Wednesday, April 6, 2011

Are We Living in an Old Joke?

There’s an old joke we are all familiar with: Everybody complains about the weather but who really does anything about it.

So what can actually be done to actually improve the economic situation? Well here’s a suggestion just for starters.

Reform the corporate tax code to create two-tiered system.

Level one: If your business income is derived from the manufacture, transport or sales of real physical goods you get taxed on that income at a very low rate. This would apply from the top to heavy industry all the way to the bottom where the mom and pop shop is selling gas and potato chips. There could be differentiations within this group depending upon what percentage of components or raw material goods are derived domestically and what percentage are imported. This would encourage the expansion of on shore business to produce or procure components or raw materials here at home rather than importing them. In other words a tariff by other means.

Level two: If your business income is derived from speculation, i.e. just moving money from one pile to another and not actually producing any real goods as exemplified by the FOREX carry trade, commodity speculation, stock and bond trading, you get taxed at a much higher rate and have severe restrictions on what are allowable deductable expenses. This would not include the individual who trades within small accounts or their 401K or IRA to try and make a few extra bucks to put their kids through school or make their retirement a little easier. We’re talking large institutional speculators. Can you hear me Goldman Sachs, JP Morgan etc. etc. etc. This would not include the transactions wherein they make loans to businesses or mortgages or car loans and the like, provided they keep those loans on their books so as to maintain a real interest and indeed risk in how well you do. The very minute that they bundle those loans into CDOs (collateralized debt obligations) all previous and future income becomes taxed at the tier one rate.

Item three: Over a set period of time phase out and then ban all OTC derivative trade or at least tax them at such a rate as to make them completely unprofitable. Ban the issuance of CDSs (credit default swaps) to anyone other than the primary risk taker. Ban financial and securities firms from taking out CDSs on the securities they have sold to their customers.

Don’t hold your breath waiting to hear any of our politicians talking such common sense as long as the revolving door between Wall Street and the Treasury Department remains in operation. Even suggesting it would unleash a pestilence of lobbyists and under the counter campaign contributions to kill it like nothing that has ever been seen.

We have been suckered into believing the fixed pie theory. It’s a fallacy perpetrated by the left and the banks. The money exists, government policy, and in this case tax policy, must be changed to pull it out of speculative none productive applications and into manufacturing where real wealth and jobs are created, the economy expands and the pie gets bigger.

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