NEW TAX PLAN AND CORPORATE TAXES

Back in 2010, I wrote a piece for my blog on the Effectiveness Of Taxes (http://stopcontinentaldrift.blogspot.com/2010/05/effectivene...).

All indicators are that reducing personal income tax is a very inefficient way of stimulating an economy, but here we are stimulating an economy on fire.  
http://stopcontinentaldrift.blogspot.com/2018/01/is-inflation-finally-coming.html

It is unclear what the effect will be of reducing corporate taxes as they form a relatively small part of the economy and company tax cuts don't happen very often, but the cut that was made from 35% to 21% is so huge it will have to have an effect, coupled with repatriation of foreign profits.

The wealthy will buy a lot of bonds (U.S., corporate , and foreign) and property outside the U.S. (e.g. chalets in Switzerland, islands in the Bahamas) or imported from outside the U.S. (e.g. personal jets from Canadian Bombardier)  We shouldn't ignore the middle class and even the poor paying off as much of their debt as possible with any increased income from increases in wages and reduction in income taxes. Household debt is at a record high as in credit card debt. A lot of the GDP has come from consumers piling up debt. So paying off debt is not stimulating.

How are the increased company earnings going to be spent? Many companies gave employees bonuses and increased their minimum wage.  Just how this money will be used is yet to be determined (see above paragraph).

For one thing, we are seeing a huge increase in dividends being paid. Just this last week, increases of 10% or greater in dividends were announced for 41 company stocks. This is dividend time, and, of course, there were many more increases of less than 10%. So dividends will be added to personal income and those will be spent like other income.

With the new tax plan, we (the U.S.) are piling money on an industry that does not know what to do with it.  But a lot of the reduction in taxes by corporations will go into buying back stock which they will do near record high values on the stock market (even after the current drop). This is largely wasted money (It means CEOs can't think of anything productive to do with the money.) and does not contribute to the economy.  And companies have said that their main goal for repatriated foreign profits will be buying back stock.   Clearly, much of the money will be wasted, including bad investments in mergers and acquisitions where companies eventually go back to their "core" business.  This has been demonstrated many times.

It does look as if companies will at least increase somewhat their purchase of new plant and equipment that should raise the GDP a bit as the lack of companies doing this was the main cause of the low GDP.  Certainly, this would be a good time to upgrade and modernize plant and equipment as both are now getting old and in need of replacement.

We are in rather uncharted waters.  We'll just have to see how this works out, but the new tax plan could push us into an economic bubble with disastrous results when the bubble bursts.  As I have said elsewhere, people may like a bi-polar  (boom and bust) economy rather than the steadily increasing economy such as we had for the previous 8+ years.
(http://stopcontinentaldrift.blogspot.com/2016/07/the-american-economy-great-recovery.html)