Do you want to subsidize rich people’s political contributions?

from Dean Baker

In prior decades we in the US used to try to restrict the ability of the rich and very rich to buy elections. We have limits on campaign contributions to candidates and political parties. Until the Supreme Court’s 2009 decision in Citizens United case, corporations were prohibited altogether from contributing to politicians and political campaigns.

This is no longer the case. The rich have found ways to largely circumvent campaign funding restrictions with independent campaign committees. And corporations can support whatever candidates or causes they want.

But the problem of money is even worse than it seems. Not only do the rich get to spend as much as they want to advance their interests, they can actually get taxpayer subsidies for pushing their political agenda. Through a loophole in the tax code, they can donate an asset, like shares of stock, that has appreciated in value, and not ever pay tax on the capital gain.

To see how this works, suppose that Elon Musk bought shares of Tesla for $100 million that are now worth $1 billion. If Mr. Musk wanted to contribute $1 billion to his favorite political cause, he could sell these shares and then hand over a check for $1 billion.

However, in this case, he would have to pay capital gains taxes on the $900 million gain ($1 billion sales price, minus the $100 million he paid for the stock). His tax bill in this case would be 20 percent of his gains or $180 million.

But due to a loophole in the tax code, Elon Musk’s accountant can arrange to simply transfer the Tesla stock to the campaign committee. In that situation neither Musk nor the campaign committee ever has to pay taxes on the gain. By reducing his taxes, we have effectively given Elon Musk $180 million to support his favorite political cause.

This clearly does not make sense. Whether or not we think we should be limiting rich people’s ability to use their money to influence politics, it is hard to see an argument that the taxpayers need to subsidize their contributions.

To level the playing field at least a little bit, so that we won’t be subsidizing the political contributions of the rich, Rhode Island Senator Sheldon Whitehouse and California Representative Judy Chu are introducing the End Tax Breaks for Dark Money Act. This bill would eliminate the current loophole in the tax code. If it passes, rich people would simply have to pay their taxes on their income like everyone else, before they make their campaign contributions.

The rich and very rich will not like giving up their special subsidy, but it is hard to see why anyone else would object to this proposal.

Addendum

A reader reminded me that high-income people would also pay a 3.8 percent Medicare surtax on capital gains. Also, many states have their own income tax on capital gains, with California’s being the highest at 13.3 percent. This means I substantially understated the subsidy to the political contributions of the rich. In the example here, If Elon Musk still lived in California, the taxpayer subsidy for his $1 billion contribution would be over $300 million.