The Internal Revenue Service is investigating campaign donations to groups incorporated under 501(c)(4) of the tax code. Some in the IRS apparently hope to apply gift taxes to the contributions.
Higher taxes on an activity would generally lead to less of that activity, especially if a good substitute exists that is not taxed. In this case, donors could give money to 527 groups. Such donations are exempt from taxation. But 527 groups are subject to disclosure of donors.
The IRS investigations involve tax provisions “that had rarely, if ever, been enforced.” Why now? We do not know. But 501(c)(4) groups played in a important part in the 2010 campaign. As you know, the party in power lost control of the House of Representatives in 2010. With the president’s re-election at stake in 2012, the administration might hope that that less money is available to fund the political speech of its opponents.
The White House has already issued a draft order requiring disclosure of political spending by government contractors. Now these investigations of donors. The IRS effort need not lead to legal complaints to be politically effective. As one expert notes, “The lack of clarity and the potential for not-insignificant taxation on these gifts will cause many of the biggest donors to think twice.”
Many people argue that mandatory disclosure of political spending has few costs and many benefits. Such laws are said to discourage few donors from funding political speech. If that is true, why is the Obama administration so interested in forcing donors out of anonymity?
Perhaps the administration believes deeply in transparency. Or perhaps the administration believes that attacking (no longer anonymous) donors will effectively discourage speech critical of the President in 2012.
The political misuse of the Internal Revenue Service should be a concern of everyone. During the Kennedy, Johnson, and Nixon administrations, presidents and their people decided, as John Dean put it at the time, to “use the available federal machinery to screw our political enemies.” Have we forgotten that history?