead of
time for another automotive metaphor, but the
way Americans use health insurance is akin to
filing a car insurance claim for a carwash or oil
Undoubtedly, most Americans will need some
sort of plan in place for the unexpected and
catastrophic injuries and illnesses. Yet there
is no need for routine procedures and care to
be so prohibitively expensive that they require
an insurance conglomerate to cover their cost.
Actually, the fact that Americans aren’t paying
the direct cost for the routine health care they
receive is a big reason why it is so expensive.
Very little incentive exists on either the provider
or patient side when someone else is picking
up the tab. Ideas like health savings accounts,

which are tax free pools for Americans and
their families paid into by themselves and their
employers, could go a long way in applying the
same market forces that keep prices low across
the economy to the routine health care market.
National licensing and certification standards for
health care workers could also lower costs for
health care providers, allowing them to lower
The list of reforms that actually get at the root of
the problem, the high cost of health care itself,
goes on and on. There are countless books that
look at market-based reforms to drive the cost
of health care downward and empower patients.
Two great examples are America’s Health Care
Crisis Solved by J. Patrick Rooney and Dan Perrin
and American Health Care: Government Market
Processes, and the Public Interest, the latter
being a compilation of essays by health care
policy experts edited by Roger D. Feldman.
While long-term solutions and replacements
for the Affordable Care Act are important to
keep on the horizon, the matter at hand for
the immediate future is that ObamaCare is not
going to be signed out of law by the president
from whom it derives its nick-namesake. In the
meantime, between 2015 and 2017, there are
solutions, which enjoy bipartisan support, that

48 HEALTHCARE & OBAMACARE | BLUEPRINT for 2015: Setting the Stage for the Next Session

Again, the fundamental problem with
ObamaCare is that it does very little, if anything,

to actually make the delivery of health care
to patients more affordable. In fact, one
controversial part of the law directly drives up
the cost of providing health care, from checkups
to major surgery.

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 49


can relieve many Americans from the health
care havoc being caused by ObamaCare.



The Medical Device Tax is 2.3 percent excise tax
imposed by ObamaCare in order to help finance
other parts of the law, such as the premiums
subsidies and administration of other programs.
The tax is estimated to collect roughly $30
billion over the next decade. The qualifying
criteria for the tax are incredibly broad. Per the
Tax Foundation:28
“Taxable medical devices are defined as any
device ‘intended for use in the diagnosis of
disease or other conditions, or in the cure,
mitigation, treatment, or prevention of disease
in man or other animals . . . or intended to affect
the structure or function of the body of man.’
For instance, the tax would be levied on devices
such as pacemakers and defibrillators.”
Such a definition easily applies to products like
IVs, needles, stethoscopes, X-ray machines, etc.
By definition, this tax makes all of these products
used in providing health care more expensive,
therefore making health care more expensive.
This is but one side of the coin. Companies
that produce and import medical devices will
undoubtedly pass off some of the cost of the
tax in this way, however they will also compete
to keep prices as close to pre-medical device
tax levels as possible. This means that the tax
creates an incentive to cut production costs and
a disincentive to pursue new investments and
AdvaMed, a group that represents the American
medical device industry, released a report
summarizing how member firms of their group
were adapting to the tax. AdvaMed found that
medical device companies had laid off 14,000
workers and forgone the hiring of an additional
19,000. Nearly a third of all companies reported
slashing their research and development
28 Kyle Pomerleau, “The ACA Medical Device Tax: Bad Policy
in Need of Repeal”, The Tax Foundation, April 9, 2013. http://

budgets, jeopardizing the invention of countless
life-saving technologies. The impact of the tax
ripples on and on. Per the AdvaMed report:29
“Three-quarters of [firms] said they had taken
one or more of the following actions in response
to the tax: deferred or cancelled capital
investments; deferred or cancelled plans to
open new facilities; reduced investment in startup companies; found it more difficult to raise
capital (among start-up companies); reduced or
deferred increases in employee compensation.”
The tax has a trifecta of impacts that are
antithetical to the understood intentions of
health care reform. It increases the cost of
delivering health care, creates a disincentive
against research and development of
technologies which could lower health care
costs and improve health outcomes, and
it has killed thousands of good jobs which
probably provided those employees with health
It’s common sense not to levy a tax on
something you’re trying to make more
affordable. That’s why previous repeal efforts
of the medical device tax have enjoyed broad
bipartisan support.30 Repealing the medical
device tax is an obvious first step in ending the
counter productivity of the Affordable Care Act
as a whole.

29 “Impact of the Medical Device Excise Tax”, AdvaMed, Accessed here:
30 Kristina Peterson, “Senate Votes Against Key Health-Law
Tax”, The Wall Street Journal, March 21, 2013. http://online.

50 HEALTHCARE & OBAMACARE | BLUEPRINT for 2015: Setting the Stage for the Next Session

One of the main solutions proposed as part of
many alternative packages to the Affordable
Care Act is allowing American’s to purchase
insurance across state lines. The idea is that
nation-wide competition would help drive
premiums down and eliminate the problem of
virtual monopolies that now exist in some states.
In 30 states, a single insurance company within
that given state covers 50 percent or more of
customers in the individual health insurance
market.31 Naturally, forcing these companies to
compete with others around the country would
force them achieve more competitive rates,
which, again, is the case with products like car
These virtual monopolies are at the root of
the cost problem with American health care
and ought to be eliminated in the future
through policy changes that facilitate interstate
markets. Yet, for the time being, the cause of
these markets being dominated by one or two
companies may actually be a source of relief
from future cancellations.
As mentioned, total cancellations as a result of
ObamaCare will surpass at least 20 million by
the time all the loopholes and grace periods
expire in 2016. It’s safe to assume that millions of
plans have yet to be cancelled because of these
temporary reprieves. Existing policies have been
cancelled and others face cancellation because
ObamaCare nationalized the standards for what
constituted a minimum accepted plan in terms
of covered benefits and actuarial value.

31 Christine Vestal, “New Health Exchanges Unlikely to End
Insurance Monopolies in Some States”, Kaiser Health News,
April 25, 2013.

Thus, the reason that Americans cannot buy
insurance across state lines? Prior to the
Affordable Care Act’s nationalized standards,
each individual state set their own minimum
standards for what qualified as acceptable health
insurance.32 Plans offered in one state that may
have been more affordable may also not have
met the minimum requirements in another state.
What this also means is that each and every
coverage policy cancelled, or set to be cancelled,
previously met state-government regulatory
standards intended to protect consumers.
Why not simply call those sufficient? Of course
ObamaCare’s minimum benefit standards are
more rigorous, hence the cancellations, however
many of the EHBs mandated are inherently
superfluous for millions of patients across the
The REHAB Act would repeal ObamaCare’s
EHBs and actuarial value standards in favor
of the existing state-level standards. This
would automatically immunize plans slated
for cancellation, open up the market to lesscomprehensive and thus less expensive
policy options, all the while allowing those that
purchased exchange based plans to keep their
plans as well. This is a fix that with the potential
for net positive outcomes on the health reform
criteria of coverage and cost, expanding coverage
through low cost plans and relieving the upward
pressure on premiums created by the excessive
minimum standards set out by the ACA.

32 Phil Galewitz and Lexie Verdon, “FAQ: Selling Health Insurance Across State Lines”, Kaiser Health News, January 25,

BLUEPRINT for 2015: Setting the Stage for the Next Session | HEALTHCARE & OBAMACARE 51




“Economic action demands stable conditions,”
said Ludwig Von Mises, one of the most
renowned economists in history and ardent
advocate of free markets.

for 2015:

Setting the Stage
for the Next Session

For individuals to innovate and produce, they
must be distracted to the least extent possible
with other endeavors.
For example, it would be very difficult for a
jeweler to make and sell their jewelry if they had
to spend all of their time standing in front of
their workshop on guard to prevent people from
stealing their gold and diamonds.

This truth can apply to any actor in the market
and any possible disruption. It would be very
difficult for a coastal resort in Florida to operate if
an invading army was landing on its beach. Thus,
individuals throughout history have sought to come
together and form societies where cooperation
and agreement can yield collective benefit and
protection from both internal and external disruptors.
This can be as simple as settlers in a village building
a wall around that village and volunteering in turns
to stand guard. Or it can be as complicated as an
entire national government, which enforces general
customs agreed to by the members of the society
with the force of law, outlawing actions of violence,
theft, and other instability. Regardless of the chosen
example, these collective agreements and their
stabilizing services must ultimately be funded if they
are to be effective; the wall needs bricks and the
sheriff needs a horse.
The Constitution established the current
government of the United States as this stabilizing
mechanism for the nation. The government is
divided into three branches, each with a unique
purpose and ability to check the power of the other
two, a stabilizing force in and of itself. The legislative
branch represents the people and the states in the
formation of the nation’s laws. The executive branch

enforces these laws. Finally, the judicial branch deals
with adjudicating violations of and discrepancies
with the law. In addition, the Constitution authorizes
the creation of a military to protect the nation from
external threats. Of course, the US government
has grown into a massive entity that now certainly
does things that are well outside of these roles. It
is hard to see how building interstate highways, for
example, fits in with the creation, enforcement, and
adjudication of law. Regardless, most are happy that
the government does do things from building and
maintaining the highways to outer space exploration.
Many are also unhappy with a lot of the other things
government does, such as the ridiculous examples
of federal spending that often appear in the news
from time to time. Regardless, the Constitution allots
specific roles for the government to serve and the
people have instituted others. Agree or disagree with
the various examples of the latter, at the very least
the specifically enumerated powers of government,
the mechanisms through which Americans have
agreed to stabilize their society, must be funded
somehow. This makes taxation, to some extent,
necessary. That extent, however, is entirely up for
According to Joseph Minarik, formerly the chief
economist at the Office of Management and

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 53


Budget under the Clinton administration,
“Economists specializing in public finance have
long enumerated four objectives of tax policy:
simplicity, efficiency, fairness, and revenue
sufficiency.”1 These serve as excellent criteria by
which to evaluate current US tax policy.

Right away the current US federal tax code
comes up short. Let us emphasize short in the
figurative, not the literal, sense. Indeed the
tax code is anything but short and therefore
anything but simple. As of April 15, 2014, tax
day, the tax code was at a reported length of
3,951,104 words.2 To be clear, nearly four million
words is a lot by any standard. To get a better
perspective on just how long the tax code is, let
us look at how many pages it takes to hold four
million words. Again, as of April 15, 2014, the tax
code was a reported 73,954 pages long.3 That is
seven times the length of Leo Tolstoy’s War and
Peace,4 a book that is arguably more famous for
its breathtaking length than its actual content.
In this review, it was important to state the date
of these measurements since the tax code is
constantly changing and on net grows each year.
The tax code has grown in length by nearly 2
percent each year since 2008.5

“[t]he most serious problem facing taxpayers.”6
Not even the savviest businessmen and women
are anywhere near fluent on all aspects of the
tax code, let alone the average small business
owner or head-of-household. This means that
Americans spend precious time and resources
each and every year, given the tax code’s rate
of change, in making sure their taxes are filled
out correctly. Americans have not one but
two major incentives to ensure that taxes are
filled out correctly. First, of course, is the fact
that people want to make sure they are taking
advantage of all possible exemptions in order
to keep the maximum amount of their money.
The second reason is the reputation of the IRS.
The IRS is notoriously heavy handed in its pursuit
of owed taxes, whether or not the taxpayer is
purposefully avoiding owed taxes or has simply
made an honest mistake in calculating what they
owe. Thus, as the Taxpayer Advocate Service
explained to Congress, the tax code “[m]akes
compliance difficult, requiring taxpayers to
devote excessive time to preparing and filing
their returns,” and “[r]equires the significant
majority of taxpayers to bear monetary costs to
comply, as most taxpayers hire preparers and
many other taxpayers purchase tax preparation

The daunting length of the tax code presents
an obvious problem for all Americans who file
taxes. Even the Internal Revenue Service (IRS),
the law enforcement agency charged with
collecting taxes, has admitted that the tax code
is far too onerous. In its 2012 report to Congress,
the Taxpayer Advocate Service, an office within
the IRS, listed the complexity of the tax code as

Economists have sought to estimate the total
cost to the overall economy imposed by both
the time and resources it takes for Americans to
prepare their taxes each and every year. Jason J.
Fichtner and Jacob M. Feldman of the Mercatus
Center at George Mason University conducted
a meta-analysis of existing studies on this topic.
Their conclusion is remarkable:7





Joseph J. Minarik, “Taxation, A Preface”, The Library of Economics and Liberty.
Jennifer Harper, “4 Million Words: the U.S. Tax Code is seven
times the length of ‘War and Peace’”, The Washington
Times, April 15, 2014.
“2014: How Many Pages in the U.S. Tax Code?”, Townhall,
April 13, 2014.
Jennifer Harper, “4 Million Words”.
TownHall, April 13, 2014.

54 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

“[W]e estimate that hidden costs range from
$215 billion to $987 billion and that the tax
code results in a $452 billion revenue gap in
unreported taxes.”


Taxpayer Advocate Service, 2012 Report to Congress,
Accessed here:
Jason J. Fichtner and Jacob M. Feldman, “The Hidden Costs
of Tax Compliance”, The Mercatus Center, May 20, 2013.

Revenue Sufficiency
Evaluating revenue sufficiency is difficult, given
that the federal budget has run at a deficit all
but 12 years since World War II. On the surface,
clearly, revenue to the federal government
has been insufficient to cover the money the
government distributes to its various offices and
programs. That being said, the primary drivers
of federal spending are well outside of the
previously discussed role of the government as
an agent of enforcing rule of law and protection
from outside disruptors.
Federal spending in 2014 totaled $3.65 trillion.
Of that, roughly $1.9 trillion, or just over half, was
spent on the big three entitlement programs,
Social Security, Medicare, and Medicaid, plus
net interest on the debt owed by the federal
government. In 2014, the government collected
just over $3 trillion in various taxes and other
revenue generating programs. Personal income
taxes, corporate taxes, excise taxes, and
“other” functions collected $1.98 trillion.9 This
excludes revenue specific to programs like
Social Security and Medicare. After excluding
spending on the entitlements and net interest,
the federal government spent about $1.75 trillion.
Technically, the tax code brought in enough


OMB Historical Table 1.1 Summary of Receipts, Outlays, and
Surpluses or Deficits (-): 1789–2019. http://www.whitehouse.
OMB Historical Table 2.1 Receipts by Source: 1934–2019.

money to cover all functions of the executive,
legislative, and judicial branches as well as
the entire defense budget. Certainly there is
a level of spending within those four parts of
the government that would also fall outside
of creating and enforcing law plus necessary
national defense, but at the very least, revenue
is more than sufficient to finance the most core
functions of the government in addition to other
popular fringe programs.
It also demonstrates that the way forward on
long-term budget stability and correcting the
trend of perennial deficits requires a focus on
the structure of federal entitlements, not tax

The reason why the tax code scores so poorly
on simplicity is the same reason why it scores
poorly on efficiency. Tax efficiency is defined as
how little tax policy drives decision making by
actors in the economy. Unfortunately, Congress
has been unabashed in its use of taxes to
engineer the economy throughout history.
Washington has been able to both encourage
and discourage various activities and behavior
simply by raising taxes on that particular activity
or allowing for people to deduct expenses they
incur from behaving a certain way from their
owed taxes. A perfect example of this is the
exclusion for employer-provided health care.
Employers can compensate their employees by
purchasing health insurance for them without
either the employer or the employee facing
taxes on that compensation.
These forms of engineering the economy
through the tax code are called tax
expenditures. They are called this because tax
expenditures are technically a way for Congress
to direct funds without actually appropriating
money already collected. Tax expenditures are
the primary cause of the tax code’s complexity.
The number of tax expenditures in the code
has been growing steadily over the last three
decades. Tax expenditures have made the tax

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 55


These figures, regarding both the length and
the cost of complying, make an undeniable
case for broad tax reform. Even the IRS, which
a complicated tax code behooves to a certain
extent, agrees that something must be done
to begin simplifying the code. These figures,
even on the scale of the enormous federal
budget and the US economy as a whole, are
quite significant. The revenue gap of $452
billion, which is taxes that could technically be
collected but are not, would be enough to close
roughly 80 percent of the projected 2015 federal
budget deficit.8 This brings on the criterion of
revenue sufficiency.


code so complicated that it is difficult to get a
solid figure on exactly how many are currently
in effect. Estimates from within the government
actually disagree. Estimates from the Treasury
Department, the parent department of the IRS,
and the Congressional Joint Committee on
Taxation on the number of expenditures are
separated by roughly 40. The low estimate,
from the Treasury, is about 170, while the Joint
Committee pegs the number at over 200.10 While
this may not seem like a lot, these expenditures
come with qualifying rules that make many of
them infinitely complex in their own right and
are hence why the tax code is well over 70,000
pages long.
These expenditures, from incentives to buy
energy efficient products like hybrid vehicles,
to deductions for education expenses, however
popular these ideas may be, make the tax
code inefficient by definition. The fact that there
could be over 200 by some official estimates
makes the tax code grossly inefficient. These
tax expenditures are just the direct and explicit
inefficiencies. As mentioned, tax compliance
costs range in the hundreds of billions annually.
This is also a mass redirection of resources
caused by the tax code, albeit indirectly, and
thus a huge source of the tax code’s inefficiency
as well.

Differing incomes, both in terms of size and
source, make achieving a universally popular
tax code in terms of fairness problematic. Once
again, per economist Joseph Minarik: 11
“Fairness, to most people, requires that equally
situated taxpayers pay equal taxes (“horizontal
equity”) and that better-off taxpayers pay more
tax (“vertical equity”). Although these objectives
seem clear enough, fairness is very much in the
eye of the beholder. There is little agreement
over how to judge whether two taxpayers are
equally situated. For example, one taxpayer
might receive income from labor while another
receives the same income from inherited wealth.
And even if one taxpayer is clearly better off
than another, there is little agreement about
how much more the better-off person should
pay. Most people believe that fairness dictates
that taxes be “progressive,” meaning that
higher-income taxpayers not only pay more,
but proportionately more. However, a significant
minority takes the position that taxes should be
flat, with everyone paying the same proportion
of their taxable incomes. Moreover, the idea
of vertical equity (i.e., the “proper” amount of
progressivity) often directly contradicts another
notion of fairness, the “benefit principle.”
According to this principle those who benefit
more from the operations of government should
pay more tax.”

Unlike the other three criteria, fairness is much
more difficult to define and there exists deep
disagreement over what exactly fairness in the
tax code looks like.
People expect others in the society to “pay their
fair share” for the benefits of government that
are enjoyed universally and equally. It is hard to
say, for example, that someone with $1 million
dollars benefits any more or less than someone
with $10,000 dollars from military protection or
law enforcement.
10 William McBride, “A Brief History of Tax Expenditures”, The
Tax Foundation, August 22, 2013.

56 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

These are essentially ideological differences
that likely won’t be solved now or anytime soon.
However, there are issues with the current tax
system that ought to anger both those who
support progressive taxation as well as those
who support flat taxation.
On one hand there is the issue of the tax code
being overly progressive. The non-partisan Tax
Foundation recently released a study evaluating
tax data from the year 2012.12 The findings
11 Joseph J. Minarik, “Taxation, A Preface”.
12 Kyle Pomerleau and Andrew Lundeen, “Summary of Latest
Federal Income Tax Data”, The Tax Foundation, December 22,

“Combined, the top 1 percent of taxpayers
accounted for more income taxes paid than the
bottom 90 percent combined.”
How, by any definition of the word, could this be
considered “fair”? As you can see in the following
chart of this data, it is not only unfair in the sense
that the top 10 percent are shouldering so
much of the tax burden, but also the unfair due

“There are 20 companies in the Standard &
Poor’s 500…which reported effective tax rates
of 0% or lower in the second calendar quarter
despite reporting a profit during the period.”
These major corporations, including
pharmaceutical giant Merck and automaker
General Motors, are able to exploit many
of those several hundred tax expenditures
previously discussed in order to reduce their
tax liability to effectively zero percent. Some
of these companies, particularly energy
companies that qualify for renewable energy tax
credits, even get away with negative taxation,
which occurs when federal subsidies and tax
expenditures to a company exceed what they
owe in taxes.

Top Half of Taxpayers Pay 97.2% of All Income Taxes
Share of Income and Share of Income Taxes Paid by Income Group, 2012
Source: Internal Revenue Service









11.0% 11.2%



Bottom 50%

50% to 25%

25% to 10%

Share of Adjusted Gross Income

to the fact that these groups are also paying a
disproportionately higher share in income taxes
than they receive of the national income itself.
On the other hand, the tax code also allows for
some to escape significant amounts, if not the
entirety, of their tax liability. For example, CNBC
reported in April of 2014 the following:13
13 Matt Krantz, “20 big profitable US companies paid no
taxes”, CNBC, August 13, 2014.

10% to 5%

5% to 1%

Top 1%

Share of Income Taxes Paid

Many wealthy individuals are able to escape
significant amounts of their income tax liability
as well by exploiting tax expenditures and gray
areas in the code.
Only a tax system as convoluted and flawed
as the US tax code could accomplish such a
feet as has been demonstrated. Despite the
lack of a concrete definition of what fairness in
taxation really means, there are essentially two
camps, as noted. The tax code simultaneously

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 57


would likely startle even staunch progressives
unfamiliar with tax policy. The study found that
in 2012, the top 50 percent of all taxpayers paid
nearly the entire individual income tax burden.
The bottom 50 percent of taxpayers paid only
2.8 percent of all income tax revenue. Per the
Tax Foundation:


violates principles espoused by both camps.
Simply upsetting only one of the two basic
schools of thought on tax fairness would be an
The fairness criterion, of the four discussed
tax evaluation criteria, perhaps is the strongest
indicator that now, not next year, or the year
after, or during the next administration is the
appropriate time to approach tax reform. No
potential reform is too insignificant given the
system’s deep inconsistencies and severe

58 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

violations of three out of the four common
evaluation criteria for tax policy. What follows
are a few changes that can be implemented
immediately, without the need to wait for
another election, to begin improving the
efficiency, simplicity, and fairness of the US tax



Recently, many corporations with household
name recognition have been gaining notoriety
for reasons other than the products and services
they offer. Corporations such as Apple and
Burger King are being criticized and called
“unpatriotic” for engaging in practices designed
to reduce their own corporate tax liability. Apple
has been accused of shielding liquid assets in
offshore accounts to avoid taxes on repatriating,
or returning, those funds the United States while
Burger King is in the process of simply moving
its headquarters out of the country through
a process called an inversion. Why is this
happening? Are these companies really being

How did the US get in such a dubious position of
global distinction? Well, even as recently as two
decades ago, most other countries in the OECD
had corporate income tax rates somewhere
within the high 30s to even the 60s percentage
range.15 Since then, however, these countries
have been gradually reducing their rates.
Ireland’s rate, for example, has fallen from a high
of 50 percent to a mere 12.5 percent during this
time frame. The US rate, however, has hovered
right around 40 percent since the late 1980s. So
why is this now a problem, all of a sudden, if the
US has had these rates in place since the 1980s
and even higher rates before? There are a few
factors at play here.

The answer is no. There may be some lack of
patriotism here, but it isn’t coming from these
companies. In fact, what these corporations are
doing may be very beneficial to the average
Americans that are consuming their products
and using their services.

First, as mentioned in a previous section, there
has been explosive growth in government
regulation. These impose costs on businesses
that increasingly eat away at their ability to cope
with high levels of taxation.

America, the land of the free, home of the
entrepreneur, and presumed free-market haven,
has the highest corporate income tax in the
developed world. Even nations routinely, and
often appropriately, lampooned for their heavyhanded taxation on various activities, forms of
property, and forms of income, such as France
or Sweden for example, have lower tax rates on
corporations based in their country. The average
corporate income tax rate in the Organization
for Economic Cooperation and Development
(OECD) is 25.5 percent. That includes national
and local corporate taxes. The average statutory
corporate tax rate in the US, combining federal
and state taxes, is 39.1 percent.14 This is an issue
that must be addressed on the federal level,
given that it is the 35 percent federal corporate
income tax rate that comprises almost the entire
statutory liability.
14 OECD Corporate Income Tax Rates, 1981-2013, The Tax
Foundation, Accessed here:

Second, corporate taxation used to be higher
in other parts of the developed world, meaning
that international firms were competing on a
more level playing field with their American
counterparts. This dynamic has disappeared,
and with it has gone a veil over the truth about
corporate taxation: corporations don’t pay taxes,
people do.
High corporate tax levels have become a
problem for the US because American firms
are increasingly being put at a disadvantage
compared to their international competitors.
This disadvantage stems from the fact that
corporations do not pay taxes, but instead
collect them. That fact may be hard to
grasp from just that statement, so here is a
brief example that illustrates precisely what
economics are at play here.

15 Ibid.

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 59


Jonathan Gruber is an economist at the
Massachusetts Institute of Technology and
was one of the chief policy architects behind
the Affordable Care Act, or ObamaCare. One
part of the amalgamation of economic policy
mechanisms that is ObamaCare is a provision
called the Cadillac Tax. This tax, which imposes
a 40 percent tax on plans above a certain
threshold, was designed to begin discouraging
employers from issuing generous tax-free
health care plans as employee compensation
versus taxable wages. By diminishing the
incentive to provide generous health benefits
as compensation, a tax increase was effectively
imposed on Americans with these plans. Yet
that explanation was not politically feasible.
Americans were not going to accept a tax
increase in order to finance a bill already being
met with broad skepticism and nationwide
protests. Gruber thus constructed an alternate
reality for the Cadillac Tax. In his own words,
Gruber’s solution was, “mislabeling it, calling
it a tax on insurance plans rather than a tax on
people, when we know it’s a tax on people who
hold these insurance plans…We just tax the
insurance companies, they pass on the higher
prices . . . it ends up being the same thing.”16
What Gruber said here proves exactly the point
that corporations do not pay taxes, people do.
Corporations will simply pass increased costs
onto somebody, somewhere. When costs on
a company increase, that money has to come
at the expense of less money for people.
Businesses basically have three options to
generate additional funds to pay taxes when
they rise:
1. Reduce labor expenses either through pay
cuts or layoffs. This results in less money for
employees. The company can also reduce
16 Marc A. Thiessen, “Thanks to Jonathan Gruber for revealing
Obamacare deception”, The Washington Post, November 17, 2014.

60 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

returns on shareholder investments, which is
effectively the same thing.
2. Raise prices on the goods and services
offered. This reduces the amount of money
that the company’s customers have.
3. Reduce investments in capital assets,
technology, and supplies. This results in
less money in the pockets of the company’s
suppliers and their employees.
4. Avoid the tax. This either means using
loopholes or moving the company.
Three out of the four options mean less money
for real people because of a tax. Thus, corporate
taxes are simply a roundabout way of collecting
taxes from people in terms of higher prices or
reduced pay. The forth option is simply a way for
corporations to get around raising their prices or
reducing pay and employment on net.
Companies that choose to pursue any of the
first three options instead immediately put
themselves at a disadvantage to their foreign
competitors in an increasingly globalized
world where corporate taxes are plummeting
everywhere but here. Companies around the
world can sell their products for less, pay their
employees better and thus attract better talent,
and can make critical investments in research
and technology that will push them past their US
competitors. It is as simple as the fact that they
do not have to collect as many taxes for their
home nation as American companies do.
This is why companies are trying to avoid
the now comparatively draconian corporate
tax imposed in the US. They aren’t being
unpatriotic; they’re just trying to keep money
in the pockets of their customers, employees,
and suppliers, where it belongs. Unfortunately,
the US government still hasn’t seemed to wake
up to this reality entirely, as some politicians
continue to hurl scorn at the likes of Burger King
and Apple. Meanwhile, a frightening trend has
accompanied the slide in corporate tax rates
around the world.

This chart, produced by Gallup, is alarming.
Further analysis by Gallup shows that annual
business closures are currently outpacing
openings by 70,000. 17

at least lowered to below the OECD average
of 25.5 percent for the United States to keep
pace with the rest of the world’s developed
As glaring as these problems with the corporate
tax are, they also violate important criteria by
which we have judged the entirety of the tax
code. The corporate tax code is inefficient, as it is
changing the behavior of actors in the economy,
demonstrated by companies pursuing inversions
and shielding assets as well as by individuals
refusing to begin new businesses they otherwise
would have created. Also, the corporate tax is
inherently unfair. The only way to escape the
corporate tax is to have the ability to pursue
favorable tax treatment by way of lobbying and

Business Closings Hold Steady While Business Startups Decline
Source: U.S. Census Bureau, Business Dynamic Statistics






% new firms

This phenomenon is clearly a product of, in part,
excessive corporate taxation on small firms,
which can no longer compete in a global market.
The corporate tax must be either eliminated or
17 Jim Clifton, “American Entrepreneurship: Dead or Alive?”,
Gallup, January 13, 2015.







% closed firms

exploitation of tax expenditures. Or businesses
must have the means to move overseas
in order to level the playing field with their
international competitors. Small firms don’t have
the resources to pursue these options and thus
are crushed by their larger competitors who do.
Even eliminating the expenditures and loopholes

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 61


Businesses aren’t just leaving the United States;
they are increasingly not beginning here either.
While, as mentioned, large companies are
sometimes able to avoid paying most, if not
all, of their taxes by exploiting loopholes and
available tax expenditures, this often requires
teams of lawyers, lobbyists, and accountants—
none of which come cheap. Start-up companies
can’t afford these services and are often stuck
paying close to the full 40 percent right off the
bat. Combined with a growing regulatory state,
you produce the following trend:


wouldn’t stop the problem of businesses leaving
and also not beginning in the first place.
Reducing, or even perhaps eliminating, the
corporate tax rate is the only way to stop the
flow of jobs, talent, and capital overseas and to
fertilize the soil for new businesses immediately.
The corporate tax also presents itself as perfect
candidate for a large reduction or elimination
because it is a deceitful policy. Corporations

62 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

don’t pay taxes; people do through higher prices
and lower pay. Running these taxes through
the middleman of corporations disguises much
of the total federal tax burden from taxpayers.
This veil must be lifted if the nation is to have an
honest conversation about broader tax reform in
the future.



Most are familiar with some variation of the
phrase, “There are only two certainties in
life: death and taxes.” (Some feel that such
a grouping is an insult to death.) However
most Americans are probably not aware that
a combination of the two exists. The Estate
Tax, also known as the death tax, is literally a
tax owed to the government on estate or net
assets upon death. More explicitly, the death
tax is a percentage of the value of everything
owned, tangible and intangible, above a certain
threshold that is owed when a person dies.
Per the IRS itself, “It consists of an accounting
of everything you own or have certain interests
in at the date of death.”18
Right away, it’s hard not to get a sense that there
is something deeply flawed with such a policy,
even if it’s just on moral grounds alone. By its
very nature, there are a few fairly reprehensible
givens with such a policy. First off, where every
other tax on the books is prompted by a gain,
such as new income or a new purchase, the
death tax is the only one triggered by not only
a loss, but by tragedy itself. Further, because
the person who the death tax is being levied on
is, of course, dead, it falls on their survivors to
orchestrate all of the necessary procedures for
compliance with the tax.
Whether it comes by natural causes, sickness,
an accident, or something unspeakably worse,
the death of a loved one is something that
brings about unimaginable pain and stress.
Putting aside all other differences, there should
be broad agreement that the last thing anyone
needs following the loss of a loved one is
endless meetings with lawyers, accountants,
and IRS agents to figure out how large of check
needs to be cut to Uncle Sam. 

18 IRS Summary of the Estate Tax, Accessed here: http://www.

These are the obvious problems with the death
tax and they probably account for why polls
routinely show that the overwhelming majority
of Americans, when informed and asked about
the death tax, favor eliminating it.19 Yet the
death tax still exists and continues to create
unnecessary anxiety for those with elderly or
ill loved ones who own businesses or have
cherished investments. What’s worse is that for
how morally backward the policy is, it doesn’t
make even a shred of economic sense.
The proponents of the death tax want Americans
to believe that it is only a tax on the richest
individuals whose families can no doubt afford
to pay it. And, after all, who needs all that money
when they’re dead right? It is true that only
those with more than $5.34 million in assets
were subject to the tax in 2014, and even then
the tax only applies as a percent of every dollar
assessed above that threshold, not below. The
problem is that the death tax isn’t just a tax on
pools of money, gold, and jewels sitting in some
bank vault somewhere.
As stated before, the death tax is determined as
a percentage of all assets and investments. This
includes, homes, cars, stocks, land, cattle, etc.
More to the point, this also includes businesses.
The tax is no haircut either. The 2014 rate was 40
percent, but it has been as high as 70 percent
as recently as the 1980s. That 40 percent can
also be on top of double-digit state-level death
taxes on the books in 19 states and the District of
What the death tax sets up is a perilous situation
for small, family-owned businesses. If a family
19 Rushad Thomas, “The Top Five Tax Polling Questions Anyone
Would Ever Need to Know”, Americans for Tax Reform,
February 2nd, 2012.
20 Ashlea Ebeling, “Where Not To Die In 2014: The Changing
Wealth Tax Landscape”, Forbes, November 1, 2013. http://

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 63


member owns the entirety of or a major share
in a privately-held business, their death forces
the surviving members or inheritors to come up
with the cash equivalent of 40 percent of the
deceased’s stake in the company. Let that really
sink in for a moment and think about everything
involved with owning and operating a business.
It doesn’t take too long to realize that the term
“death” tax holds a duel meaning.  This policy
kills businesses.
Consider any privately owned business. Think
about the basic needs to keep virtually any
kind of brick-and-mortar business operating:
land, structures, electrical and plumbing
fixtures, vehicles, machinery and equipment,
computers, office supplies, raw materials, parts,
tools, merchandise, and finished products. It’s
not difficult to imagine, that for a business the
size of no more than a few dozen employees,
these assets alone could push the value of the
business close to, if not beyond, the $5.34 million
required to trigger the death tax. And all of that
is before considering the business’s various
savings and spending accounts and investments.
It is safe to say there is not a single business
owner in the country able to cut a check for 40
percent of their company’s net worth today and
keep their doors open tomorrow.
The death tax forces small businesses that
experience an ownership death to immediately
begin liquidating assets and, as any business
owner will attest, their most easily dispatched
cost is labor.
So first go the jobs created by the company.
Next goes the company itself, as it is forced to
sell the very things it requires to do business in
order to make enough cash available to comply
with the tax.  As devastating as this is for the
business and its employees, it is also a drag on
the entire economy. Unemployment rises, fewer
investments and capital purchases are made,
and prices rise across the market as competing
firms adapt to reduced competition. In addition,
the average consumer is deprived of the choice
to purchase whatever good or service that
company offered.

64 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

If this seems like a far-fetched scenario, rest
assured it’s not.  A recent story from just
outside Seattle, Washington resembles the
exact scenario just posited and reminds that
the impact of the death tax is very real on
survivors. Per the Seattle Times:21
“The story of the McBride family, recounted by
Seattle Times reporter Erin Heffernan, shows us
what we lose as a result of the estate tax — in
this case, the last working farm in a fast-growing
suburb. Twelve acres of open space farmed by
a single family since 1883 will soon become a
subdivision. The family had to sell, explained
Jim McBride. ‘There wasn’t any other thing for
us to do. All my parents’ wealth was in that land,
and we couldn’t afford to pay the taxes that
come with inheriting it at the current property
value.’ The McBride case ought to show us
conventional thinking is wrong — the death tax
really isn’t a whack on the wealthy.”
It certainly is not. In addition, as recently as 2001,
the death tax threshold was a mere $675,000
taxed at a 55 percent rate.22 This would impact
countless more families and businesses that
would by no objective measure be considered
“rich”. It would be foolish to think the tax couldn’t
reach that level again. 
The only way to be sure that the death tax won’t
continue to destroy more and more family
businesses and the decades of hard work that
they are worth is for Congress to permanently
repeal it. Luckily, such a plan has already
been put on the table and a lot of members of
Congress are supporting it.
Last summer, Representative Kevin Brady,
(R-TX) introduced H.R. 2429, which would
permanently repeal the death tax. The bill
enjoyed enormous and bi-partisan support in the

21 Seattle Times Editorial, “Death tax imposes cost on family business stability”, The Seattle Times, August 14, 2014.
22 Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014, The Tax Foundation, Accessed here: http://

But just as the arguments against the death
tax are not exclusively economic, neither are
the ones in favor of it. Some believe the death
tax is a necessary tool for societal engineering.
They see the death tax as a way of curbing two
perceived problems: lazy rich kids and powerful

Naturally, eliminating the death tax would
reduce incoming revenue to the Treasury
in the short-term. However, on the scale of
government receipts and outlays, scrapping the
death tax would have a microscopic impact. This
year, combined estate and gift taxes, according
to the Office of Management and Budget, will
bring in an estimated $15.746 billion.23 It’s hard to
say how much exactly of this total comes from
the death tax and what constitutes gift taxes,
but we can make an educated guess based on
the 2010-2011 numbers. In 2010, the death tax
was temporarily suspended in its entirety. The
following year, 2011, the government collected a
combined $7.4 billion from estate and gift taxes,
down from $18.885 billion in 2010 and below
the $18.912 billion collected in 2013.24 Therefore
it seems fair to estimate an average value of
estate tax revenues at about $10-11 billion.

Supporters of the death tax see it as a way of
forcing the children of America’s wealthiest
citizens to go out and become successful
contributors to society instead of laggards
living off of trust funds. There’s a big problem
with that line of thinking. First off, this
entire idea is a distant cousin of economic
technophobia.  Economic technophobia or, as
famed economist Henry Hazlitt referred to it in
his classic book Economics in One Lesson, “the
Curse of Machinery”, is the belief by some that
machines and technological innovations cause
economic harm by reducing the amount of work
that needs to be done to accomplish certain
tasks. Despite the thorough debunking of this
myth by Hazlitt in his book, which was published
in 1946, policy makers today still subscribe to
this kind of nonsensical thinking about economic

This year, the federal government will collect
just above $3 trillion in taxes. That puts the
death tax somewhere around .3 percent of total
federal revenue (Not three percent—point three
percent). As concerned as all Americans should
be about the state of federal finances, the
deficit, and the growing national debt, clinging
to spare-change revenue from a tax that eats
away at the foundation of the economy isn’t the
answer. Besides, according to the Government
Accountability Office, eliminating redundant
federal programs could save taxpayers at least
$45 billion a year,25 over four times the amount
raised by the death tax.

President Obama himself made this statement in

23 OMB Historical Table 2.5- Composition of “Other Receipts”:
24 Ibid.
25 Brianna Ehley, “$45 Billion Wasted in Redundant Federal
Programs: GAO”, The Fiscal Times, April 9, 2014. http://www.

“There are some structural issues with our
economy where a lot of businesses have
learned to become much more efficient with
a lot fewer workers,” he said. “You see it when
you go to a bank and you use an ATM, you don’t
go to a bank teller, or you go to the airport and
you’re using a kiosk instead of checking in at the
If this was really the case, that technology is
the reason for long-term unemployment and
economic hardship, then why stop at the ATM?
Forget reinventing the wheel: destroy them all!
26 Russell Roberts, “Obama vs. ATMs: Why Technology Doesn’t
Destroy Jobs”, The Wall Street Journal, June 22, 2011. http://

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 65


House. It had 221 cosponsors, already a majority
of the 435-member body, including a handful
of Democrats. Of course there are those that do
defend the institution of the death tax, however
arguments in favor of the policy don’t really hold
a candle to the fact that the tax vaporizes small,
family-owned businesses.


Someone ought to ascend Mount Olympus
and politely ask Zeus to unchain the titan
Prometheus, for humanity is giving his gift of the
ultimate technology, fire, back to the gods!
Of course, in this context, President Obama’s
argument about technology and the economy
crumbles rapidly under the weight of basic logic.
The ultimate point is that human civilization
has not become more advanced by keeping
everyone as busy as possible. Instead, progress
is achieved when technology and innovation
liberate productive effort and leave people free
to pursue new challenges. Does wealth not do
the same?
Families that have built up great wealth leave
their descendants in a better position to pursue
ventures for reasons that are not entirely
economic. Children and grandchildren of the rich
and famous quite often go on to become great
assets to society through work that they engage
in for their own personal enrichment or through
charitable purposes. There are countless
examples of this, from the Rockefellers, the
Fords, the Pritzkers, and the Waltons, to the
Kennedys, the Bushs, and now even the Clintons.
In this light, the argument for the death tax,
which would thus essentially set those with the
time, resources, and inclination to make society
better back to square one, seems entirely
The other moral argument for the death tax
stems from a feeling some may have felt from
reading that last passage – a fear of some
families and their companies becoming too
powerful. This is a legitimate concern, but the
death tax is far from an effective remedy. In fact,
it actually eliminates the most effective way of
combating such a problem: competition.
Small businesses with new ideas, products, and
services are the most effective check against
large corporations and powerful families.
Small, family-owned companies are the
cradles of business ideas that keep powerful

66 TAXES | BLUEPRINT for 2015: Setting the Stage for the Next Session

conglomerates on their toes or put them out
of business. Yet the death tax looms large
over these privately-held small enterprises,
threatening to destroy them before they can
even reach the next generation. Meanwhile,
powerful companies and families are able
to hire the best and brightest attorneys and
accountants, as well as purchase favor in
Washington, to avoid feeling the brunt of
the death tax. Again, the Clintons provide a
wonderful example:27
“Bill and Hillary Clinton have long supported
an estate tax to prevent the U.S. from being
dominated by inherited wealth. That doesn’t
mean they want to pay it.
To reduce the tax pinch, the Clintons are using
financial planning strategies befitting the top
1 percent of U.S. households in wealth. These
moves, common among multimillionaires, will
help shield some of their estate from the tax
that now tops out at 40 percent of assets upon
All things considered, the death tax amounts
to unnecessary pain on those already suffering
from the loss of a loved one without any
realistic benefit to society as a whole. In fact
the broader society suffers because of the
death tax’s continued existence. The tax acts
like an herbicide, killing the business roots from
which the entire economy grows and leaving
it top heavy. The result is fewer jobs, fewer
investments, fewer customers for manufacturing
equipment and other products needed to do
business, and less of the healthy competition
that America’s market economy needs. And all
of that comes after considering how morally
reprehensible it is to impose a 40 percent (or
more) tax on someone’s life’s work and family as
a final send off from the government. 

27 Richard Rubin, “Wealthy Clintons Use Trusts to Limit Estate
Tax They Back”, Bloomberg, June 17. 2014. http://www.



One of the big problems with the tax code is that
many wealthy individuals are able to utilize tax
expenditures to end up having very little, if any,
tax liability. This has been a problem for decades.
At one point, in the mid-20th Century, the top tax
rate in the United States was 90 percent, if you
can believe that. The only reason the economy
didn’t implode is because 1. it applied to very
few people and 2. those people it did apply to
exploited tax expenditure programs to escape
liability. So unfairness in the tax code, especially
in the progressive sense, has been a problem for
decades. Congress sought to correct this issue
in 1969 when it created the Alternative Minimum
Tax (AMT).28
The problem with the AMT however, is that in an
attempt to make the tax code fairer, it sacrificed
its simplicity. Ultimately, both were still lost.
The AMT is essentially a separate income tax
system, requiring individuals to calculate their
owed taxes under the normal income tax rules
and then again under the AMT’s rules. The AMT
simply allows for fewer of the usual deductions.
Once your liability is calculated under both
systems, you then owe the higher of the two.
This essentially doubles the complexity of an
already tortuous system.

28 Patrick Fleenor and Andrew Chamberlain, “Backgrounder
on the Individual Alternative Minimum Tax (AMT)”, The Tax
Foundation, May 24, 2005.

To make matters worse, the AMT was initially
not indexed to inflation. Although Congress did
fix this problem in 2012, millions of people who
were never intended to be the target of the AMT
have become liable for paying it. Adding insult
to injury is the fact that many wealthy individuals
are still able to escape all tax liability. The IRS
estimates that 7,000 people worth over $1
million avoided paying any income tax in 2011.29
Not much further detail ought to be needed to
explain why the AMT ought to be repealed even
with the 2012 fix in place. It makes absolutely no
sense for every American to have to fill out and
calculate their tax liability, already an arduous
process that often requires professional help,
twice. And yes, technically all Americans who
owe taxes are supposed to calculate their AMT
liability as well. This is a backwards approach
to ensuring that the tax code is fair which
exacerbates the existing issues with simplicity.
If Congress is truly concerned about the
exploitation of tax expenditures by the wealthy,
the correct approach is to reevaluate those
expenditures, not impose high compliance costs
and stiff AMT rates on middle class Americans.

29 Taxpayer Advocate Service, 2012 Report to Congress, Accessed here:

BLUEPRINT for 2015: Setting the Stage for the Next Session | TAXES 67

America’s greatest days lie ahead.
This is a steadfast belief, an intrinsic principle serving as the foundation
for American exceptionalism.
Principles, though, cannot defend themselves. Our destiny as a great
nation depends on the advocacy of its citizenry to defend and promote
the ideals that made America the greatest nation in history. America’s
greatness and its potential continue to be tested by the expansion of
government bureaucracy, an assault on free enterprise and challenges
to America’s defense of freedom and democracy around the globe.
American Encore is dedicated to helping our nation and its leaders
rise to the test and to confront these challenges. American Encore will
defend freedom, promote free markets, work to expand economic
opportunity and make the case for the American ideals of liberty and
democracy, both at home and abroad.
In doing so, we can ensure the next century is America’s best yet.