101st edition of Carnival of the Vanities
National Sales Tax is a great Idea

Electoral Reform policy of Liberal Party of India

The Swantantra Bharat Party's policy document on Electoral Reform, at http://www.liberalpartyofindia.org/policies/SBP-policy-electoralreform.doc, correctly points out that:
The need to spend enormous amounts as election expenses provides a major incentive for corruption amongst officials as well as politicians. Tightening the rules about collection of contributions or submission of accounts of expenditure is unlikely to bring about any improvement.

I agree completely.

Also, the document further says,


Governmental financing of election expenses will be worse than the disease itself.

Well said!

On compensation of Representatives SBP correctly recognizes that:


Compensation of Representatives: The current amount and methods of compensation to representatives ensures that only the corrupt enter the system.

Perfect!

However, in my view the document falls short of suggesting any drastic reforms in the system and method of compensation. It recommends increasing the amount of compensation. Only change in method, it suggests, is removing perks (such as free travel, etc.) and ensuring full asset disclosure.

The real problem seems to be that compensation is fixed. There is no incentive to produce better results other than getting reelected. One can always get elected (and reelected) by catering to special interest groups! In fact who else, but special interest groups, can finance the enormous amounts needed to finance the election expenses! Thus, the existing system and the proposed changes are both recipes for corruption.

One solution, is to introduce compensation which depends on performance and results. To ensure that representatives work keeping in mind long term perspective, the compensation has to be deferred and based on results measured years later.

But, how do we measure the results and performances of our representatives? The system of measurement should not give perverse incentive to inflate the results. Secondly, representatives should be able to see a clear link between their actions and probability of better results in the future. Public should be able to see the same link between the results and actions of the representatives, atleast in the hindsight! Otherwise, public will feel cheated! Thirdly, the system should allow them to raise finance for the election expenses and pay their contributors without granting special favors from Govt.

We can take advantage of the fact that Govt. anyway needs to measure various economic variables in order to collect taxes. For example, for income tax we need to measure incomes of individuals, corporations, families and so on. For collecting sales taxes, Govt. needs to collect information on retail sales. What if we define collection of such tax variables as our criteria for measuring performance of our representatives? We can then compensate our representatives as a fixed percentage of such economic variables as measured years afterward their actions.

Let's see if we met our criterias mentioned earlier.

First, does such a system provide incentive to politicians to inflate the results? The answer is no! We are measuring the results years later, when the representatives, whose compensation we are trying to determine, will not be in power. Hence, they will not have enough power to influence the measurement of results. Importantly, inflating results will cause higher taxes to be collected by Govt. and higher compensation to representatives, thus resulting in less incentives for private people. This will cause results in later year to go down. For example, increase in measured income base will cause more income tax collected and more compensation being paid. This should cause, income in later year to decrease. So, incentive to inflate results to increase current compensation will be balanced by incentive to increase compensation in later years. In other words, the proposed system provides incentive to our representatives to maximum their future income over a number of years and thus demand and get fair compensation.

Furthermore, representatives will have a strong incentive to maintain optimium compensation rates for them as well as optimium rates for taxes as there is a clear link between compensation, tax rates and the future results and thus their future compensation.

On second criteria, of clear link between actions and results, it is easy to see that opening up economy, removing the corruption, and maintaining law and order, ensuring security of the country, etc. will result in increase in the agregate variables such income base, sales base and so on. Because, unfree economy, corruption and lack of justice and security result in transfer of wealth from one set of people to another. This being a negative sum game, any aggegate economic measures should decline. Public can also see that actions of representatives, though painful at that time, in hindsight, produced better results.

On third criteria, of having corruption free election financing, our representatives can always raise finances and after getting elected can pay back their financers from their future compensation. There is no incentive here to give any special favors, as any special favors will cause agregate measures to decline in future and hence the compensation. It will be much easier if representatives simply pay their contributors (including themselves) from the compensation they will receive because of superior results. The financiers will be willing to handle the risk of their candidates not getting elected or of risk of unfavorable future results in same way any businessperson handles the any other risky investment. That is demanding premium on rate of return on successful investment.


Thus, the proposed system seems to be better than simply increasing the fixed amount of compensation and introducing more transparency. Whatever, form and method of compensation we decide will have a major impact on our long term future. Ensuring proper incentives for our representatives to look out for our long term just interests is critical. Otherwise, the existing system of corruption and injustice will continue to wreck havoc in our lifes. I welcome suggestions, comments and discussion so as to make the proposed system (or any other system) perfect and workable.

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