Before the President Speaks

On the eve of the President’s “Jobs Speech” I thought it might be a good time to return to my previous proposal on taxation and job creation. Slightly revised and edited verbiage for clarity but the substance remains the same.


The question of course is what can actually be done to substantively improve the economic situation? Well here’s my 2 cents worth just for starters.

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

Tier 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 top level heavy industry all the way to the bottom where the mom and pop shop is selling gas and potato chips. There should be differentiations within this rate 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.

Tier 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 placed on what are allowable deductable expenses. This would not include the individual who trades within small accounts or their own 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 trading on their own accounts not managing the accounts of individuals below certain threshold levels.

This tier would not apply to transactions wherein these same institutions make loans to businesses engaged in tier one activities or mortgages or car loans and the like, provided they keep those loans on their own books and maintain a real interest and indeed risk in how well those loans perform. The very minute that they bundle those loans into CDOs (collateralized debt obligations) all previous and future income becomes taxed at the tier two rate. If they simply sell those loans to another entity, any profit derived over and above the normal expected rate of return on that loan would be taxed at tier two rates, except in the case where the proceeds of the sale are then used to extend further business and job creating loans.

Tier three: Over a set period of time either phase out and then ban OTC derivative trades and the creation of CDOs or tax and regulate 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 either directly or indirectly through subsidiary companies.

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 and trade where real wealth and jobs are created, the economy expands and the pie gets bigger.