Taxing Political Donations: The Case for Corrective Taxes in Campaign Finance

Article excerpt

   Campaign finance lives in a time warp, untouched by the
   regulatory revolution of the past generation.

   --Bruce Ackerman and Ian Ayres (1)


Incentive-based regulations are generally more efficient than command-and-control measures. (2) One of the primary categories of incentive-based regulations--and one that has gained significant support of economics scholars over the past few decades--is corrective taxation. (3) Corrective taxes, under various guises, are used in numerous areas of the law: (4) "Sin taxes" are the method of choice for regulating goods such as cigarettes and alcohol, (5) pollution taxes are familiar tools of environmental law, (6) and liability rules play a central role in tort law. (7) Nevertheless, the potential of corrective taxes has been overlooked in the debates over campaign finance reform. (8)

The equivalent of command-and-control measures in campaign finance law are contribution ceilings, which lie at the heart of the American approach to regulating campaign finance. (9) Current law places a $2000 ceiling on donations from individuals to political candidates. (10) This limit is supplemented by a $5000 ceiling on donations from individuals to political action committees, (11) a $25,000 ceiling on donations from individuals to national party committees, (12) and an assortment of additional ceilings on numerous other forms of political donations. (13) Contribution ceilings have become an enduring component of our system of campaign finance regulation. (14)

There are critics of this reliance on contribution ceilings. (15) Some argue that caps on campaign contributions violate First Amendment rights, (16) help incumbents against challengers, (17) and lead donors to divert their contributions through regulatory loopholes. (18) The (mostly conservative) adherents of this position favor allowing donors to contribute unlimited sums to political campaigns. Meanwhile, others argue that permitting even moderately sized donations is incompatible with true political equality. (19) The (mostly liberal) adherents of this position would replace private donations with government-financed campaigns or a regulated system of public debates.

This Note is not directed at either of these positions. (20) Instead, I begin with the premise that political donations are neither categorically harmful nor categorically benign. I accept the underlying purpose of contribution ceilings: to limit the size of political donations without completely banning them. In order to achieve such an end, this Note applies the logic of corrective taxes to the problem of campaign finance. Specifically, I argue for replacing contribution ceilings with "contribution taxes." (21) Rather than capping the size of political donations at a specified dollar level, I propose taxing donations based on a schedule of graduated rates--the larger the size of a contribution, the higher the rate of taxation. (22) The argument proceeds on a highly theoretical level; questions about design variables are largely outside the scope of this Note. (23) Instead, I present an economic argument for why contribution taxes are superior to contribution ceilings.

My argument stems from a single observation: As compared to contribution ceilings, contribution taxes affirmatively select for donors with a greater willingness to pay taxes on their donations. To demonstrate this point, imagine that donors were required to obtain government permits before contributing any given amount to a candidate. Under this hypothetical, a contribution ceiling would grant every donor a permit to contribute up to the amount of the ceiling. In contrast, contribution taxes would distribute permits based on a donor's willingness to pay the tax. Donors with greater willingness to pay taxes would receive permits allowing them to donate larger amounts, while donors who were unwilling to pay the taxes would be allowed to donate only small amounts. …