Dano: Public Campaign Financing? It Doesn't Matter

(Note: Reed's post gives a succinct history of campaign finance in the U.S., so I'll not repeat it. I will also avoid repeating his citations for brevity, though I relied on some of them also.) 

Well, for a change, I got a coin-flip this week that threw me for a loop. I am supposed to argue that we should maintain the public campaign finance system for federal elections (and, perhaps, mandate its use). But, by golly, after my research, I decided that it doesn't make a lick of difference where the candidates get their "individual contributions." I guess that sounds confusing.

The term, "public financing," is a bit of a misnomer. The fact is that money provided by the government comes from individual taxpayers (private citizens) who decided to contribute $3.00 of their personal tax obligation to the campaign finance fund for presidential elections. Yes, this is a small amount from each donor, but it adds up (though, as of 2006, fewer than 10% of taxpayers contributed annually--more on this issue, later). Moreover, there is an element of private donations within the public finance system, because it only provides "matching funds" of up to $250 per private donation. "Private financing" simply means that individuals donate directly to candidates instead of doing so through their tax returns. The difference is that individuals can (and do) contribute considerably more, though also limited by law, through this direct-donation mechanism. Also by law, corporations are prohibited from donating directly to candidates under both systems.

Fundamentally, proponents of public campaign financing say that this system reduces the possibility of corruption (because the source of candidate funding is known in advance, and is above-board), and helps to minimize the relative advantage of having deeper coffers than other candidates, such that "buying an election" becomes less likely. Under this system, candidates are not permitted to use more than $50,000 of their own money for their campaigns (unlike the substantial personal financial input provided by previous candidates, Steve Forbes, Ross Perot, Mitt Romney, and Hillary Clinton, to name a few). Of concern to candidates of parties other than Democratic or Republican, public financing is not available to them.

Those who support private campaign financing suggest that it, alone, protects the constitutional right of (unlimited) free speech, and that this system is regulated sufficiently to guard against corruption. The system is said to be superior because each donor has the right to direct their support to a specific candidate (where no such ability exists with public finance funds), further protecting the rights of donors to not support a candidate they don't like. Moreover, there are no limits on how much can be amassed in the aggregate, so if a candidate enjoys support from a much larger proportion of the public than his/her opponents, then his advantage in advertising funds is proportionate and fair. Finally, any party's candidates can get this form of funding -- not just Democrats and Republicans.

So, why doesn't it matter which system we use?

Of minor relevance, there are some equalizing factors between the two systems. First, the advantages of private financing are mitigated by available funds through public financing: 1) public financing subsidizes the nomination conventions of those candidates that accept it (not an insubstantial cost), and 2) public financing pays for the costs of attorneys and other administrative costs (also nothing to sneeze at). But that's not the main issue.

A less obvious issue is that, while we all know that public financing, at least in the 2008 campaign, garnered Senator McCain only about half the money that was collected by President-elect Obama, this is a consequence of both systems being utilized. Remember, above I noted that income tax contributions to public financing were made by fewer than 10% of taxpayers in recent years. (http://www.usatoday.com/news/washington/2007-04-17-preztax_N.htm?csp=34)

 If, however, candidates were required to use public financing (or, more accurately, prohibited from using private financing), the percentage of citizens choosing to donate with their tax returns would likely rise precipitously.  So, while the free choice to accept private financing exists along with the public financing system, a candidate can choose either method and take his chances, but private financing seems to hold the advantage so long as it remains available. This, by itself, is no reason to mandate one or the other.

The overarching reason the system chosen doesn't matter is that they each deal with "hard money" contributions only. Both systems allow expenditures of "soft money" contributions through the activities of political action committees (PACs), and by organizations known as "527s" and "501(c)s." Taken together, these organizations spend unlimited donation monies to support issues (directly), and candidates (indirectly ). The only "free speech" limitation on these groups is that they cannot suggest voting for or against a particular candidate. They can (and do), however, say things like, "candidate A is the only patriotic contender," and "candidate B is clearly unpatriotic." The power of these groups to affect elections was well illustrated by the soft-money-funded "swift boat" campaign against Senator John Kerry in the 2004 presidential race -- many believe this advertising strategy cost Kerry the election. The Supreme Court has upheld the right of these groups to advertise in this way, and no legislation short of a Constitutional amendment can change this fact (see Buckley v. Valeo, 424 U.S. 1 [1976]). So, essentially, as long as PACs, 527s, and 501(c)s can operate with impunity, their impact on election outcomes is far more relevant than the direct ads by the candidates, regardless of the sources of their funding.

Some might argue that direct candidate ads have a great deal of impact on voters' choices. That may be true, but I submit that the number of ads, and the geographic spread of them, is not as important to campaigns as it once was because of the advent of 24 hour news networks that endlessly replay the campaign ads of the candidates during the entire course of the election cycle. Even though John McCain spent far less than Barack Obama, for instance, I saw every important political ad that McCain produced as many times as I saw Obama's ads (okay...maybe not quite as many times, but effectively so). The news pundits see these ads as free content, and this essentially gives every candidate free air time. Unfortunately, the news outlets also give free replay time to the ads from the PACs, 527s and 501(c)s. So, again, the power of soft money organizations remains superior. Until this changes (through FCC regulations on media or a Constitutional amendment limiting soft money free speech), there is simply no important difference between the public and private campaign finance systems.

Campaign finance is a very complicated issue, to be sure. But concerning ourselves with an either/or argument over public or private donations is, quite simply, a misdirected effort. Both systems are regulated to prevent corruption, with debatable success, perhaps. But campaign finance reform needs to concern itself primarily with soft money controls if we expect to level the playing field for all candidates and prevent corruption and influence peddling in presidential campaigns.

Reed: Flat Tax? A Wonderful, Unworkable Concept

If I were to say to you, "It doesn't matter how much money or how little money you make, or how much or how little you spend, we're all going to pay the same tax rate," your first reaction would be, "Well, makes sense to me."

That was certainly my reaction when Steve Forbes proposed a flat tax system during his Presidential campaign in 1996. While I gave the publishing magnate a less than 17 percent chance of actually winning the Republican nomination, I paid close attention to his point, well-received on both sides of the aisle, that our tax system was inherently unfair, unwieldy and complicated, and reform was necessary.

But my research then, and my belief now, is that the "flat tax" proposal Steve Forbes proposed, and most if not all such proposals prior and subsequent to Forbes', are incapable of meeting the revenue needs of the government of the United States while still preserving our institutions and protecting our citizens.

Forbes was certainly not the first to point out the flaws of America's system of collecting the funds necessary to run our government. From the founding of America to today, leaders and citizens have debated the pros and cons of taxation as a means to "establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty for ourselves and our posterity".

But no one denies that these principles, espoused in the preamble to our Constitution, are necessary to uphold, with our labor, our honor and our dollars.

So as our society has evolved over 232 years, so has our system of taxation, and no longer is it possible to say, "Okay, you earned $5000.00 this year, give Uncle Sam $500.00 and he'll protect you." What we earn, what we save, what we spend is all relative to factors that make a flat-tax system unworkable.

A simple but telling example of the fallacy of flat taxation rests in pure geography. According to the U.S. Census Bureau, the state with the lowest household income is Mississippi, at $34,500.00. (see: www.census.gov/hhes). I'm confident this does not come as a surprise. What is surprising is that the state with the largest household income, based on the same census data, is New Jersey (can you say "Tony Soprano?"), at $60,000.00. But the most telling statistic rests in the corresponding Consumer Price Index for each state. In Mississippi, the CPI is 169.7, while in New Jersey, it is slightly higher at 181.8. One would assume that living in New Jersey would be much more expensive than living in Mississippi. But Mississippi families pay .5% more of their income just to survive than do residents of New Jersey.

This would seem to indicate that our current tax system is "regressive", that is, skewed toward the wealthier citizens. Many in the upper middle class and beyond would argue the opposite. But most data indicate that almost any system of taxation is "regressive", based on definition and practical application.

The value-added tax, or VAT, has been offered up by some economists as a "flat tax" which could replace the income tax as the government's main source of revenue. The VAT is a sales tax which is applied to a product at all levels of its "life-span", from production to consumption (www.investorglossary.com/value-added-tax.html). The website indicated gives an example of a tree, which is taxed at the point it is cut down, taxed again at the mill, again at the manufacturer who turns it into a table, again at the trucking company who transports the table to the retailer, and again at point of sale. Obviously, the bulk of the tax is then paid by the ultimate consumer, because all the entities, from lumberjack to truck driver, will pass their costs on to the buyer.

The VAT is a regressive tax because the wealthy, with their income now non-taxable, can continue discretionary spending for such things as a new table, and still afford to invest and spend at will. The middle class family is left to determine if a heavily-taxed item is a necessity, or a luxury.

Another potential problem with the VAT also applies to the flat sales tax proposal put forth by organizations such as FairTax.org. A 30% sales tax as proposed would cause many products to be manufactured and sold on the "black market", through cross-border or Internet transactions. Tax evasion would become the norm for major purchases, especially in households where income was below the median. But the wealthy would certainly not miss an opportunity to take advantage of these shady offerings, and the U.S. Treasury would be unable to maintain the revenue stream necessary to meet the government's Constitutional obligations as a result.

The Hall-Rabushka flat tax proposal of the early 1980's, proposed by two fellows of the Hoover Institution, was a variation of the VAT that would apply to businesses and individuals. It made adjustments for the inherent "regressive" nature of the tax by taking into consideration a company's or individual's income, material costs, pension contributions, etc. In other words, it weighed itself down in much the same way as has our current, convoluted tax system.

William G. Gale, a Brookings Institution fellow and proponent of the flat tax, pointed out that "many of the gains (attained through the flat tax) are also available through judicious reform of the income tax, in particular by making the taxation of capital more uniform." Reform, then, according to Gale, could solve many of the problems of the current tax code.

One of the most recent proponents of the flat tax has been Daniel J. Mitchell of the Cato Institute. In Cato's July/August 2007 Policy Report, Mitchell argued the merits of the flat tax by pointing to the various countries and protectorates that have adopted such a method of financing their government programs. Estonia, Latvia, Serbia, Slovakia, Mongolia, Kyrgyzstan, Macedonia and Montenegro are among the 19 economic "powerhouses" that have found merit in such a system. Would we trade our system for theirs?

Alas, it takes great political will to achieve even small, incremental change in such a vast wasteland as is represented by America's tax system. And until Congress can muster such will, or until we elect a President willing to take on the special interests that most benefit from the convoluted nature of our current code, then modest reform is all we can hope for.

Corporate Tax Breaks?

The Associated Press reports today that more than two-thirds of corporations doing business in the U.S. (including foreign corporations) paid no federal corporate income tax between 1998 and 2005 (see AP story here). This, on combined sales (not necessarily profits) of more than $2.5 trillion. About 25% of the non-paying corporations are considered large, C corporations--with at least $250 million in assets and/or $50 million in receipts. If we're reading this correctly, these U.S. businesses alone, which are subject to a tax rate of 35% on income of more than $18.33 million (and potentially another 15% for excess or undistributed profits), have avoided billions in tax liability over the period.

In a recent Butt and ReButt comment, J.T. Twilley educated us about corporations "not really paying taxes," because they pass on those costs to consumers through higher prices. But according to the Government Accounting Office (GAO), roughly half of U.S. companies are set up as pass-throughs (e.g., subchapter S corporations, or partnerships), and thus taxes are paid by the owners or shareholders through personal tax returns. These companies are not the problem. Democratic Senators Byron Dorgan (ND) and Carl Levin (MI) claim too many large corporations used loopholes and other questionable (illegal?) methods to avoid paying any taxes at all.

I will be shocked if our pro-big-business readers don't have some explanation for how this is either acceptable or just "not a real problem." A subject for future debate, here?