What the IRS scandal really shows us is that it’s getting harder and harder to draw a line between electioneering and political speech.

As the report of the IRS Inspector General shows, the agency’s scrutiny of conservative groups applying for non-profit status was, more than anything, a clumsy response to a task the IRS is ill-equipped to carry out – monitoring an accidental corner of campaign finance law, a corner that was relatively quiet until about 2010.

That corner is the 501(c)(4) tax-exempt organization, belonging to what are sometimes called “social welfare” groups, which enjoy the triple privilege of tax exemption (though not for their donors), freedom to engage in some limited election activity, and, unlike other political committees (PACs, SuperPACs, parties, etc.), freedom from any requirement to disclose information about donors or spending. The use of (c)(4)s as campaign vehicles didn’t originate with the Citizens United decision in 2010 (Citizens United, the organization that brought the case, was already a (c)(4)), but the decision seems to have created a sense that the rules had changed, and even small groups – especially, apparently, local Tea Party organizations — rushed to create (c)(4)s.

501(c)(4)s are not prohibited from engaging in political speech of most kinds. They are free to be “biased” without jeopardizing their tax exemption. They can advocate for or against legislation, they can lobby the government or criticize it. They don’t have to make any effort to be “non-partisan” – for example, they can support a proposal that is only supported by members of one party, or directly advise only members of one party. And they can engage in some activity directly intended to influence the outcome of an election, as long as that doesn’t constitute the organization’s primary purpose.

There’s some confusion about the definition of “primary purpose,” discussed in great depth elsewhere, but what the IRS was trying to do was to identify organizations that seemed more likely to be heavily involved in electoral activity. Since the organizations were new, there was no way to look at their actual activities to see whether they were mostly electoral. So the agency had to rely on clues in the applications, like names and telltale phrases. If organizations had words like “Democrat” or “Republican” in their titles, for example, it would be reasonable to look more closely at their election activities, or possible future activities, than an organization that called, for example, “Save the Turtles.” I’m told that organizations with the names of political parties do receive extra scrutiny, even if in some cases, like “Students for a Democratic Society,” the word might mean something unrelated to the name of the party. That’s what the closer scrutiny would find out.

“Tea Party” in 2009 and 2010 was unquestionably an election category – there were “Tea Party” candidates and there was a “Tea Party Caucus” in Congress. It was not unreasonable for the IRS to use that phrase as an indicator that an organization using that phrase might be more inclined to engage in elections. There are comparable phrases on the left – for example, the term “Netroots” might suggest election involvement, as there were groups that identified and endorsed “Netroots” Democratic candidates in 2006 and later. Perhaps there were simply fewer organizations applying for (c)(4) status with that word, or they came in before the 2010 flood, or perhaps the IRS did screen on that word – we don’t know.

While there’s a perfectly plausible case for the IRS to use flag-words that indicate an election-focused movement, the actual questions asked of the groups do raise some concerns. If accurate, they did seem to go beyond evidence that these organizations were primarily engaged in elections, such as questions about lobbying and the role of family members.

But the reason these questions are complicated for the IRS, or for any agency assigned to police these complicated distinctions, is this: The line between robust political speech and influencing elections has become frightfully difficult to draw. Finding the right line around what is an “election” is really the fundamental problem in campaign finance. Almost everyone accepts the premise of “electoral exceptionalism” – elections are structured and require some particular rules, different from the rules that apply generally to political speech. The rule in most states that keeps campaigners 75 or 100 feet from the voting booths is the most obvious uncontroversial restriction on political speech, and there is broad acceptance of the idea that direct contributions to candidates and campaigns should be limited to prevent corruption and dependence. But what happens after that? What about outside spending that looks just like campaign spending? We used to think there was a clear distinction between “issue ads” that were expressing a view on an issue and “electioneering communications” that were the equivalent of campaign contributions. That distinction is actually what the Citizens United case was about — the provision of the 2002 Bipartisan Campaign Reform Act that defined broadcast communications that mentioned a candidate within 30 days before a primary or 60 days before a general election as electioneering, which had to be financed with regulated funds.

That was an improvised line then, and it’s gotten even blurrier since. Part of the problem is partisanship – it used to be, for example, that there were environmentalists in both parties, supporters of social spending in both parties. A political ad about the environment was just that. But what’s an ad or brochure attacking “Obamacare” during the election year? Every Republican opposes it, and they’ve given it the name of the president. The Tea Party was based on issues, yes, but above all else, it was based on unflagging, total opposition to Obama and congressional Democrats.

To figure out where election advocacy begins and regular political speech ends in these cases was certainly more than mid-level IRS bureaucrats in Cincinnati could handle. But it’s not an easy challenge for anyone. All the noise about IRS “targeting” and about free speech and corporate speech is a distraction from a real challenge of money in elections: finding an agreement on the line around an “election,” and establishing some clear rules for what happens within that line in order to ensure that elections are fair and open and don’t lead to corruption.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from the Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Matthew G. Bisanz via Wikimedia Commons

Some people overhyped the influence of money in the last election, but we shouldn’t downplay the need for smart, effective reform.

“We got way too excited over money in the 2012 elections,” my former colleague Ezra Klein said at a conference on inequality and politics at Yale last week, in remarks that he published as a column. A simple political science model for predicting the presidential election, which didn’t account for spending, nonetheless hit the results exactly; Citizens United didn’t unleash a torrent of corporate spending; and even in Senate races, big spending by Republican SuperPACs didn’t make much of a difference.

The first question to ask is, “What do you mean ‘we’?” More than a few of us argued that Citizens United wouldn’t be a world-changer – if major corporations had wanted to take major risks in the electoral arena, there were already ways for them to do it. (It actually had more impact than I thought it would.) And it has long been the consensus in political science that once a candidate or campaign has reached a sufficient threshold to be heard and to be competitive, extra spending beyond that has diminishing returns, whether that spending is within the campaign or from outside groups. That is, you can be outspent 3:1 and win, as long as your 1 is enough to compete in that state. Many wealthy, self-financed candidates have learned that lesson the hard way. All presidential candidates and almost all major party Senate candidates have reached the threshold where additional spending for or against them matters very little. Many SuperPACs, predictably, did more for the political consultants who were collecting fees from them (typically 15 percent for broadcast ad buys) than for the candidates they were intended to support.

There were ill-informed journalists, pundits, and advocates last year who made all sorts of claims about the impact money would have on the elections, but just because their predictions were predictably wrong doesn’t mean that “we got overexcited” or that we should stop being concerned about the influence of economic inequality on the political process. Money matters as a gatekeeper, for example: Many candidates, especially at the congressional or state legislative level, don’t have it and don’t know how to get it. It matters as a framer of the issues that are acceptable for debate – it’s not only money that gave the National Rifle Association the clout to block an amendment with massive majority support, but money helped. Money unquestionably shaped the Dodd-Frank financial reform legislation and might ultimately render it almost unenforceable. The life of a member of Congress without a very safe seat revolves almost entirely around money, as an article in the Boston Globe over the weekend showed. Newly elected Democrats were advised last fall to set aside four hours each day for “call time” to donors, more than they spend on any other activity and more than twice the time they spend with other constituents.

If money doesn’t have such a direct impact on election outcomes, then why does it have these other impacts? Are members of Congress overexcited, too? Perhaps, but most often the reason that we don’t see the impact of money so directly in the endgame of presidential and Senate elections is that the candidates have already done whatever they need to do to reach the threshold of competitiveness. They’ve done the three fundraisers a week, the hundred phone calls a day; they’ve avoided the tough votes that would alienate supporters. If they hadn’t done those things, they wouldn’t be there, in what are, in effect, the finals.

That’s why the key principle of reform is not to limit spending in the endgame, but to make it easier for candidates of all kinds to reach the threshold where they can compete, without spending all their time with major donors and without all the compromises that necessarily ensue. Trevor Potter and Bob Bauer, election lawyers for John McCain and Barack Obama, respectively, recently proposed what they called “A New Recipe for Election Reform,” which would “focus not on further restriction funding for political activity but rather on broadening avenues of citizen participation,” drawing on the experiences of states and localities with systems that encourage small donors. This is something I’ve been pushing for many years, and it has been gratifying to see a consensus build around the idea, especially as the state and local programs, such as New York City’s matching funds for small donations, have proven effective, stable, and constitutionally sound.

But back to Ezra Klein – he’s skeptical of these approaches as well. Later in the week, he went on to argue that the Potter-Bauer approach of encouraging participation would backfire, because small donors are more likely to be driven by ideology and/or partisanship (two different things that are often conflated), and are at least as bad, and maybe worse, than big donors or corporate money. “Just as big money is corrupting, small money is polarizing. And it’s polarization that probably poses the bigger threat to American politics right now.” Ezra is right that some of the federal candidates who collected the most money from grassroots donations were the most ideologically extreme, such as defeated Rep. Allen West of Florida. But that’s looking at the extremes, not the middle tier of politics, where candidates struggle to find the base of donations to be heard. And there’s no evidence that small donor systems such as New York City’s, Connecticut’s, or Minnesota’s superb system of automatic, quick tax rebates for small contributions have made those jurisdictions more polarized. (Minnesota’s system has been unfunded since 2010.)

This skepticism also reflects a quaint view of the role of big money and corporate money in politics. There was a time when corporations, through their PACs, tended to split their donations roughly 60-40 between parties, hedging their bets and mostly protecting useful incumbents. Or an industry might have Republican firms and Democratic firms. But in a polarized time (and partisan polarization reflects forces much bigger and more intractable than either money in politics or congressional procedures), corporations and major interests have moved more sharply to one side or the other. Most of the Wall Street firms, for example, moved toward the GOP, and the U.S. Chamber of Commerce, historically as cautiously solicitous of whichever party held power as possible, moved almost completely Republican. Secret vehicles, such as the Chamber’s 501(c)4 committee, allowed corporations such as Aetna to maintain the veneer of bipartisanship, while simultaneously putting millions of dollars behind one party. The most notorious SuperPACs of 2012, such as those that kept alive the candidacies of Newt Gingrich or Rick Santorum, or that targeted Senate Democrats, were at least as fiercely partisan as West’s donors.

There is a challenge for reform: Can we encourage genuinely average voters, those who don’t watch Glenn Beck or Rachel Maddow, or read RedState.com or Daily Kos, but who have preferences and views of their own, to put a few dollars behind congenial candidates? And can we boost those contributions with public financing that doesn’t have any “ask” attached to it? As we pursue the task that Potter and Bauer set out, to absorb the lessons of successful systems, this is one of the questions that we should be asking. Small donor financing won’t end partisanship or polarization by itself. But it can be a big part of a system that allows legislators to move more independently, develop new coalitions, and spend more time listening to constituents than lobbyists and donors.

The role of money in politics has sometimes been overstated, but that doesn’t justify the fashionable cynicism about money and reform that seems to be infecting the wonk class.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from the Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

AP Photo/Charles Dharapak, File

Current limits on money in politics being tested across the country should give reformers hope.

Last Monday, the Supreme Court declined to hear a case challenging the century-old ban on direct corporate contributions to federal election campaigns. That counts as good news in a month that included the Court’s earlier decision to hear a case that challenges the aggregate contribution limits in campaign finance and Obama strategist David Axelrod declaring that he would prefer a system of unlimited contributions with full disclosure. Almost all Republicans, the Supreme Court, and a powerful faction of the Democratic Party now fall somewhere on the spectrum between skepticism and vehement opposition to limits on contributions. The flimsy remains of the post-Watergate system of campaign finance regulation are on the verge of collapse.

Richard Hasen, law professor and proprietor of the indispensable Election Law Blog, argued in Slate last week that there was still hope for campaign finance reform – just not until Justice Antonin Scalia leaves the Court. But there are other reforms currently being tested on the ground that hold out hope for changing the power of money in politics.

Hasen is right, of course, that until at least one of the five members of the Citizens United majority leaves the court by death or retirement and is replaced by a Democratic appointee, the best hope is that it will rule narrowly in cases such as the one involving aggregate contribution limits, rather than using them as opportunities, as they did in Citizens United, to punch holes in the law that are bigger than the cases themselves. He’s also right that expecting a Constitutional amendment to overturn Citizens United (or do various other things, depending on the version) is far less likely to reopen the path toward a reasonable balance of the role of money in politics than a change in the membership of the court.

Hasen proposes that campaign finance reform advocates take the time now “to plan for the next Supreme Court.” We should use the indefinite waiting period to “think more about what a reasonable campaign finance regime would look like” and acknowledge that “conservatives are absolutely right that campaign finance laws can boost incumbents and stifle political competition.”

I agree with Hasen on all of that, even the last points, but I’d go even further: A reasonable campaign finance regime, one that doesn’t boost incumbents or stifle competition, could even be put in place with the existing Supreme Court. (The current Congress is another story.) The thinking he’s proposing is going on right now, and is even being tested, in systems based on the principle of “small-donor public financing.” These systems use some combination of matching funds, tax credits, vouchers, or generous public financing for candidates who show a base of small-donor support. They make it easier for candidates to run who don’t have big-donor support in order to enhance public participation and to ensure that elected officials aren’t entirely dependent on big donors or corporations, whether those donors are giving directly to campaigns or to outside groups.

The public financing systems in Arizona, Maine, and Connecticut, which have been resilient, strongly supported by the public, upheld in the courts, and used by almost as many Republicans as Democrats, fall into this category. So does the generous matching system in New York City that has the support of Governor Andrew Cuomo and a growing number of legislators, which can serve as a model for legislation elsewhere. So can Minnesota’s system, which is currently unfunded but which until a few years ago offered a quickly refundable tax credit for small contributions along with a match on the candidate side. All of these systems can be considered part of a broad experiment, and scholars are looking closely at them to see whether they change who runs for office, who donates, and ultimately whether the states’ political processes are more responsive to the public.

Legislation at the federal level has followed the small-donor model as well. Rep. John Sarbanes’ Grassroots Democracy Act, for example, draws on elements from several of the successful state programs, including a refundable tax credit for small donors along with a matching program for campaigns. The Fair Elections Act similarly incorporates a combination of small donor incentives with full public financing. A voucher that would allow every citizen to contribute in the same way that she votes, long advocated by Yale Law Professor Bruce Ackerman who calls them “Patriot Dollars,” and more recently by his Harvard counterpart Lawrence Lessig, is attracting renewed interest as well.

All these systems are voluntary, and alone they don’t go too far toward controlling big money, except for the candidates who participate. But they do make it possible for candidates to run who wouldn’t be able to otherwise or who want to run independently of big money. If they’re designed well, they can help candidates be in the position to get their messages out, and at a certain point it doesn’t matter all that much if the other candidate has a lot more money or more outside money spent on her behalf. (The Brennan Center put out an excellent report in 2011 on the many positive effects of small-donor public financing.)

The big question is whether these systems can work without limits on outside money. Without limits, candidates might hesitate to participate, voluntarily limiting their own spending, if they worry about being overwhelmed by big outside campaigns. It’s also unlikely that the public will support throwing good money into a cesspool of unregulated spending for very long. If that’s the case, these systems will need backup from the kind of limits that are under challenge in the recent cases or rejected by the court in Citizens United or other cases. But even after the court rejected a feature of the Arizona system that gave candidates more money if they were attacked by outside money, the system survived, and a majority of candidates for statewide office in 2010 and 2012 participated in the system.

The 2012 federal elections offered even more evidence that small-donor systems can work. It was not that “money doesn’t matter” (a view challenged by Roosevelt Institute Senior Fellow Thomas Ferguson and colleagues here), but rather that once a candidate for the House, Senate, or lower office has reached the threshold that allows him to be heard, extra money on the other side, whether from outside groups or the opposing campaign itself, matters less. For example, all the Senate candidates hit with outside spending by the Sheldon Adelson and Koch Brothers-funded groups won re-election. If small-donor public financing can get candidates to that threshold, then limits on outside spending won’t be as important in making the system work.

That’s not to say that it isn’t worth trying to strengthen the limits that remain and to build on the broader consensus that supports disclosure. In particular, the Internal Revenue Service should enforce the law governing 501(c)(4) non-profits, which are increasingly being used as vehicles for undisclosed and unlimited campaign spending, but which are not permitted to have influencing elections as their “primary activity.” The sheer number of mechanisms by which a donor can try to influence the outcome of an election has proliferated so far beyond the old standby of broadcast advertising that it will be impossible to chase it all down.

The next generation of campaign finance reform doesn’t have to be developed in a laboratory while waiting for Scalia or one of his colleagues to retire or to encounter a higher judge. It’s being designed, refined, tested, and improved as you read this in a half dozen states and municipalities. If it works, it will lead us to a system that will moderate the influence of economic inequality on democracy while enhancing competition and strengthening First Amendment rights of free expression.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted From The Roosevelt Institute’s Next New Deal Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: AP/Charles Dharapak, File

A group devoted to reducing the deficit shouldn’t embrace the irresponsible tax cuts that created most of it.

“Fix the Debt,” as you’ve probably noticed from the Internet ads that are now as ubiquitous as the old Netflix pop-ups, is the newest high-profile effort by Peter G. Peterson and allies to build a public movement for long-term deficit reduction. Fix the Debt appears to be an ambitious public relations and grassroots lobbying effort layered on top of the other major Peterson-funded anti-deficit groups, all of them pushing for a “grand bargain” on taxes and spending, ideally before the “fiscal cliff” (or what I prefer to call the “fiscal reset,” because it’s a chance to start over and reconsider bad choices from the 2000s). These include the Committee for a Responsible Federal Budget, the Concord Coalition, the Comeback America Initiative (former Peterson Foundation president David Walker’s new project), as well as groups such as the Business-Industry Political Action Committee.

Although Fix the Debt’s co-chairs are Alan Simpson and Erskine Bowles, of the failed Simpson-Bowles commission, the organization has no specific deficit reduction plan. Its basic principles are that debt reduction is urgent and that it should be “comprehensive.” “Everything should be on the table” is the closest thing to a motto. That compares favorably to the Republican attitude, circa 2011, that everything should be on the table except taxes. Fix the Debt has enlisted several prominent Democrats in addition to Bowles, notably former Pennsylvania governor Ed Rendell.

So far, so good. No doubt the long-term budget gap needs to be narrowed and the ratio of debt to GDP stabilized, and it’s better to chart that path sooner rather than make disruptive changes later. The evidence I see indicates that long-term fiscal stability is primarily a problem of system-wide health cost inflation and historically insufficient revenues — but that just affects my idea of a solution, not the long-term goal.

But there’s one exception: When it comes to taxes, Fix the Debt has a less open-minded position than it seems: Their “core principle” is “comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues, and reduces the deficit.” That could be okay, too — but everything depends on the baseline. If the Bush tax cuts are allowed to expire on January 2 in accordance with the law, then the next step would surely be to lower some of the rates that would come back into effect, principally for the middle class, and also to “broaden the base,” such as by bringing taxes on capital gains in line with other rates and thus eliminating the “carried interest loophole,” the “hedge fund loophole,” and all the others that play on that unwarranted tax preference. But that doesn’t seem to be what Fix the Debt is thinking about. They seem to hold an unspoken core principle that the grand bargain must be achieved before the fiscal reset on January 2. That, in turn, implies that any deal would “lower rates” from the already very low tax rates of the Bush tax cuts. That’s the essence, for example, of Fix The Debt leader Maya MacGuineas’s WashingtonPost op-ed last week, which declared as a certainty that “Going over the cliff would be the worst possible outcome.”

It’s also the argument of a paper posted prominently on the website of MacGuineas’s Committee for a Responsible Federal Budget, which challenges a study by the congressional Joint Committee on Taxation showing just how difficult it would be to achieve all the goals of lowering tax rates, raising revenues, and reducing the deficit. CRFB claims that the Joint Tax Committee study erred by starting the exercise using the “current law baseline” — that is, assuming that all the Bush tax cuts would expire. From there, letting rates go back up will have already raised a lot of revenue, some loopholes will have already been narrowed (including the preference for investment income), and there will be some limits on deductions for high earners. CRFB insists that comprehensive tax reform is possible if and only if you begin with the “current policy baseline” — that is, assume the Bush tax cuts continue and work from there, or do the deal before the cuts expire. It’s a very complicated argument, but what it comes down to is this: Letting the tax cuts expire by law would actually achieve many of the goals of tax reform, as I wrote in October. But if the tax reform is already half-completed, there’s less room for classic tax reform in a grand bargain.

And thus, Fix the Debt and its partners find themselves twisted in a knot. Because “comprehensive tax reform” is such a central component of their vision, they have to root for the Bush tax cuts, because there’s not much room for reform otherwise. But supporting the Bush tax cuts, as a baseline, is not “fixing the debt.” It’s the opposite, since the Bush tax cuts make up almost all of the long-term projected deficit, as this chart from the Center on Budget and Policy Priorities shows:

I’m not sure why Fix the Debt put itself in a position where it now seems more concerned with protecting the Bush tax cuts than actually reducing the long-term deficit. Maybe it’s that the devotion to the fantasy of a grand bargain that includes something called “tax reform” drove them there. Maybe it’s that it’s necessary to maintain the nominal support from Republicans and business leaders that they boast. But whatever the cause, it’s where they seem to be. And a group devoted to fiscal responsibility has no business protecting one of the two most irresponsible fiscal choices in recent history.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from the Roosevelt Institute’s Next New Dealblog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: Associated Press

As part of our series “A Rooseveltian Second-Term Agenda,” an acknowledgment that the election didn’t just showcase the problems of outside money in campaigns, but a potential way forward.

It’s been tempting to treat the 2012 election as proof that money in politics doesn’t matter as much as commonly believed, or that Citizens United and the emergence of Super PACs and political nonprofits didn’t change things as much as predicted. “Effect of  ‘Super PACs’ proved to be less than expected,” the Los Angeles Times declared in a post-election headline.

It is true that the presidential candidacy most dependent on Super PACs and other “dark money” support was soundly defeated, and the same was true of the Senate candidates backed by Karl Rove’s American Crossroads and related groups. Prophecies that corporate money would flood in and swamp the candidates, particularly Democrats, didn’t come true. (Some of us were always skeptical of this prediction.) And it turned out the Super PACs had some particular disadvantages because they couldn’t purchase media time at the favorable rates that are available to campaigns. The Republican dark money committees’ focus on broadcast advertising to the exclusion of other campaign activities turned out to be misplaced in an election where the “ground game” of identifying voters and getting them to the polls is what mattered. (It’s also likely that the Republican Super PAC operators focused on radio and television because there are financial incentives for consultants to buy media and collect a commission of 10 or 15 percent. Voter mobilization efforts don’t have the same payoff.)

But a general election presidential campaign, and even a high-profile Senate campaign, is not where we would expect to see the decisive power of money in election outcomes. Presidential candidates, especially incumbents, are well known and have ample opportunity to get their message out without paying for it. For example, half the number of people who voted watched at least one of the presidential debates. Money is more significant in determining who has an opportunity to run for office and whether that candidate has sufficient resources to be heard.

This year’s elections for the House showed just how much money still matters. More than 9 out of 10 incumbents were re-elected, despite a backlash against the Republican House reflected in the aggregate vote (48 percent to 47 percent). While some of this incumbent advantage was a result of redistricting that entrenched Republican seats, a great deal of incumbent advantage involves money that incumbents can raise from lobbyists and few challengers can. According to the Campaign Finance Institute, incumbents who won with more than 60 percent of the vote, which accounts for more than two-thirds of races, outspent their challengers by a factor of nine. Notably, most of the seats captured by Democrats in this cycle involved very high-profile Tea Party Republicans like Allen West of Florida or Joe Walsh of Illinois and opponents who were either well known in progressive circles, such as Walsh’s successful opponent Tammy Duckworth, or former members of Congress with established fundraising bases. In many of those high-profile races, such as West’s, outside groups played a large role. Data from the Campaign Finance Institute indicates that successful challengers spent $2 million, suggesting that that is the new price of entry for a viable campaign, although this will vary greatly by region.

But even these results show some hope. Many of the successful Democratic candidates, like President Obama, were able to build strong bases of small donors. While Obama’s small donors accounted for 44 percent of his total, Duckworth, for example, raised 37 percent from small donors. The small donor era, which began in 2008, has continued in both parties. This suggests that the best path to making elections competitive and offsetting the influence of big money, outside money, and dark money is to enhance the value of small contributions. This can be done through a matching program such as New York City’s successful model, the proposed Fair Elections Now Act (supported by a majority of Democrats in 2010), or Rep. John Sarbanes’ Grassroots Democracy Act.

Since Citizens United, many reformers have worried that such initiatives would be rendered ineffective by the flood of big money, which would overwhelm the small donors, or that candidates would resist participating in these matching programs, fearing big outside-money attacks. That would argue for pursuing a remedy for Citizens United, in the Constitution or the Court, before moving on to matching fund public financing. But the election results, in which neither Obama nor successful candidates for House and Senate were overwhelmed by outside money, indicates that these systems are likely to be more resilient than we think. Giving every candidate the opportunity and encouragement to build a participatory base of small donors isn’t the only thing we need to do to offset the influence of money in politics, but it is a good start. House Minority Leader Nancy Pelosi identified campaign finance reform as a major priority for her caucus in the next Congress. The first step is to reach consensus on what is to be done, and the election points in a clear and positive direction toward solutions that encourage participation and grassroots campaigns.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from The Roosevelt Institute’s Next New Deal blog

The Roosevelt Institute is a nonprofit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo of Tammy Duckworth by Staff Sgt. Jon Soucy via Flickr.com

Tax reform appears dead in the water, but the dreaded “fiscal cliff” could actually offer reformers some hope.

It began with a critique of Mitt Romney’s tax proposal. But more than two months after the Tax Policy Center released a report with the anodyne title “On the Distributional Effects of Base-Broadening Tax Reform,” the entire promise of tax reform, whether Romney’s or some other version, is near death. With its demise goes the idea of a budget grand bargain. It’s been a subtle development, but a dramatic one that will reshape the landscape of policy possibilities, especially if President Obama wins re-election — probably for the better.

Tax reform is typically sold as a win-win-win that can achieve three goals at once: reduce rates, bring in more revenue for deficit reduction, and clean up the loopholes in the tax code that create economic distortions and slow growth. This vision was not Mitt Romney’s alone. It was and still is shared by many Democrats, notably Senator Dick Durbin, the White House, most members of the Bowles-Simpson deficit reduction commission who voted for its report, and most of the promoters of a budget grand bargain. I’ve held this religion myself.

But the vision of “base-broadening tax reform” is not just a budget solution — it’s a nostalgic fantasy about American politics, a hope that we can recreate the kind of bipartisan compromise and collaboration of the idiosyncratic 1970s and 1980s, symbolized by the tax reform of 1986. (Last week I argued in a debate published in the Breakthrough Journal that the old era of bipartisanship was idiosyncratic, and we shouldn’t expect it to come back.)

The Tax Policy Center report was perceived as an analysis of the Romney tax plan, showing that his math didn’t add up. But as its title indicates, it really wasn’t a report on Romney’s plan at all, but on base-broadening reform more generally. It showed that Romney couldn’t achieve his two goals — lowering rates and eliminating tax expenditures without significantly increasing taxes on the middle class or raising the deficit — because while tax expenditures such as the home mortgage interest deduction provide large benefits to the very rich, the more numerous middle-class recipients account for a large share of the costs. If Romney can’t achieve his two goals (his plan would not explicitly aim to increase revenues or reduce the deficit, relying instead on a vague hope that lower rates would drive economic growth to implausible heights), then how could we possibly achieve three goals: lower rates, fewer loopholes, and higher revenues? Nor would it be easy to achieve two other goals, fewer tax expenditures and significantly higher revenues, while keeping rates at their current level.

That’s because we’re in a very different situation than 1986. In the 1980s, the tax code was littered with provisions that benefited specific industries (especially oil and gas) and permitted individuals and corporations to take losses for tax purposes when they hadn’t really put money at risk. These “passive losses” distorted economic decisions. Just as all those provisions had been created by a kind of log rolling among legislators (those from states that benefited from pharmaceutical or agricultural tax breaks didn’t object to the oil and gas breaks), legislators in the reform coalition were essentially able to hold hands and eliminate all of their tax earmarks at once. The tax rates were nominally quite high, though no one actually paid them, so bringing the top rate down from 50 percent was a lot easier than bringing it down from 33 percent. And while there was some concern about the short-term federal deficit in 1986, it was easy enough to separate that issue from tax reform and keep it revenue neutral in the long term.

While the tax code is a mess once again, it’s a mess in a very different way. Tax rates are now too low, not too high; the most fundamental problem with the system is that it doesn’t bring in sufficient revenue to finance basic functions of government (not just in a recession, when that’s to be expected, but in the long term); and the biggest tax expenditures are not special benefits to particular industries or constituencies, but large-scale deductions that largely benefit the well-off yet give just enough to the middle class that eliminating them affects a lot of people. And while we might prefer that tax preferences such as the mortgage-interest deduction had never been invented, eliminating them or capping them would be enormously disruptive to the fragile housing market and would disproportionately affect younger families. It’s extremely unlikely that Congress will have the will to cut that deduction, the deduction for state and local taxes, or the deduction for charitable giving.

That leaves two alternatives. One is to eliminate some or all of the tax preferences for investment income – not just the “carried interest loophole” through which Mitt Romney makes much of his vast income, but the entire preference for capital gains and dividend income that makes that and other loopholes possible. (Almost all the tax gimmicks exercised by the rich involve redefining compensation as capital gains to enjoy the 15 percent rate.) There doesn’t seem to be much enthusiasm even among Democrats for fully equalizing treatment of capital gains and dividends, although we did it in 1986 and the economy thrived. The second alternative is some kind of global cap on deductions, which is where Romney has gone, first suggesting a cap of $17,000, then $25,000, but never with much detail about which deductions would fall under the cap. A $25,000 cap would raise about $1.2 trillion over 10 years according to the Tax Policy Center, which is not trivial. But a cap would hit upper-middle income households almost as hard as the very rich.

All these moves, along with the administration’s tortured “Buffett Rule,” fall well short of real base-broadening tax reform. But the fantasy of tax reform is essential to those who believe in a budget “Grand Bargain,” because the only moments when Republicans have hinted they might accept any revenue increases have been when it’s packaged under the guise of “base-broadening reform.” No tax reform, no grand bargain. That’s why the Committee for a Responsible Federal Budget, an organization funded by the Peter G. Peterson Foundation to push for a budget deal, has been almost as obsessive about rebutting the Tax Policy Center’s and other analyses as Mitt Romney has been, though not more persuasive. Senator Charles Schumer was the first to say out loud that tax reform wasn’t going to happen, in an October 9 speech. Since then, other Democrats have recognized that tax reform, especially if it begins with the current Bush tax rates as the baseline, “could be a trap,” as Chuck Marr and Chye-Ching Huang of the Center on Budget and Policy Priorities put it in a June report.

If there’s no tax reform and no grand bargain, what’s left? The answer is what’s called, ominously and inaccurately, the “fiscal cliff.” If some sort of deal isn’t reached by January 1, 2013, then all of the Bush tax cuts, as well as some Obama tax cuts for the middle class intended as economic stimulus, will expire.* And the defense and domestic spending “sequestrations” agreed to last summer, in the deal to avoid breaching the debt limit, will hit.

Many of these outcomes are undesirable and could damage the faltering economy if higher taxes and lower spending continue well into 2013. But consider some of the things that happen to taxes:

—Rates go up: the top rate, on income over $397,000, would go from 35 percent to 39.6 percent.

—Tax rates on investment income would go up. The rate on capital gains would go from 15 percent to 20 percent, and dividends would once again be taxed at the same rate as ordinary income.

—If you like the idea of a cap on deductions, such as Romney’s $17,000 or $25,000 cap, you get something like it. The Bush tax cuts repealed two provisions, known as Pease and PEP, that phase out itemized deductions and the personal exemption for upper-income taxpayers, and both would return. These have an effect similar to Romney’s cap but hit only the very wealthy.

—The estate tax returns.

Put these together and what do they look like? They look a little bit like tax reform. It’s not necessarily a perfect version. But revenues are higher, more income will be subject to tax, deductions will be limited for the well off. This doesn’t require a grand bargain, and it’s probably better than what would result from a grand bargain, if such a thing were actually possible. It’s simply what the law calls for.

There are plenty of less desirable things that will happen on January 1. The bottom tax rate will go from 10 percent to 15 percent, and rates in the middle will go up three percentage points. The child tax credit will go down, as will the Earned Income Tax Credit. And the budget sequester will constrain domestic discretionary spending.

But once we cross that line, we’ll be in a very different world. If President Obama is re-elected, he will have the initiative to propose a package of tax cuts, restoring some of the Bush tax cuts for the middle class and perhaps others, in addition to other tax changes and modifications to the sequestration plans. Congress, even if one or both houses is controlled by Republicans, will hardly have the option to block everything, because all they would be blocking are middle-class tax cuts. The long-term budget forecast will change immediately, and any effort to temper long-term spending on programs such as Medicare and Medicaid, in addition to the savings likely to be achieved through the Affordable Care Act, will be in addition to the revenues gained from letting the Bush tax cuts expire, rather than held hostage to an unachievable grand bargain.

It’s hard for me to say this, because I’ve long bought the gospel of base-broadening tax reform, but in the weird circumstances of this moment, it’s not the right answer, and I’m glad that there’s a better alternative, which can be achieved just by letting the law take its course.

*It’s worth noting why each of the tax cuts expire. The Obama cuts expire because they were always intended as temporary stimulus. In the case of the Bush tax cuts, it’s a different story: congressional Republicans in 2001 and 2003 wanted to push the cuts through without any compromise with Democrats. To do that, they needed to use the 50-vote budget reconciliation process, which prohibits any provision that increases the deficit in the future. To avoid that, they made the tax cuts expire, even though they wanted them to be permanent. That’s the deep origins of the “fiscal cliff.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from The Roosevelt Institute’s Next New Deal blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.