Jack Wheeler
  A Scum of Politicians
                     by Jack Wheeler
Reprinted from Strategic Investment (March 1, 2002)
with permission of the publisher, Agora, Inc.

The U.S. tax code is purposefully not designed to maximize economic prosperity.  Its express purpose is to maximize politicians’ power - power to extort contributions as protection money, and power to make people dependent on government subsidies...

Some of my favorite words in the English language are “collective nouns”, the colorful names for groups of animals going back to the 15th century that every kid had to know to go hunting with his dad.  Not knowing them was laughable ignorance.  We laugh today if someone said a “herd of fish”, instead of a school, or a “flock of cattle”, instead of a herd or drove.  We know it’s a pride of lions, but it’s a leap of leopards, a crash of rhinos, a shrewdness of apes, a skulk of foxes.  Perhaps you’ve heard of a murder of crows or an exultation of larks, but it’s an unkindness of ravens, an ostentation of peacocks, a bouquet of pheasants, a parliament of owls.

Collective nouns were applied to groups of people as well.  We still call it a congregation of churchgoers, but it’s an impatience of wives, a boast of soldiers, an impertinence of peddlers, an illusion of painters.  I love the one for prostitutes: a flourish of strumpets.

Thus I would like to offer a candidate to be added to the venerable list of English collective nouns: a scum of politicians.  Which brings me to the orgy of anticapitalism currently going on in Washington, academia, and the media, with Enron as the excuse.

Endlessly we are subjected to revelations of venality on the part of Enron execs or Arthur Andersen accountants, offered as final proof that greedy capitalists are all Simon Legrees at heart.  Supinely the leaders of corporate America beg forgiveness from their attackers and refuse to attack back.

What I’m waiting for is a businessman with balls enough to explain to the American people that Congess is a Mafia running a protection racket, and that the tax code bears a principal responsibility for business failures.

Two distortions in the tax code stand out in particular regarding Enron.  The first is that dividends are taxed as regular income and capital gains are not.  You pay twice as much for the former at top rates (39.5%) as you do for the latter (20%).  This is a gigantic incentive to put money into risky investments (“growth stocks”) to make money with capital gains, and avoid stocks that only pay dividends.  Millions of investors, including Enron employees, were sucked into the company’s efforts to ramp up the stock because of the capital gains distortion.  The entire dot.bomb fiasco, with trillions of ephemeral wealth created out of thin air and vanishing back into it, was in large part due to the same distortion.

One hears calls for eliminating capital gains taxes.  That would be disasterous, leading to ever wilder speculative frenzies and the destruction of value-based companies with normal P/Es, if taxes on dividends were not also.  A first step to bringing stability, trust, and value back into the market would be to lower taxes on dividends to the same rate as capital gains: 20%.

Few things would also put an end to the current recession - except perhaps for the second great distortion that nailed Enron, the depreciation schedule.  Enron was once a solid company that owned natural gas pipelines.  To expand its business normally would mean building more pipelines.  But there is a 20-year depreciation for such an investment.  That’s in effect loaning money to the IRS with no interest for 20 years.  The rational thing to do is what it did: minimize investments with long-term depreciation, maximize investments with short-term depreciation instead.  So Enron got into energy-trading - which it made money on for a few years, but the low entry costs attracted competition that eventually drove them out of business.

It’s the same old story that caused the S&L crisis a decade or so ago.  The media frenzied-out on crooks like Charles Keating, when the real cause was the Democrats in Congess raising the depreciation schedule for commercial buildings from 16% to almost 40%.  Buildings which sold on the basis of deducting 1/16th of the cost per year now could be sold only with a deduction of 1/40th of the cost.  Too many became simply unprofitable, the owners walked, the financing S&Ls crashed and burned.  Not a single politician took the rap.

The obvious solution is to eliminate the depreciation schedule entirely, and to let a business deduct its expenses over whatever period of time it chooses, including deducting as it spends.

The moral to all of this is not that there are cheaters in the business world, or who will cheat and deceive when their back is against a wall.  Anyone with a three-digit IQ knows this.  The real moral is:

The U.S. tax code is purposefully not designed to maximize economic prosperity.  Its express purpose is to maximize politicians’ power - power to extort contributions as protection money, and power to make people dependent on government subsidies thus gaining the vote of those so dependent.

Actual tax reform in America doesn’t have a ghost of a chance until business leaders and those rare honest politicians clearly explain this and the American voting public understands it.  Until then, Congess will ceaslessly try to distract us with shell game frauds like Campaign Finance Reform or anticapitalist scandals, and circus freaks like South Carolina’s embarrassment Fritz Hollings, South Dakota’s blemish Tom Daschle, or West Virginia’s epitome of arrogant senility Bobby Byrd.

It’s these guys we should be enraged at, who are far bigger crooks and thieves than Kenneth Lay ever will be.  Last month, Bobby Byrd - a man who has never created wealth but has enormous power derived from stealing wealth and dispensing it as largesse - tried to intimidate and poor-mouth Treasury Secretary and former ALCOA Chairman Paul O’Neill.  As a preeminently successful businessman, O’Neill’s career has been creating wealth and prosperity.  He had the guts to stand up to Byrd and tell him off right at a Senate hearing.  The recipe for prosperity is for people to pay more attention and respect to those who create it, and less to scums of politicians.