Tax Proposal Aims to Reward Domestic Manufacturers

Tax Break for Manufacturers Offset Elsewhere –

This mirrors a portion of my tax reform plan for New Jersey: Shifting tax liability from in-state employers and investors and increasing taxes on dividend and capital gains that do not originate in the state nor are earned from in-state activity.

Missing from the Obama plan is any measure to increase aggregate demand. Without an increase in demand, employers will not have much reason to expand domestically even if the tax code favors such expansion. Only greater demand leads to greater supply and consequently, more employment. The only exception to this rule, and it is a temporary exception, is when supply has been disrupted by an extraordinary event and shortages have disrupted the economic balance. In such an event, demand is artificially high. But that is not the case here. What applies here is that aggregate demand is directly proportional to the standards of living of the majority. In other words, most people have to make more  money.

Liquidity achieved through leverage fueled an artificial expansion that has brought us to the current crisis. That is why monetary easing has not yielded the fruits that the Federal Reserve anticipated. The liquidity has to be genuine. People have to truly own the disposable cash.

But I have come to believe that both parties in power are rather unimaginative when it comes to policy or they are hindered by their principal priority which is to stay in power. Party before nation seems to be the slogan: Or party before New Jersey.

“It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America,” Mr. Obama said in a statementannouncing the plan.

Geez, it only took 30 years. And Obama’s plan may not be bold enough.

Of course governor Christie is terminally deaf to this type of call. He is marching blindly through the already beaten path of an ineffectual tax cut in the face of a dismal fiscal picture.

There is little chance that the Obama proposal will see life this year, with a congress divided and the lurking election. However, at least it signals that the administration is focusing on what I call “Geographic Taxation” – meaning, where you put you money makes a difference at tax time.

Neither the White House nor the republicans, who quickly responded to the plan, offered many details. The republicans responded that the plan should not be a campaign instrument but a mechanism to stimulate growth and the creation of jobs. There is no shortage of people figuring out what the problems are. In fact, I find no less than 100 articles every day describing the difficulties that America faces and offering general descriptions of what must be done.

But a recovery plan that does not describe the smallest nut and bolt of its mechanism, detailing the how’s, when’s, and where’s, does not deserve the name of “plan”.

I tend to believe that the recovery of New Jersey, or America for that matter, will involve either a reform of great complexity or a very long time of stagnation, similar to Japan’s lost decade. In our case it may be much longer than a decade because we lack some elements of the Japanese economy – theirs is more exports-oriented and most of the Japanese creditors are themselves Japanese. Most of the interest that the Japanese government pays for its sovereign debt stays in Japan. That is not the U.S. case and New Jersey has this bloated government whose political class devours everything; where the Japanese have ethics, we exhibit greed and selfishness. With the two political parties hugging power and petrified at the prospect of far-reaching reforms, chances are that is it the long tern sluggishness which will become the avenue of our future.