Party finance reform: a different idea

Party funding is in the news again, and once more the focus is on caps and bans, as well as increased taxpayer funding. What's missing from the debate is another possibility: why not tax 'unwanted' or 'undesirable' contributions and spending proportionately to the degree of their undesirability rather than ban them outright? Here's what I wrote back when there were about three people reading this blog:

I am no expert, but these are the main issues as I understand them:

1. Owing to their ability to make higher contributions, rich individuals and corporations disproportionately influence the political agenda and government decisions. On the other hand, small contributions by individuals are seen as beneficial, as they promote wider participation in the political process.

2. The bulk of campaign spending is socially wasteful, closely resembling an arms race. If there was a way to bring total spending down in a universally accepted manner, everyone would be better off.

3. The main approach in the UK and the US to rectifying problems 1 & 2 above is legislation that imposes more transparency (parties have to declare the contributions they receive) coupled with restrictions on the amount of money an individual or organisation can donate.

Here's a different idea. Why not tax campaign contributions to the extent they are deemed to be socially undesirable? I propose instituting the Undue Influence Tax (UIT), to be introduced as part of the 'Invigorating Democracy Act' and waged on individual donations (and to give it an extra bit of harmless spin, it should be paid by the political parties rather than the donors). It will start at 0% of the value of the contribution, jumping to 30% after the first $5,000 or so, 50% after $10,000 and reaching 95% beyond $50,000.

This will make 'buying' political influence much more expensive - and as we know, when the price of a good rises, quantity falls. It will increase the relative value of small contributions, making candidates reach more to 'the people', rather than the wealthy and large corporations. Suitably calibrated, it can rectify all the actual and perceived ills of the current campaign finance framework.

Furthermore, the UIT is a tax-man's dream. It could become the most popular tax in history, as it only affects a small number of citizens, while clearly contributing towards a greater public good - 'giving power to the people'. The revenue obtained should allow for cuts elsewhere in the tax system or increased spending on public services. There is no need for additional bureaucracy - parties already have to declare contributors' names and donations. Whatever the rate, avoiding the tax is an option only for candidates with a political death-wish. Finally, it can be introduced gradually and fine-tuned to desirable levels , without generating any distortionary behavioural effects.

I'm sure the membership of the (carbon) Pigou club would approve.

That's what I wrote back then, but it seems I have ignored another important benefit of using a tax approach. Since cross-party agreement is needed, moving from banning to taxing also means that the policy space becomes a continuum rather than a series of discrete choices where it's impossible to meet the other party 'in the middle'. Allowing variable tax rates in the policy space means that the probability a mutually agreeable compromise can be reached is much higher than when choice is restricted between binary 'ban-no ban' options.