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

Abstract

Command-and-control regulations are generally thought to be inferior to incentive-based alternatives. This essay proposes an incentive-based approach for regulating campaign finance. In place of our current regime of contribution ceilings, the essay calls for a graduated system of contribution taxes. Rather than capping the size of political donations at a specified dollar level, we should tax donations based on a schedule of graduated rates - the larger the size of a contribution, the higher the level of taxation.

Contribution taxes generate two primary advantages over contribution ceilings. First, contribution taxes preserve more total surplus. This surplus can be shared by the donors and by society as a whole, with society benefiting from the tax revenue. Second, contribution taxes lead fewer donors to divert their contributions through loopholes. We cannot possibly prevent all diversions of this sort under our current constitutional precedents, and these diversions serve to undermine our system of campaign finance. This essay also refutes the arguments that contribution taxes would engender greater inequality or corruption; that contribution taxes would be found unconstitutional; and that contribution taxes would be defeated by our inability to quantify the harms caused by political donations.

Keywords: Campaign finance, political donations, election law, contribution ceilings, campaign regulation, election, donation, McCain, Feingold, BCRA, contribution taxes

JEL Classification: K00, K20, K29, K34, K39, H10, H11, H23, H80