Campaign finance reform, Pigou style

With the current Presidential election on course to becoming the most expensive in history, campaign finance is a hot topic again. 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.


  1. Anonymous Says:

    sounds too easy to avoid your UIT. I'm a big company- I just give lots of small donations. or alternatively, I tell my staff to donate to you privately and give them a supplement on their wage.

  2. datacharmer Says:

    There isn't a tax that people can't find a way of avoiding to some extent. However, in this case the effect should be extremely small. Both the options you mention are illegal under current legislation, and it will not be very difficult to discover anyone attempting to do either. The first one can be picked up automatically by any system tracking how much a single organisation donates in total (the tax will apply to your marginal contribution taking your previous donations into account - so breaking down the total amount into smaller donations will have no effect whatsoever). As for the second, you sure must have built great rapport with your staff to trust they will not report your cunning machinations.