Viewpoint: Political Capitalists

I spent a good portion of January 20 whistling a tune once made popular by Gladys Knight and the Pips. In their immortal words, "He's taking that midnight train to Georgia and he ain't coming back."

I'll admit it. I was glad to see Carter go. Goodbye and good riddance were my approximate sentiments. In fact, I was so pleased by the change of administration, that I began to behave like a Republican. I went to the Inaugural Ball and danced to the music of Donny and Marie Osmond and what is left of the Tommy Dorsey band. It was one of the few times in my life that I've danced without feeling the least bit shy or awkward. There were so many people crammed together that no one, even the woman with whom I was dancing, could tell that I had not practiced my four-step at Arthur Murray's.

While I was celebrating the end of Carter's reign in Washington, some of his appointees were no doubt celebrating as well. After four years of merely generous pay and benefits in the upper reaches of the federal government, the young Georgia lawyers were no doubt licking their chops over the prospect of six-figure incomes. They'll be partners in establishment law firms where they couldn't even have gotten an interview four years ago. In short, their years of puttering around, running federal agencies, departments, and commissions, will make them rich. Even if they did not do good in Washington, they certainly did well.

This is fascinating to me on several counts. It illustrates that "you can't go home again." At least you can't when you're being paid a fortune to stay behind and join the establishment you disparaged from the outside. And more, it is a sign of how positively dull America's business community has been and how dull we have been as citizens to have allowed politicians (lawyers) to impose high tax rates on productive capital gains while not taxing human capital gains at all. Think about it. This disparity has encouraged people to devote their energies to politics. The lawyer who attaches himself to a successful political campaign or accepts a high-level post in Washington is making a rational investment of his time. The more of it he spends mastering the Byzantine arts of political intrigue and influence peddling, the greater his human capital endowment.

We don't often think of the value of human capital because, with few exceptions (such as pro athletes), individuals cannot sell their future incomes streams. But whether they can sell them or not, they will certainly be shrewd enough to equate returns from the alternate uses of their time. The young Georgian who followed Carter to Washington and gave up $25,000 a year in Georgia in order to earn $40,000 in the federal government might have stayed home and started a widget factory. If he had, the chances are he would have needed to work quite diligently to make a success of the widget business.

For the sake of argument, let's assume he could do just that. In four years of toil, he is able to produce a business that will yield him an annual profit of $150,000 (or just the salary he will now get as an employee of a Washington law firm). Under the tax laws, he will be far better off for not having tried to succeed in the widget business and coming to Washington instead to wreak havoc as a presidential appointee.

For one thing, the lawyer can shield his human capital gains from taxation during all the time that he is employed in government. Then, when he starts collecting the dividends from his investment in politics, they will be taxed at the earned income rate, which is substantially lower than the so-called unearned income rate that the widget maker will have to pay on his dividends, which will have been taxed twice—first at the corporate level, then again on his personal return.

Another notable advantage for the political entrepreneur is that he can all but entirely escape the ill consequences of currency depreciation in altering his input prices and screwing up his long-term contracts. He has almost no inputs, and his only long-term contracts are the annual retainers his firm receives for his help in influence peddling and unraveling the deleterious effects of previous political actions on his part.

A literal-minded reader might object that the lawyer's problems are the same in principle as those faced by a productive businessman. That is surely misleading. Not only is the lawyer saved from intricate coordination problems, but inflation does not reduce the real present value of the lawyer's depreciation. Ordinarily, his human capital investment does not need replenishment. And the extent to which a law firm invests in typewriters and other equipment is hardly comparable to the business whose chief assets consist of productive capital implements. By the same token, there are no such things as phantom inventory profits for political entrepreneurs, as there are for the widget maker in time of inflation.

The considerations above indicate why there is so much interest in politics, especially among attorneys. If President Reagan really wants to encourage Americans to be productive again, he should take steps to bring the rewards for productive investment to a par with the returns for investing one's time in politics. This would mean lower-than-ordinary returns for many of his supporters, including those who do much of the gritty work of political campaigning. But only by lowering the rate of return to human capital investment in politics, while raising the rewards of other endeavors, can we discourage more and more people from crowding into politics to rake off all the goodies that can be had there.

I'll learn to dance for the celebration at the end of Reagan's term if there are more moving vans heading out of Washington than there are heading in.

Jim Davidson is founder and chairman of the National Taxpayers Union. His most recent book is The Squeeze.