The term 'plutocracy' means government by rich individuals. A common criticism of democracy, made around the turn of the Century by anti-democrats such as Italian sociologist, Vilfredo Pareto, was that abuses of the system of financing elections meant that so-called democracies were actually no more than plutocracies. By their ability to bribe politicians and to fund their campaigns, the super-rich retained a grip on power, despite 'one person, one vote'.
Without drawing Pareto's extreme and pessimistic conclusions, it is reasonable to express alarm about the potential influence of rich donors. Even though politics is a costly business, a number of the richest men and women in many countries are able - provided they are permitted to do so - to make political donations so large that they will have a distinct impact on the political process. For example, the central campaign costs of the two main UK parties (Conservative and Labour) in a modern general election are around the £20 million (US$ 33 million) level. There are a considerable number of British residents whose wealth is at least ten times this figure. In the British general election of 1997, one businessman, the late Sir James Goldsmith, gave £20 million of his private fortune to run an anti-European Union campaign.
Why do the Rich Make Political Contributions?
There are five common motives:
- First, there is the motive of self-protection. It is rational for the rich to donate money to avoid the return of a government committed to policies of nationalisation, high taxes for the wealthy, or other measures likely to damage their general interests.
- Second, donations may be given with the object of gaining some specific reward such as a business contract from new government.
- Third, there are - very occasionally - ideological reasons for contributions; a wealthy person may wish to contribute to a cause in which he strongly believes.
- Fourth, there are social motives. At times when new fortunes are being made, there sometimes emerges a group of newly rich millionaires who desire to gain social prestige to match their wealth. One traditional method of gaining social access is to contribute handsomely to charities, universities, and symphony orchestras - bodies that will have members of distinguished families on their boards of governors. Another way to achieve social success is to donate money to top politicians, thereby receiving as rewards invitations to exclusive gatherings.
Examples of social payoffs include the titles awarded in the early twentieth century to political contributors in Britain (peerages - carrying the hereditary title of 'Lord' and the right to a seat in the house of Lords; baronetcies - the hereditary title of 'Sir', without the entitlement to a seat in the House of Lords; and knighthoods - the non - hereditary title of 'Sir'). The award of titles in exchange for political contributions was made illegal in 1925. According to some, the system has survived, albeit on a less formal, less easily detected basis. In the United States, the traditional reward for upwardly-mobile millionaires has been an appointment as ambassador.
- Fifth, the rich are able in some countries to use money to forward their ambitions to gain elective office for themselves. In the United States, candidates for the Congress are permitted to spend unlimited amounts of their own money on their personal election campaigns.
Trends in Plutocratic Donations
According to a common interpretation, the heyday of plutocratic funding of political parties in countries such as the United States and Britain was in the late nineteenth and early twentieth centuries. This was a time when vast fortunes were being made in a number of countries; it was the age of the Robber Barons in the United States. The importance of 'fat cats' (rich individuals) was arguably reduced, first, by the rise of institutional financing of political parties (by corporations and by trade unions) and, second, by the spread of public funding of parties and elections from the 1950s onwards and by the introduction of regulations designed to limit large individual contributions, see Funding by Institutions.
It is too early to proclaim the demise of the political 'fat cat'. Billionaires play active roles in political funding in some of the 'tiger economies' of Asia. In Britain and other Western countries, the pro-business policies of governments in the 1980s and 1990s have led to the creation of a large number of new rich, some of whom have become generous political donors. There is evidence that, in countries such as Britain, political financing has once again entered a 'plutocratic era'.
Loopholes
Where regulations demand that personal donations to candidates or to political parties must be publicly declared if they exceed a fairly low threshold, there are several techniques for evading the rules. Some of these are similar to the techniques used by corporations and, in some countries, by trade unions, see By Business Corporations, Fundraising Activities and In Kind Contributions. Evasion techniques especially suited to personal donations include the following:
- Dividing one large (declarable) contribution into a number of smaller (not declarable) ones. This seems to be a practice in Germany. An owner of a business consisting of a number of holding companies is able to give a donation from each. Provided that the amount given by each of the companies is below the threshold for declaration, a large combined total may remain legally undeclared. The same applies to donations given by separate member's of the donors family or by individual employees or directors of his business.
- Providing money in the form of loans rather than outright 'contributions'. Loans may be especially valuable when a party is unable to raise money for its activities from a commercial bank. The party stands to benefit from below-market interest rates. Moreover, if the party proves unable to repay the loan it may be possible for the donor to write off the loan at a later stage as a business loss.
- Donating to personal funds of politicians. Political donations may be free from rules concerning declaration provided that they do not go into the accounts of a political party. In these cases, there is an incentive for politicians - particularly party leaders - to collect personal political war chests. These special funds may be controlled by a group of trustees to ensure that the money in them is kept distinct from the recipient political leader's personal finances. Moreover, the money may be designated for specific political purposes such as policy research. Nevertheless, the effect is to create a channel for political funding that escapes the disclosure rules that may apply to party donations.
British examples of personal political funds are the Lloyd George Fund, collected from 1916 onwards on behalf of the Liberal Prime Minister, the political fund collected in the 1970s for the Labour Party leader and, from 1974-76, Prime Minister, Harold Wilson, and the 'blind trust fund' raised in the early 1990s on behalf of the then Labour opposition leader, Tony Blair, contributions in kind.
Other activities that may be regarded as indirect political contributions include business or employment given to a member of a political leader's family. In a major American city, the son of a powerful political leader was employed as representative of an insurance company. By directing insurance contracts to this company, the politician was effectively receiving a commission.
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