The Need for Improved Transparency

The following post comes to us from Darrell M. West, vice president and director of Governance Studies at The Brookings Institution, and based on a book authored by Mr. West, titled “Billionaires: Reflections on the Upper Crust;” a sample chapter may be downloaded for free here. Work from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. A committee of law professors co-chaired by Bebchuk and Jackson submitted a rulemaking petition to the SEC concerning corporate political spending; that petition is discussed here.

Anyone paying the slightest amount of attention recognizes that the U.S. political system is performing poorly. Washington is gripped by extreme partisanship, which prevents Congress from conducting even routine business, and cooperation between the executive and legislative branches is near historic lows. But as I argue in my new book, Billionaires: Reflections on the Upper Crust, the problem with the nation’s politics is even deeper than the daily headlines suggest. There is limited transparency surrounding money and politics, and many institutions that in the past could counterbalance the power of the wealthy and other special interests have grown weak. It is difficult for financially strapped news organizations to provide quality coverage of government, and political parties have become heavily dependent on a relatively small number of wealthy and well-connected people for campaign contributions.

Supreme Court rulings in the United States have created a situation in which large amounts of secret money are flowing into elective politics and influencing public policy at all levels of government. With the Citizens United v. Federal Election Commission and McCutcheon v. Federal Election Commission decisions, it is easier than it has been in many years for wealthy individuals to spend enormous amounts of money to influence elections. The 501(c)(4) “social welfare” groups recognized by the Internal Revenue Service and the super PACs allowed by the Federal Elections Commission have blurred the boundaries between different sectors. These rulings allow the wealthy to spend millions of dollars in secret to influence elections and public policy, thereby undermining democratic accountability and representation. An analysis by the nonprofit Center for Responsive Politics shows that spending by these tax-exempt nonprofit groups grew from $5.8 million in the 2004 elections to $310.8 million in 2012. About 40 percent of donors either are not disclosed or are only partially disclosed. [1]

In the past, social welfare organizations focused on nonpartisan “do-gooding.” They raised money that helped people deal with concrete problems. Grant recipients weren’t especially political or partisan in how they pursued their missions. In recent years, however, new types of groups have emerged to take advantage of U.S. tax laws. With the aid of favorable legal decisions, 501(c)(4) organizations have engaged in explicitly political activity: supporting or opposing candidates, lobbying for laws and policies that they favor, and influencing public opinion. [2]

The outpouring of activism by tax-exempt organizations has led to calls for clearer rules regarding political activity. New proposals from the Internal Revenue Service have suggested that groups must focus “exclusively” on social welfare as opposed to electioneering. Those organizations classified as 501(c)(4) would be prohibited from “advertisements that mention a candidate within sixty days of an election,” engaging in voter registration or get-out-the-vote efforts, or sponsoring within sixty days of a general election events at which candidates appear, even bipartisan debates. [3]

This proposal, released in 2013, generated criticism from the left and the right. Around 150,000 comments were received from various organizations about the proposed rules. [4] Many groups complained that the proposal was overly broad, and they defended their right not to disclose their donors on the grounds that disclosure would subject them to possible political retaliation. From their standpoint, greater transparency would be problematic. The reality is that cracking down on social welfare groups may merely push electoral advocacy to other parts of the system. If people cannot influence politics through putative social welfare organizations, they may form super PACs or use other types of nonprofit organizations to circumvent IRS rules. Squeezing one part of the money balloon will push the money to other parts of the balloon.

But that fact notwithstanding, policymakers need to clarify the regulations that govern each type of advocacy. Currently, different rules govern tax exemption, deductibility of gifts, and disclosure, depending on the category of organization. That creates uncertainty for groups, donors, and regulators. Activists are not sure what restrictions they face in various areas, and regulators cannot be sure what legal authority they have to oversee political activity.

The result is a Wild West of political activism. With limited disclosure and poor accountability, it is the worst of all possible worlds. The public has little access to information about what is being spent to influence elections (other than information that rich people voluntarily disclose) and how the super wealthy are using their financial resources to shape public policy. That allows the rich to influence local, national, and global debates in secret, raising serious risks for the political system as a whole. [5]

It often is difficult to trace cash flows because so-called “dark money” is just that, deliberately hidden from public view, sometimes in violation of laws or regulations. An investigation in California, for example, found that several political groups spent money on referendum campaigns without making the public disclosures required by state law. The state’s Fair Political Practices Commission fined the organizations the sum of $16 million, based on the illegal contributions that they received. These groups had put considerable effort into fighting proposed tax hikes and supporting limits on union political activities. [6] If voters do not know who is behind certain campaign activities, it is difficult for them to judge the donors’ motives or actions.


[1] Quoted in Thomas Edsall, “In Defense of Anonymous Political Giving,” New York Times, March 18, 2014.
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[2] Bradley Smith, “The Latest IRS Power Grab,” Wall Street Journal, December 8, 2013.
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[3] Nicholas Confessore, “New Rules Would Rein In Nonprofits’ Political Role,” New York Times, November 26, 2013.
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[4] Susan Page, “IRS Chief: New Rule on Way for Non-Profits,” USA Today, April 15, 2014.
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[5] Lucy Bernholz and Rob Reich, “Social Economy Policy Forecast 2013” (Stanford University, Stanford Center on Philanthropy and Civil Society, September, 2013), pp. 13–15.
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[6] Chris Megerian and Anthony York, “California Fines Groups $16 Million for Funneling Money to Campaigns,” Los Angeles Times, October 25, 2013.
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