What about a tax on political contributions?

Jan 7, JDN 2458126

In my previous post, I argued that an advertising tax could reduce advertising, raise revenue, and produce almost no real economic distortion. Now I’m going to generalize this idea to an even bolder proposal: What if we tax political contributions?

Donations to political campaigns are very similar to advertising. A contest function framework also makes a lot of sense: Increased spending improves your odds of winning, but it doesn’t actually produce any real goods.

Suppose there’s some benefit B that I get if a given politician wins an election. That benefit could include direct benefits to me, as well as altruistic benefits to other citizens I care about, or even my concern for the world as a whole. But presumably, I do benefit in some fashion from my favored politician winning—otherwise, why are they my favored politician?

In this very simple model, let’s assume that there are only two parties and two donors (obviously in the real world there are more parties and vastly more donors; but it doesn’t fundamentally change the argument). Say I will donate x and the other side will donate y.

Assuming that donations are all that matter, the probability my party will win the election is x/(x+y).

Fortunately that isn’t the case. A lot of things matter, some that should (policy platforms, experience, qualifications, character) and some that shouldn’t (race, gender, age, heightpart of why Trump won may in fact be that he is tall; he’s about 6’1”.). So let’s put all the other factors that affect elections into a package and call that F.

The probability that my candidate wins is then x/(x+y) + F, where F can be positive or negative. If F is positive, it means that my candidate is more likely to win, while if it’s negative, it means my candidate is less likely to win. (If you want to be pedantic, the probability of winning has to be capped at 0 and 1, but this doesn’t fundamentally change the argument, and only matters for candidates that are obvious winners or obvious losers regardless of how much anyone donates.)

The donation costs me money, x. The cost in utility of that money depends on my utility function, so for now I’ll just call it a cost function C(x).
Then my net benefit is:
B*[x/(x+y)+F] – C(x)

I can maximize this by a first-order condition. Notice how the F just drops out. I like F to be large, but it doesn’t affect my choice of x.

B*y/(x+y)^2 = C'(x)

Turning that into an exact value requires knowing my cost function and my opponent’s cost function (which need not be the same, in general; unlike the advertising case, it’s not a matter of splitting fungible profits between us), but it’s actually possible to stop here. We can already tell that there is a well-defined solution: There’s a certain amount of donation x that maximizes my expected utility, given the amount y that the other side has donated. Moreover, with a little bit of calculus you can show that the optimal amount of x is strictly increasing in y, which makes intuitive sense: The more they give, the more you need to give in order to keep up. Since x is increasing in y and y is increasing in x, there is a Nash equilibrium: At some amount x and y we each are giving the optimal amount from our perspective.

We can get a precise answer if we assume that the amount of the donations is small compared to my overall wealth, so I will be approximately risk-neutral; then we can just say C(x) = x, and C'(x) = 1:

B*y/(x+y)^2 = 1
Then we get essentially the same result we did for the advertising:

x = y = B/4

According to this, I should be willing to donate up to one-fourth the benefit I’d get from my candidate winning in donations. This actually sounds quite high; I think once you take into account the fact that lots of other people are donating and political contributions aren’t that effective at winning elections, the optimal donation is actually quite a bit smaller—though perhaps still larger than most people give.

If we impose a tax rate r on political contributions, nothing changes. The cost to me of donating is still the same, and as long as the tax is proportional, the ratio x/(x+y) and the probability x/(x+y) + F will remain exactly the same as before. Therefore, I will continue to donate the same amount, as will my opponent, and each candidate will have the same probability of winning as before. The only difference is that some of the money (r of the money, to be precise) will go to the government instead of the politicians.

The total amount of donations will not change. The probability of each candidate winning will not change. All that will happen is money will be transferred from politicians to the government. If this tax revenue is earmarked for some socially beneficial function, this will obviously be an improvement in welfare.

The revenue gained is not nearly as large an amount of money as is spent on advertising (which tells you something about American society), but it’s still quite a bit: Since we currently spend about $5 billion per year on federal elections, a tax rate of 50% could raise about $2.5 billion.

But in fact this seriously under-estimates the benefits of such a tax. This simple model assumes that political contributions only change which candidate wins; but that’s actually not the main concern. (If F is large enough, it can offset any possible donations.)
The real concern is how political contributions affect the choices politicians make once they get into office. While outright quid-pro-quo bribery is illegal, it’s well-known that many corporations and wealthy individuals will give campaign donations with the reasonable expectation of influencing what sort of policies will be made.

You don’t think Goldman Sachs gives millions of dollars each election out of the goodness of their hearts, do you? And they give to both major parties, which really only makes sense if their goal is not to make a particular candidate win, but to make sure that whoever wins feels indebted to Goldman Sachs. (I guess it could also be to prevent third parties from winning—but they hardly ever win anyway, so that wouldn’t be a smart investment from the bank’s perspective.)

Lynda Powell at the University of Rochester has documented the many subtle but significant ways that these donations have influenced policy. Campaign donations aren’t as important as party platforms, but a lot of subtle changes across a wide variety of policies add up to large differences in outcomes.

A political contribution tax would reduce these influences. If politicians’ sole goal were to win, the tax would have no effect. But it seems quite likely that politicians enjoy various personal benefits from lobbying and campaign contributions: Fine dinners, luxurious vacations, and so on. And insofar as that is influencing politicians’ behavior, it is both obviously corrupt and clearly reduced by a political contribution tax. How large an effect this would be is difficult to say; but the direction of the effect is clearly the one we want.

Taxing donations would also allow us to protect the right to give to campaigns (which does seem to be a limited kind of civil liberty, even though the precise interpretation “money is speech” is Orwellian), while reducing corruption and allowing us to keep close track on donations that are made. Taxing a money stream, even a small amount, is often one of the best ways to incentivize close monitoring of that money stream.

With a subtle change, the tax could even be made to bias in favor of populism: All you need to do is exempt small donations from the tax. If say the first $1000 per person per year is exempt from taxation, then the imposition of the tax will reduce the effectiveness of million-dollar contributions from Goldman Sachs and the Koch brothers without having any effect on $50 donations from people like you and me. That would technically be “distorting” elections—but it seems like it might be a distortion worth making.

Of course, this is probably even less likely to happen than the advertising tax.

We all know lobbying is corrupt. What can we do about it?

JDN 2457439

It’s so well-known as to almost seem cliche: Our political lobbying system is clearly corrupt.

Juan Cole, a historian and public intellectual from the University of Michigan, even went so far as to say that the United States is the most corrupt country in the world. He clearly went too far, or else left out a word; the US may well be the most corrupt county in the First World, though most rankings say Italy. In any case, the US is definitely not the most corrupt country in the whole world; no, that title goes to Somalia and/or North Korea.

Still, lobbying in the US is clearly a major source of corruption. Indeed, economists who study corruption often have trouble coming up with a sound definition of “corruption” that doesn’t end up including lobbying, despite the fact that lobbying is quite legal. Bribery means giving politicians money to get them to do things for you. Lobbying means giving politicians money and asking them to do things. In the letter of the law, that makes all the difference.

One thing that does make a difference is that lobbyists are required to register who they are and record their campaign contributions (unless of course they launder—I mean reallocate—them through a Super PAC of course). Many corporate lobbyists claim that it’s not that they go around trying to find politicians to influence, but rather politicians who call them up demanding money.

One of the biggest problems with lobbying is what’s called the revolving doorpoliticians are often re-hired as lobbyists, or lobbyists as politicians, based on the personal connections formed in the lobbying process—or possibly actual deals between lobbying companies over legislation, though if done explicitly that would be illegal. Almost 400 lobbyists working right now used to be legislators; almost 3,000 more worked as Congressional staff. Many lobbyists will do a tour as a Congressional staffer as a resume-builder, like an internship.

Studies have shown that lobbying does have an impact on policy—in terms of carving out tax loopholes it offers a huge return on investment.

Our current systems to disinventize the revolving door are not working. While there is reason to think that establishing a “cooling-off period” of a few years could make a difference, under current policy we already have some cooling-off periods and it’s clearly not enough.

So, now that we know the problem, let’s start talking about solutions.

Option 1: Ban campaign contributions

One possibility would be to eliminate campaign contributions entirely, which we could do by establishing a law that nobody can ever give money or in-kind favors to politicians ever under any circumstances. It would still be legal to meet with politicians and talk to them about issues, but if you take a Senator out for dinner we’d have to require that the Senator pay for their own food and transportation, lest wining-and-dining still be an effective means of manipulation. Then all elections would have to be completely publicly financed. This is a radical solution, but it would almost certainly work. MoveOn has a petition you can sign if you like this solution, and there’s a site called public-campaign-financing.org that will tell you how it could realistically be implemented (beware, their webmaster appears to be a time traveler from the 1990s who thinks that automatic music and tiled backgrounds constitute good web design).

There are a couple of problems with this solution, however:

First, it would be declared Unconstitutional by the Supreme Court. Under the (literally Orwellian) dicta that “corporations are people” and “money is speech” established in Citizens United vs. FEC, any restrictions on donating money to politicians constitute restrictions on free speech, and are therefore subject to strict scrutiny.

Second, there is actually a real restriction on freedom here, not because money is speech, but because money facilitates speech. Since eliminating all campaign donations would require total public financing of elections, we would need some way of deciding which candidates to finance publicly, because obviously you can’t give the same amount of money to everyone in the country or even everyone who decides to run. It simply doesn’t make sense to provide the same campaign financing for Hillary Clinton that you would for Vermin Supreme. But then, however this mechanism works, it could readily be manipulated to give even more advantages to the two major parties (not that they appear to need any more). If you’re fine with having exactly two parties to choose from, then providing funding for their, say, top 5 candidates in each primary, and then for their nominee in the general election, would work. But I for one would like to have more options than that, and that means devising some mechanism for funding third parties that have a realistic shot (like Ralph Nader or Ross Perot) but not those who don’t (like the aforementioned Vermin Supreme)—but at the same time we need to make sure that it’s not biased or self-fulfilling.

So let’s suppose we don’t eliminate campaign contributions completely. What else could we do that would curb corruption?

Option 2: Donation caps and “Democracy Credits”

I particularly like this proposal, self-titled the American Anti-Corruption Act (beware self-titled laws: USA PATRIOT ACT, anyone?), which would require full transparency—yes, even you, Super PACs—and place reasonable caps on donations so that large amounts of funds must be raised from large numbers of people rather than from a handful of people with a huge amount of money. It also includes an interesting proposal called “Democracy Credits” (again, the titles are a bit heavy-handed), which are basically an independent monetary system, used only to finance elections, and doled out exactly equally to all US citizens to spend on the candidates they like. The credits would then be exchangeable for real money, but only by the candidates themselves. This is a great idea, but sadly I doubt anyone in our political system is likely to go for it.

Actually, I would like to see these “Democracy Credits” used as votes—whoever gets the most credits wins the election, automatically. This is not quite as good as range voting, because it is not cloneproof or independent of irrelevant alternatives (briefly put, if you run two candidates that are exactly alike, their votes get split and they both lose, even if everyone likes them; and similarly, if you add a new candidate that doesn’t win you can still affect who does end up winning. Range voting is basically the only system that doesn’t have these problems, aside from a few really weird “voting” systems like “random ballot”). But still, it would be much better than our current plurality “first past the post” system, and would give third-party candidates a much fairer shot at winning elections. Indeed, it is very similar to CTT monetary voting, which is provably optimal in certain (idealized) circumstances. Of course, that’s even more of a pipe dream.

The donation caps are realistic, however; we used to have them, in fact, before Citizens United vs. FEC. Perhaps future Supreme Court decisions can overturn it and restore some semblance of balance in our campaign finance system.

Option 3: Treat campaign contributions as a conflict of interest

Jack Abramoff, a former lobbyist who was actually so corrupt he got convicted for it, has somewhat ironically made another proposal for how to reduce corrupting in the lobbying system. I suppose he would know, though I must wonder what incentives he has to actually do this properly (and corrupt people are precisely the sort of people with whom you should definitely be looking at the monetary incentives).

Abramoff would essentially use Option 1, but applied only to individuals and corporations with direct interests in the laws being made. As Gawker put it, “If you get money or perks from elected officials, […] you shouldn’t be permitted to give them so much as one dollar.” The way it avoids requiring total public financing is by saying that if you don’t get perks, you can still donate.

His plan would also extend the “cooling off” idea to its logical limit—once you work for Congress, you can never work for a lobbying organization for the rest of your life, and vice versa. That seems like a lot of commitment to ask of twentysomething Congressional interns (“If you take this job, unemployed graduate, you can never ever take that other job!”), but I suppose if it works it might be worth it.

He also wants to establish term limits for Congress, which seems pretty reasonable to me. If we’re going to have term limits for the Executive branch, why not the other branches as well? They could be longer, but if term limits are necessary at all we should use them consistently.

Abramoff also says we should repeal the 17th Amendment, because apparently making our Senators less representative of the population will somehow advance democracy. Best I can figure, he’s coming from an aristocratic attitude here, this notion that we should let “better people” make the important decisions if we want better decisions. And this sounds seductive, given how many really bad decisions people make in this world. But of course which people were the better people was precisely the question representative democracy was intended to answer. At least if Senators are chosen by state legislatures there’s a sort of meta-representation going on, which is obviously better than no representation at all; but still, adding layers of non-democracy by definition cannot make a system more democratic.

But Abramoff really goes off the rails when he proposes making it a conflict of interest to legislate about your own state.Pork-barrel spending”, as it is known, or earmarks as they are formally called, are actually a tiny portion of our budget (about 0.1% of our GDP) and really not worth worrying about. Sure, sometimes a Senator gets a bridge built that only three people will ever use, but it’s not that much money in the scheme of things, and there’s no harm in keeping our construction workers at work. The much bigger problem would be if legislators could no longer represent their own constituents in any way, thus defeating the basic purpose of having a representative legislature. (There is a thorny question about how much a Senator is responsible for their own state versus the country as a whole; but clearly their responsibility to their own state is not zero.)

Even aside from that ridiculous last part, there’s a serious problem with this idea of “no contributions from anyone who gets perks”: What constitutes a “perk”? Is a subsidy for solar power a perk for solar companies, or a smart environmental policy (can it be both?)? Does paying for road construction “affect” auto manufacturers in the relevant sense? What about policies that harm particular corporations? Since a carbon tax would hurt oil company profits, are oil companies allowed to lobby against it on the ground that it is the opposite of a “perk”?

Voting for representatives who will do things you want is kind of the point of representative democracy. (No, New York Post, it is not “pandering” to support women’s rights and interestswomen are the majority of our population. If there is one group of people that our government should represent, it is women.) Taken to its logical extreme, this policy would mean that once the government ever truly acts in the public interest, all campaign contributions are henceforth forever banned. I presume that’s not actually what Abramoff intends, but he offers no clear guidelines on how we would distinguish a special interest to be excluded from donations as opposed to a legitimate public interest that creates no such exclusion. Could we flesh this out in the actual legislative process? Is this something courts would decide?

In all, I think the best reform right now is to put the cap back on campaign contributions. It’s simple to do, and we had it before and it seemed to work (mostly). We could also combine that with longer cooling-off periods, perhaps three or five years instead of only one, and potentially even term limits for Congress. These reforms would certainly not eliminate corruption in the lobbying system, but they would most likely reduce it substantially, without stepping on fundamental freedoms.

Of course I’d really like to see those “Democracy Credits”; but that’s clearly not going to happen.