A little goes a long way for corporate PAC contributors

The huge sums raised by corporate-driven Political Action Committees are legend, but the average voter is unaware of just how effective such contributions can be. Most citizens and even shareholders accept the existence of PACs, but questions arise when the legislation or favor that the company wanted ends up hurting more people than it helps, or when decisions are influenced more by money than by people — people who have only their votes to give. Research co-authored by a W. P. Carey School of Business professor quantifies the impact of business contributions and comes up with some surprising conclusions.

"Who, after all, can seriously contend that a $100,000 donation does not alter the way one thinks about — and quite possibly votes on — an issue? Donations from the tobacco industry to Republicans scuttled tobacco legislation, just as contributions from the trial lawyers to Democrats stopped tort reform."

Former Sen. Alan Simpson (R-Wyo.)

On the influence of soft money, in testimony pertaining to the legal challenge to the McCain-Feingold campaign finance law (Washington Post, 12/4/2002)

Mind-boggling sums of money are raised for and spent in politics. In the 2004 elections, 1,213 candidates for the House of Representatives raised over $696 million, 190 Senate hopefuls raised over $488 million, and 15 presidential candidates garnered nearly $868 million. But the tie between money and politics is not confined to election years. Major contributions to candidates or political parties by big business may win favors in the form of legislation, contracts, etc.

Most citizens accept this dynamic (if grudgingly), but questions arise when the legislation or favor that the company wants ends up hurting more people than it helps, or when decisions are influenced more by money than by people — people who have only their votes to give. The electorate may not be the only loser when political contributions dramatically influence policy. Heavy contributions from corporations also can damage shareholders, many of whom are unaware of a company's political activity because businesses are not required to disclose the information.

A 2005 report by the Center for Political Accountability reveals examples: Enron, Qwest, Westar, WorldCom and Global Crossing — all spectacular rises and collapses — used political contributions not only to build their wealth but also to grasp for help as they foundered. In undertaking the study, the center sought to alert shareholders that a company's political spending could raise red flags concerning its business practices.

Quantifying the impact of business contributions is the subject of a paper published in the Journal of Law and Economics by Sanjay Gupta, a professor of accountancy at the W. P. Carey School of Business, and Charles W. Swenson, a professor at the University of Southern California.

Their paper, "Rent Seeking By Agents Of The Firm" focuses not only on money given by companies through Political Action Committees (PACs), but also by the companies' directors and officers to the tax-writing members of Congress — that is, representatives on the House Ways and Means Committee and senators on the Senate Finance Committee.

The "rent" in "rent seeking" signifies the tax benefit sought by companies when they contribute money to legislators. In particular, the authors examine whether the giving by the directors and officers was higher when their personal wealth was at stake via bonuses tied to the company's performance or the shares they held in the company. The researchers found that during the 1980s, the companies they were examining collected significant returns on investment when they were attempting to sway voting on certain deferred-tax issues. For their sample firms, the average benefit was roughly $1,616 for every dollar of PAC contributions.

This ratio appears comparable to other examples detailed in the paper in other settings. For example, the authors report that for every dollar contributed to a related PAC, Archer Daniels Midland received $2,500 in ethanol tax credit benefits; for Alliance Capital and various computer and pharmaceutical companies, the return was 1:1,000 for other tax benefits.

Though the purpose of the paper was to analyze contributions made by managers and officers of corporations with a stake in legislation, "The punch line of the paper is the extent of the tax benefits relative to the contribution," Gupta says. "There is a huge disconnect between the two. It's remarkable that such a small contribution can have such a huge benefit."

Gupta and Swenson chose a portion of the Deficit Reduction Act of 1984 (DRA84) for its test. Beginning in 1971, United States tax laws allowed corporations to set up subsidiaries known as domestic international sales corporations, or DISCs. Taxes on a portion of the profits from DISCs could be indefinitely deferred, so just about every corporation with any export activity set up a DISC.

DISCs resulted in huge tax benefits for these companies but also riled up U.S. trading partners, who claimed the DISCs were export subsidies. The U.S. promised to snuff out DISCs, and did, under DRA84. The rent-seeking accompanying the voting on DRA84 concerned whether the companies affected would have to pay the deferred taxes once DISCs were ended. For each of the paper's sample firms the average tax was $5.8 million with over $13 billion overall.

If legislators on related committees decided the deferred taxes did not have to be paid, those companies which had in fact deferred the taxes would be saved huge amounts, and those which had chosen to pay would get money back. The paper analyzed 473 firms with DISCs and found that the companies' contributions to the PACS of tax-writing members of Congress had a positive (for the company) association with tax benefits.

It also found that corporations with managers whose income was positively affected by the tax benefit made larger contributions than those whose managers' incomes had no ties to company earnings, and that those managers with a stake in company performance also made higher individual contributions ($1,000 limit). Additionally, it established that the firms with DISCs spent "considerably" more on tax rent-seeking than companies without DISCs.

That latter finding was the most difficult, as Gupta, Swenson and their research assistants had to first identify each company's officers, then match the names with individual contributors' entries under 'Occupation' found in the data of the Federal Election Commission. The companies' proxy statements had to be hand-collected because they were not machine-readable. "It was incredibly hard — almost two years of data collection," Gupta says.

To be conservative, the authors did not use individual contributions if one initial was inconsistent between the two data sources. The paper controlled for company size, normal pattern of contributions, and tax status, managers' stock ownership and/or bonus plans tied to company performance.

Gupta emphasizes that there could be plenty of hidden costs that would lower the contribution/benefit ratio, such as a company's expense to maintain a lobbying office in Washington, D.C., and to staff it. On the other hand, contributions from household members of managers were not tracked.

Friends of managers could be influenced to give to the cause as well. The authors indicate that the implications of their paper's findings could be that firms with managers whose incomes are tied to the performance of their companies could have more influence than those without.