Apr 19 2013

Politics and Special Interest Money


Reform Party of California Essay

Although politics is complicated, only a few factors exert a major influence on most issues. One factor is ideology. Based on how modern American politics works, the Reform Party of California (RPCA) believes that ideology is more of a detriment than a benefit when it comes to intelligent, efficient governance. Another key factor is the role that special interest money has on politics, politicians and political parties. This essay begins to address the question of whether the effect of special interest money on political outcomes is a net benefit, a net detriment or about neutral toward the public interest.


The first amendment to the U.S. Constitution reads in part: “Congress shall make no law . . . . . abridging the freedom of speech, . . . .” There are deep disagreements about how this applies to legal entities (corporations) and, on the surface, that tends to split along democratic-republican party lines. In 2010, the Supreme Court changed the free speech landscape in its Citizens United v. Federal Election Commission decision. In that decision, the supreme court interpreted the freedom of speech clause to include the act of political spending by corporations and unions. Although corporations or unions cannot give money directly to campaigns, they can spend unlimited money to influence voters in other ways. Under current circumstances, imposing severe limits on this kind of spending is not easy, maybe not possible.

Regardless of laws and court opinions, American politics at the federal level is arguably a pay to play game for the most part. If you do not have enough money, you do not get access to tell your side of the story or ask for what you want. Access is critical. That is true for the Obama administration and it was true for the Bush administration and the republican K Street project beginning in the 1990s[1]. K Street was the beginning of the modern era of high cost federal elections. Currently, about $10.5 million is needed to win a U.S. Senate seat. To obtain that money, politicians in congress typically spend a great deal of their time with donors or donor’s lobbyists. A few people in congress spend as much as 50% of their time that way. Some people, especially supporters of the two-party system, see that as a net good. Others want to limit or ban such activities as essentially corrupt.[2]

One can begin to discern the complex reality of special interest money in politics by asking what does the special interest money want and how does the federal government respond to those requests. Specifically, what interests are served and how are they served? Looking at the U.S. tax code and tax compliance is the best place to start. According to Internal Revenue Service (IRS) estimates[3], the net tax gap in 2006 was $385 billion. It was $290 billion in 2001. The net tax gap is what taxpayers owe to the treasury but is never collected. Based on the past trend, one can reasonably assume that there was an average net gap of about $350 billion each year for the last 10 years (2002 to 2012). The treasury was therefore owed, but did not collect, about $3.5 trillion. One analysis argues that that amounts to a surtax of about $3,300 per year that tax compliant individuals and entities pay to subsidize noncompliance by people and entities who do not pay what they owe. If that assessment is accurate, law abiding taxpayers subsidize tax cheats and they have been doing that for years.

A matter of special interest money?

It is fair to ask if special interest money plays at least some role in a federal tax policy that allows at least $350 billion per year to go uncollected. Money is critical to normal two-party operations. No one disputes that, not even the two parties. Special interests supply a lot of that money. The tax code is blindingly complex. Essentially nobody understands or even pays attention to arcane tax law. Nobody, that is, except the special interests and politicians who write those laws and benefit from each others’ participation in the process. Because of that, it is an excellent place for political payback for political contributions. Does democratic and republican party and politician dependence on outside money help to create some or most of the incomprehensible and arguably ineffective aspects of U.S. tax law, including the massive annual tax gap? There is both opinion and solid evidence that says it does.

Some analysts argue that special interest money is the dominant major factor in what congress and the two parties do and fail to do in terms of tax law and compliance. One tax law expert, David Cay Johnston, analyzes the interaction between special interest money and the tax code. Johnston asserts that an important aspect of tax law enforcement is based on deterring tax evasion. He points out that Congress intentionally restricts the funding the IRA needs to enforce tax law and deterrence decreases. No surprise there. The IRS itself is aware of the situation. One frustrated IRS employee put it like this; “I know that there are millions and millions and millions of dollars being passed untaxed right over my desk and there is nothing I can do about it.”[4]

Other analysts come to similar conclusions. Lawrence Lessig, a law professor at Harvard, argues that congress’ endless need for cash weakens the connection between what congress does and what ordinary Americans might need from government. He quotes then senator, now Secretary of Defense, Chuck Hagel; “There’s no shame anymore. We’ve blown past the ethical standards, we now play on the edge of legal standards.”[5] Hagel’s comments remark on how congress as an institution has become what Lessig calls the “Fund-raising Congress”. Other analysts see a direct connection between insatiable demands for cash and the polarization of the democratic and republican parties. By contrast, most Americans do not appear to be much more polarized that they have been in recent history.[6] As one analyst observed, it is ideological zealots, not average Americans, that are active providers of campaign money.[7]

Common sense could easily lead one to conclude that Congress does not want at least some tax laws enforced and that is largely why the tax gap is so big. Johnston, Lessig and other experts believe that this is at least partly payback for campaign contributions from large corporate and individual donors. Anti-government political ideology no doubt plays a role in this as well, particularly for conservative republicans. They generally dislike government, dislike taxes and they really dislike the IRS. Conservatives love to make the IRS a target for criticism, much of which is simply unwarranted.[4]

Looking objectively, it is easy to argue that neither political party nor their politicians come out looking good in the matter of the tax gap. Most federal debt discussions focus on the current $16.8 trillion, which is very large. That ignores even larger future debt promises and/or obligations, which admittedly are hard to know with certainty.[8] This source of future debt comes from obligations under current law to pay medicare, social security and employee pensions. Estimates and timelines vary, e.g., $61.6 trillion by a 2011 estimate, $80 trillion by a different estimate, $86.8 trillion by another and about $220 trillion by yet another. If unfunded debt obligations are included in discussions about our fiscal situation, a net tax gap of $350 billion per year is even more incomprehensible.[9] There is no compelling evidence that allowing large-scale tax cheating serves the public interest. In that context, the tax gap makes little or no sense. Ignoring unfunded debt obligations simply misleads the American public, which reflects poorly on both parties.

It is constructive to consider this another way. If existing tax breaks, including the uncollected $350 billion in annual tax gap money, were clearly effective at building jobs and the economy, America should have a much lower unemployment rate. Trillions have gone to “job creators” over recent years, i.e., most tax gap money flows to wealthy individuals and corporations. If the tax gap money and other tax breaks for job creators was such an effective job creator and economy booster, America should have never experienced the severity of the economic collapse and financial meltdown of 2007. The financial deregulation and tax cuts that were put in place years earlier under presidents Clinton and Bush should have propelled America into a dazzling wonderland of sustained economic prosperity. That obviously did not happen. Not by a long shot.

Donors are not going to provide that money unless they have a good chance of getting some return on their investment. That is just common sense. Estimates vary, but one study observed that each additional dollar of lobbying earns firms $6 to $20 in tax benefits. Another study estimated that lobbying for the American Jobs Creation Act earned firms $220 for every dollar of money spent on lobbying activities. To say the least, lobbying accompanied by campaign contributions can be lucrative at least occasionally. The question is whether those benefits mostly serve the public interest or mostly serve the special interest at the expense of the public interest.

If it were the case that uncollected taxes should never have been collected, as some (most?) staunch conservatives might argue, then why didn’t conservatives change the situation when they had a chance to do so?[10] Why make tax cheats out of people and entities that arguably should not be paying in the first place, assuming that argument holds any water at all? The republicans had power under president Bush in 2000-2006 but did nothing. The democrats had power in 2008-2010 and they did nothing. From that, it is reasonable to conclude that both parties like things exactly the way they are. The trillions lost to tax cheats are never going to be paid back. That much is certain. That will remain true even if congress acts today and significiantly reduces future tax gaps. Looked at another way, we should never have come to be in the situation we now face. Nonetheless, here we are.

It’s not just the tax code

There is ample evidence that special interest money buys more than just innocent access to the political process in formulating tax policy. The banking and financial sector has powerful influence over key committees in congress.[11] They are major campaign contributors and they pay to get
service, not to serve the public interest, regardless of how hard and often that is denied. For the most part, protecting the public interest is the job of government, not the private sector. That is a statement of fact, not a criticism. The obvious debate is what exactly is the public interest, which is a different topic that will be addressed in due course.

The RPCA approach

The RPCA believes that our true fiscal situation, whatever it is, represents a present and significant threat to the U.S. economy and therefore America’s national security. For people who accept that perception of reality as basically accurate (not all experts do) some reasonable steps would seem to be obvious, e.g., increase IRS enforcement capacity and collect more of what is owed and/or simplify the tax code to make cheating harder or riskier. For many average Americans concerned about our fiscal situation, it would be obvious to at least hear about and then consider such options.[12]

The RPCA’s approach to politics differs fundamentally from what the two-party system has delivered and will continue to deliver. In the modern two-party political system, both parties are powerful special interests that typically act in their own interest before they act in the public interest. One overriding interest is satisfying the need for large amounts of money. No one can argue that the two parties are not special interests. The debate is over who they serve first and foremost. Listening to each side makes it clear that neither considers the other to serve the public first. What if they are both right about this?

By contrast to the two-party approach, the RPCA’s approach is merit based. Anyone can ask for favors, including tax breaks, provided they can reasonably show it is deserved and serves the public interest. There will be circumstances where a tax break or other favor would help a certain industry or the economy as a whole. The inquiry would include asking if the cost of conferring the favor is affordable. When that is the case, the RPCA considers such requests to be merit-based and would look for possible ways to implement that in a fiscally sustainable way. Doing that is consistent with serving the public interest. The RPCA sees nothing wrong with trying to help industry when it makes sense to the public interest to do so, e.g., helping sectors of the economy facing unfair foreign competition.[12] Doing that and serving the public interest are not necessarily incompatible. However, such requests do not need to be accompanied by large donations of money from the people or entities asking for favors. Once special interest money is injected into the process there is at least the appearance of a conflict of interest and sometimes (or usually) actual corruption. The RPCA’s definition of responsive and responsible government is one where merit is served and you don’t have to pay for it. Under that system, there is no appearance of a conflict based on money changing hands.

Naturally, everyone involved in the current two-party system will strenuously argue that what is given and taken is well-deserved and always serves the public interest. There is universal agreement within politics as usual that there is, with very rare exceptions, no conflict of interest and no corruption. Of course, if all of that was the case and everything was working well, then why is congress talking yet again about reforming the tax code and looking at eliminating tax breaks? Why are federal deficits running at about $1 trillion? Why do analysts like Johnston and Lessig say the things they say? Do they just make things up to sell books?

Which version of reality strikes you as more accurate – the two-parties’ vision or the RPCA’s vision?

Everyone will see this differently and that may depend largely on their personal economic interests and/or their ideology. That is fair enough. Regardless, the RPCA sees the recent record of the two-party system as one of failure to effectively serve the public interest.[13] A significant contributor to that failure is the adverse impact of special interest money on politics both here in California and in Washington. If there is an appetite for change in American politics, it is not going to be fed by the democratic or the republican parties. In addition to their ideological straight jackets, they have far too much to lose financially to permit meaningful change. Common sense strongly suggests that real reform must come from elsewhere.

1. Both sides participate in this for their own benefit: Democratic pay to play, democratic and republican pay to play.
2. The issue of lobbyists and their role in government overlaps with this essay’s topic, but it is nonetheless separate. Addressing it requires a separate essay. Lobbyists can be seen as simply participating in politics to the net benefit of the public interest. They can be seen as participating in overt political corruption or subtle forms of corruption; the “distinction between legal lobbying and criminal conduct may be subtle, but, as this case demonstrates, it spells the difference between honest politics and criminal corruption.” U.S. federal district court in United States v. Ring, No. 11-3100 (D.C. Cir. Jan. 25, 2013).
3. Because of the complexity of doing these analyses, the IRS estimates tax gap numbers every five years or so. Getting a handle on these numbers is very difficult. That makes sense. The IRS is trying to obtain information from tax evaders.
4. David Cay Johnston, Perfectly Legal, The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else, Penguin Group, 2003, page 168. Also see page 208; “Congress tightly restricts funding to enforce the law”. At page 158: A congressional attack on the IRS was not supported by facts according to a study by the General Accounting Office. The politician behind the attack, former senator William Roth (R-DE), tried to hide the GAO report from the public. That report exonerated the IRS of political allegations of widespread and systematic misconduct.
5. Lawrence Lessig, Republic Lost: How Money Corrupts Congress – And a Plan to Stop It, Twelve, 2011, Part III, pages 89-226.
6. Jacob S. Hacker & Paul Pierson, Winner-Take All Politics, How Washington Made the Rich Richer – and Turned its Back on the Middle Class, Simon & Schuster Paperbacks, 2010, pages 159-160; Regarding the role of money, campaign manager Mark Hanna is quoted (page 170) as saying “There are two things that matter in politics. The first is money. I can’t remember the second.” That observation came from near the beginning of the 1900s. Money has crucial in U.S. politics a long time and it isn’t going away. The issue is what, if anything, should be done about it?
7. Jeffrey Birnbaum, The Money Men: The Real Story of Fund-raising’s Influence on Political Power in America, Crown Publishing Group, 2000, page 11.
8. Unfunded liabilities are not true locked in liabilities on the books like normal federal debt. Congress can reduce the liability (promise of benefits), e.g., by reducing future social security or medicare benefits. Nonetheless, if obligations projected under current laws are considered, the amount is tens of trillions or more. The question that neither party will discuss in public is what, if anything, they think they need to do to address this issue. Therefore, they ignore it. The RPCA believes that it should be part of the conversation to accurately inform the American people about what it is they are facing.
9. At present, there is some talk in Washington of reforming the tax code, which may or may not include reducing the net tax gap. Talking about reforming the tax code is routine. What is not routine is meaningful change. Far too much is at stake to change for powerful stake holders, including both political parties. Defenders of the status quo will vigorously oppose tax code reform. That makes perfect sense in the context of maintaining modern two-party politics but the RPCA believes it does not make sense in the context of serving the public interest.
10. If some conservative or liberal politicians do believe that taxes owed but not paid should not be collected, then those people should tell Americans exactly why and support that argument with unspun data and unbiased analysis, e.g., data showing that more jobs will be created and the lost revenue will be made up by future fast GDP growth. The RPCA is aware of no commonly accepted, authoritative and unbiased studies showing that lost tax gap money is justifiable under our current fiscal circumstances or that it ever was.
11. Lobbying backed by special interest money does not just affect tax law, it affects other areas of law as well. For example, a 2009 Frontline broadcast, The Card Game (transcript), included this: Q: Lowell Bergman, Correspondent: “Why hasn’t there been credit card legislation to control some of these abusive practices? Why did it take a near depression?” A: Sen. Richard Shelby (R-AL), Banking Committee: “Lobbying Power.”
12. All requests for favors are no doubt accompanied by the argument that what is wanted is in America’s best interest and serves the public. Everyone in politics always says that about everything they do. The question is whether you believe that or not.
13. The RPCA will address ways to blunt at least some of the corrosive influence of special interest money on politics in a later essay.