Tax Cuts

Clarity on the winners and losers of the Republican tax cuts is important for taxpayers, because it signals what legislators aim to accomplish and the effects of the tax cuts on them. Tax cuts reduce government revenue and if government spending is not reduced by the same amount of the tax cuts, the deficit increases. When the government deficit increases, it crowds out private investments because the government as to borrow to cover expenses. Additionally, if the government reduces spending to accommodate the tax cuts, private sector suppliers of goods and services, as well as their employees, social security beneficiaries and so on will be adversely affected.

Apparently, the Republican tax cuts return more income to the rich and corporations than to the average tax payer. Thus, the average tax payers will not significantly stimulate demand. Tax cuts targeted to the middle-class would stimulate demand in the short-run. However, if the economy is close to full capacity it is likely to cause inflation, which will lead the Federal Reserve to reduce the money supply (raise federal funds rate), constraining consumers’ spending and private investments.

The macroeconomic effects of tax cuts affect people’s well-being and it is difficult for the public to anticipate their outcomes, particularly when legislators implement the tax cuts with little or no public debate. 

Keynesian economists believe that fiscal policy is a powerful lever to move the economy, because the effect of an increase in government spending or a cut in taxes would be multiplied by stimulating additional demand for consumption goods by households (Nelson, 2006). However, the effectiveness of the fiscal policy multiplier depends on whether fiscal policy changes emanate at low or high level of output relative to the full employment output (Branson, 1979) and if the banking system is increasing money in circulation through lending to compensate for the higher demand for real money balances.

Often, proponents of a tax cut advocate its virtues and ignore the fact that it is income growth that drives demand. Tax cuts do not increase the amount of money in circulation, they merely reallocate funds from government to taxpayers. However, when the largest share of the tax cuts goes to the rich and corporations, they seldom use the windfall to purchase additional goods and services. Moreover, if the money in circulation is not increasing, demand will remain at its current level and business will not invest or hire new workers.

It is the increase of currency in circulation (lower federal funds rate) that increases demand, and hence gross domestic product. Tax cuts do not change the amount of currency in circulation, they merely change the way purchases are allocated in the short-run. Moreover, expectation of rapid inventory decumulation due to the tax cuts will increase selling prices, resulting in an increase in inflation. At any sign of inflation increasing above the 2 percent annual rate will lead the Federal Reserve to remove money from circulation (higher federal funds rate), causing interest rate to rise, demand to fall and employee layoffs.

Thus, the decoupling of tax cuts from monetary policy often leads to unfavorable economic outcomes in the long-run.

References

Branson, W. H. (1979). Macroeconomic Theory and Policy. New York, NY: Harper and Row, Publishers, Inc.

Nelson, C. R. (2006). Macroeconomics: An Introduction. Retrieved from http://faculty.washington.edu/cnelson/Chap11.pdf

Comments

Cliff M. Added Dec 16, 2017 - 7:08pm
I hope they are right but this appears to be more policy similar to what has failed to increase demand and economic growth in the recent past.
Jeff Michka Added Dec 16, 2017 - 7:12pm
Cliff M sez: more policy similar to what has failed to increase demand and economic growth in the recent past. -What?  You don't think trickle-down economics will work, like it has in the past?  No faith, Cliff.  LOL
Dino Manalis Added Dec 16, 2017 - 7:22pm
Business tax cuts are essential to improve economic conditions, but the personal tax cuts are muted and questionable.  Subsequently, we definitely need careful long-term deficit reduction and elimination that President Clinton credited for prosperity in the Nineties.
Dr. Byron A. Ellis Added Dec 16, 2017 - 7:23pm
Why was the GOP deficit hawks during the Obama administration, relentlessly preventing fiscal spending and under the Trump administration deficit doves? A clear indication that it is not about economics and not even politics, it's about upward redistribution to contributors.
Cliff M. Added Dec 16, 2017 - 7:28pm
Without demand these gains will not be invested to grow the economy. Without income gains from job growth demand will not increase. This has been the main problem which continues to fail to be addressed.
Jeff Michka Added Dec 16, 2017 - 7:41pm
Dr. BAE sez: A clear indication that it is not about economics and not even politics, it's about upward redistribution to contributors. -There had to be a payoff day, right?  How else will they fund themselves?
Cliff M. Added Dec 16, 2017 - 7:59pm
Dino, Didn't Clinton raise taxes?
Dr. Byron A. Ellis Added Dec 16, 2017 - 8:06pm
Dino Manalis' comment that business tax cuts are essential to improve economic conditions, but the personal tax cuts are muted and questionable, is interesting. First, I would like his explanation as to how business tax cut affects demand and why personal tax cut are questionable. Since, he seems to be arguing that business drive demand, akin to Say's logic. Say argued that supply creates its own demand, but the Great Depression disproved the efficacy of Say’s Law; it demonstrated that supply does not automatically create its own demand.
 
Even A Broken Clock Added Dec 16, 2017 - 9:56pm
Pushing on a string - that's what deficit and debt is doing to the economy right now. Running a deficit is an inefficient way to stimulate demand, and borrowing money domestically for a corporation to buy back shares while leaving the free cash flow in another country does nothing for domestic demand. My prediction is that 85-90% of all cash repatriated through this tax plan will be used for one of 3 purposes:  Debt repayment; dividend increase: and share buybacks. Very little will be used to invest to grow market share or capacity.
Cliff M. Added Dec 17, 2017 - 9:30am
We have reached a conundrum in the American economy. Growth will not occur without an increase in demand. Demand will not increase without investment in growth.With the current economics tilted highly in favor of most income gains going to the top who are not interested in investing in the growth needed to increase demand what can be done?
George N Romey Added Dec 17, 2017 - 11:19am
EAC is right. Corporations are out for the fast buck and ginned up share price. It immediately pumps up C level pay. None to little of that money will be used for innovation other than advancing “labor saving” technology.
Bill H. Added Dec 17, 2017 - 12:21pm
If anyone actually thinks that the "excess profits" for corporations will be used to either improve infrastructure, quality, service, or increase wages, then I have a bridge I will sell you.
Most U.S. corporations are saying they would use a tax reform windfall to buy back shares, retire debt and other shareholder-friendly moves, in recent post-earnings calls with investors and securities analysts.
If any of the windfall is actually spent on infrastructure, it would probably be in overseas operations.
This tax cut will only benefit those way up on the top at the expense of the majority of American citizens. Ironically, Trump's voter base will be hurt the most as has been the case with most of what he has been proposing to accomplish.
George N Romey Added Dec 17, 2017 - 1:27pm
Bill not to mention to acquire competitors and investing in “labor saving technology”.  Both actually continue to destroy jobs.
 
Here’s  America in 2030. An over the top economic elite, a small middle class that maintains the machines and serves the needs of the wealthy (personal trainer, chef, make up artist), the working poor and the unemployable. The last category will be the latest edition. Outside of the rich zones will be a very scary US. It’s already happening in my town Miami.
Bill H. Added Dec 17, 2017 - 3:43pm
Yup, see it here George.
All of these younger people that were told to major in computer science and other related fields living back with their parents as they watch these promised "jobs" disappear overseas, be replaced by robots, or be filled by people from overseas thanks the H1-B Visa program.
Someone else here on WB actually wrote a recent article trying to justify how good automation would be for all of America (??). I wrote a comment disagreeing with him and it appears he deleted the article. Did you get a chance to read it before it was deleted?
Hamilton Added Dec 17, 2017 - 4:08pm
Bill H,
On your initial point, whether realizing it or not, you swerved into the justification for eliminating the corporate tax altogether, and the realization that it was a bad idea from the beginning. So many corporations, as a matter of tax policy, dodge taxes by dumping out their coffers in October or thereabouts. The corporate tax is just another of the myriad of taxes that our greedy government created to get more money. Makes sense, right? Create more and more taxes and on balance, even with tax dodges, some of those taxes will stick and get paid. Instead of all that gangster psychology, why not require that every year, corporations dump out their profits in the form of worker compensation and/or capital improvements to the business, and then tax the People only? As far as I'm concerned, we need an ownership society in which everyone pays taxes and therefore, when going to the polls, everyone will be voting for politicians who will cut government and thereby reduce costs and taxation.
 
Hamilton Added Dec 17, 2017 - 5:18pm
Dr. Byron,
You present debatable economic principles for which, I imagine, you would get arguments from your peers. If you say increasing "A" will decrease "B", a colleague of yours might be 180 degrees opposite.
 
Without intending to criticize here, when I read what you wrote, I concluded that you're so far into the weeds of economic cause-and-effect, that you've missed the elephant in the room, so to speak.
 
Some salient facts (although not all of them I'm sure) are as follows:
1) We are around 230 years old now, i.e. 230 years of government expansion. We've been paying for that in solvent exchanges between the government and taxpayers, but also in the creation and growth of our national debt. ($20T now).
2) 223 years ago, James Madison objected to a congressional outlay of $15000 for the benefit of some French refugees, by saying, "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents." It was arguably that outlay which served as the ugly precedent for all manner of illicit government outlays from then until now, which has only served to burden taxpayers and grow government.
3) The federal government now regulates just about everything that happens here in America, with the states following suit, imitating the federal government as an adolescent monkey would imitate a parent. I used to work for an industrial sewing machine manufacturer and have personally seen a 2" thick hard-bound government book of stitch regulations.  All these regulations require staff and periodic, if not annual, attention and updates.
 
Whether we have tax cuts is almost immaterial if we never succeed in reducing the size and cost of government. My point is that this nation needs to cut its government spending, institutionally. We will never retire our debt unless our annual deficits begin to become negative numbers, consistently. And the greedy SOBs in government will continue to come after the wealthy minority's income while absolving the "poor", in wide income ranges, from taxation, until there's a sea change attitude adjustment in congress. And we'll continue to have a reckless, irresponsible congress and a growing dependency class of citizens and noncitizens.
 
Cliff M. Added Dec 17, 2017 - 6:12pm
Hamilton,  I do not understand how you are for reducing  the size and cost of government on one hand while on the other support funding the MIC corporate interest's and their shareholders which is by far the largest expense and still growing out of control.
George N Romey Added Dec 17, 2017 - 6:22pm
Yes Bill I did. It was a work of ignorance. Automation does not grow jobs, it’s purpose is to save on labor.
Jeff Michka Added Dec 17, 2017 - 6:40pm
I hate to write this, but Geo Romey is right when he sez: Automation does not grow jobs, it’s purpose is to save on labor. And even for that, it represents an investment that should go to the pockets of stockholders and C* structure.  Almost as good cost wise as a 20 something working for minimum wage.  You don't need techs and programmers to "work" "them." 
Jeff Michka Added Dec 17, 2017 - 6:43pm
 Cliff M asks: Hamilton,  I do not understand how you are for reducing  the size and cost of government on one hand while on the other support funding the MIC corporate-Hamilton is just another rightist that apparently lives for rightist "values" like primacy of the R donor class above ALL else. It part of his rightist narrative, he can't help himself.  LOL
Dr. Byron A. Ellis Added Dec 17, 2017 - 7:47pm
Mr. Hamilton, in not all cases increasing "A" decreases "B," as you claimed. For example, if "A" and "B" are complementary products, increasing "A" could also increase "B," such as razors and razor blades. The elephant in the room are tax cuts and their outcomes. Arguing that government expansion is a bad is an indication that you have not evaluated countries with contracting, stagnated or no governments; these countries are often unable to expand their infrastructure, defense capability and have low GDP growth.
Private industry will seldom, if ever, fund public goods, such as roads, airports, defense, elementary and secondary schools and so on. If you do not want the people's representatives (the government) to regulate social endeavors, are we to assume that they should not be any regularization?
It appears that from your vantage point, car owners should not be regulated, required to insure their vehicles; drivers should be able to drive on any side of the road and not obey stop signs. I do not think I went "far into the weeds of economic cause-and-effect" as you claimed. In fact, that is what the GOP legislators should have done, determined the cause-and-effect of their haste to reduce corporate taxes in an economy that is near full employment.
opher goodwin Added Dec 17, 2017 - 8:02pm
The rich get richer and the poor get poorer. And Trump makes millions!!
A. Jones Added Dec 17, 2017 - 8:40pm
Tax cuts reduce government revenue
 
A cut in the tax rate broadens the tax base and thus increases government revenue.
Cliff M. Added Dec 17, 2017 - 9:42pm
A. Jones, What just happened with the tax experiment that just failed in Kansas?
A. Jones Added Dec 17, 2017 - 11:01pm
Cliff M., What happened with the tax experiments in Florida, Arizona, Texas and Indiana?
George N Romey Added Dec 18, 2017 - 8:14am
Or like New Jersey that used accounting gimmicks to cut taxes and balance its budget. I’m not for higher taxes because our government will just spend it on expanding our military and dollar hegemony. Let the frickin deficit double to $40 trillion. None of it is ever going to be repaid. Dirty little secret is that the Fed is already monetizing the debt. Countries like Iran that want out of the dollar are threatened with total destruction.
 
But there will come a day when the Treasury and Fed can no longer run a board game economy.
Dr. Byron A. Ellis Added Dec 18, 2017 - 8:57am
A. Jones, please delineate the mechanism(s) of how a tax cut increases goverment revenues.
opher goodwin Added Dec 18, 2017 - 11:23am
A.Jones - tax cuts increase revenue - an oxymoron - or without the oxy?
Bill Kamps Added Dec 18, 2017 - 11:56am
When the government deficit increases, it crowds out private investments because the government as to borrow to cover expenses.
 
While this claim is often made, its validity isnt really certain.  When the government borrows money it issues bonds.  Saying that the buyers of US Treasuries would have otherwise invested in the private sector is unknown.  More likely, if the US bonds werent available, the bond buyers would have bought something else with a similar  investment profile, like German bonds, or Swiss bonds.   If the demand for US  bonds were low, interest rates would be rising, they are not.
 
Probably the worst part of this plan is the phase out of benefits for the average person over time.  Many of the benefits are phased  out over the next 6-8 years, so that the total cost of the plan can be minimized.  This is a rather cynical way to conduct policy, since the plan starts out looking good, and then gets less good with time.  It is another example of politicians creating a mess, that will later have to be cleaned up.
 
Economies are complex.  The results of complicated changes in the tax code are unpredictable.  First the changes often give with one hand and take away with another.  However, the cut in corporate tax rates will benefit corporations.  What percentage of the benefits will flow to shareholders, corporate executives, workers, communities, etc, is unknown and will vary by company.  Everyone with a 401K, IRA or retirement plan is a shareholder of some set of companies, probably large public companies, which will benefit from the tax cuts.
 
It is difficult to benefit the poor or even the lower middle class with tax cuts, because these folks dont pay income tax.  Some 40% of workers pay no income tax at all, they do pay the FICA part of the payroll tax, which is very regressive in nature.  You can give the working poor a tax rebate, and there is some effort to do that, though small. 
 
Is this a great plan, no.  It certainly gives most of the benefits to the rich, and to corporations.  The phase out part of the plan is bad idea in particular. The tax cuts targeted to people who have businesses like Trump is particularly poor politics, and poor optics.  It is just  a blatant way  for politicians to continue to feather  their own nests.
Bill Kamps Added Dec 18, 2017 - 1:15pm
George, Dirty little secret is that the Fed is already monetizing the debt
 
This is not a secret.  Any time the Fed buys bonds it is monetizing the the debt and adding the the money supply.  This is what it has been doing since 2008 on a large scale, some $3-4 Trillion at least.   They are now starting sell off some of those bonds on the open market.
 
George,  Countries like Iran that want out of the dollar are threatened with total destruction.
 
Iran does not use the dollar for transactions, it has been off the dollar for quite some time. US banks will not support transactions to and from Iran, and so it is very difficult for Iran to use the dollar.  Foreign banks in theory can do dollar transactions in Iran, but they generally are not doing it, because they dont want to annoy the US banks, and the favorable treatment they get from them.  I know people in Iran, and dollar accounts are impossible to create, so the only way to do a deal in dollars is first to get Euros, and then convert those to dollars with a European bank.   However, if you have Euros, you dont need to do the deal in dollars, because you can do the deal in Euros.  Any deal you can do with a dollar you can do with a  Euro.
 
 
wsucram15 Added Dec 18, 2017 - 4:17pm
George..learn how to grow your own food, you live in the perfect place for it. Its coming...the balloon can only last for so long.  It took Regan 5 tax increases to balanced what his cuts screwed up.  Then
Even though he reduced the government..he still spent more overall then we do today by about 2%. 
The tax cuts in Kennedy across all incomes had a slight increase until Johnson added ta high tax rate for high income earners with did both good and bad for the economy.  Reganomics, crushed the economy until taxes were increased 1982, 1983 and 1984 which was the best growth we had since 1961 and it fell from there.  1982 showed a negative growth rate which is the lowest chart I have seen. In the abstract 1984 was 6%.
 
Reagans second tax cut was just bad..causing us to have a recession in 1991 (-2% GDP) during the Bush 43 presidency. We were at -2% GDP when he left office. 
Clinton raised taxes after that for the top margins and fixed the growth rate to a more steady mark, except for 1995 in which it dipped somewhat. He got it at -2% and kept it at 2%-3% for most of his Presidency.
 
Bush 44 tax cuts- 27% (top tax rate 4.7%) his cuts were set over ten years (much like the ones currently) by Congress. They had two economically good years..2003-2005 and it began to dip. Eventually dropping to 0 and the great recession.
 
Obama raised taxes (by countering Bush 44s tax cut on upper margin)  and brought us out of recession but slowly and GDP never came above 2%.
 
I dont see cuts being the answer..but  we will see.
Dave Volek Added Dec 18, 2017 - 4:21pm
Dr. Ellis
 
Nice article with great logic. I was able to follow it quite well with my beginner's understanding of macroeconomics.
 
I see you have encountered the ideologues who have their own version of economics. It's a good think they are not running the show.
George N Romey Added Dec 18, 2017 - 4:41pm
Bill the Fed talked about reducing its balance sheet but since then has become mum. If the Fed sells off bonds then yes that forces up interest rates and maybe crowds out other investment. Most Americans are clueless to how the Fed was the real bailout not the piddly ass TARP. So far all that junk is still on the Fed balance sheet and they’ve never been forced to account for it at market value. The Fed has always been exempt for accounting standards.
Cliff M. Added Dec 18, 2017 - 6:42pm
Jones, Please inform me about the tax cuts in the states you mention.The Kansas tax cuts are currently in a state of repair by many of the republicans that voted for them. Please give me a reason for some optimism.
Dr. Byron A. Ellis Added Dec 18, 2017 - 9:09pm
Dave, thanks for your kind words.
Dr. Byron A. Ellis Added Dec 18, 2017 - 9:30pm
Bill Kamps, the validity of the crowding out effect is real. When the government borrows scarce money, it is not available to the private sector. 
A. Jones Added Dec 19, 2017 - 8:31am
A. Jones, please delineate the mechanism(s) of how a tax cut increases goverment revenues.
 
You're joking, right? When I posted earlier that a reduction in tax rates broadens the taxpayer base thus leading to an increase on overall tax revenue, what precisely did you not understand?
 
Earners have less incentive to under-report their incomes, or hide their incomes, or illegally avoid payment of taxes, or legally avoid payment of taxes when rates are low. When rates are high, the opposite tends to hold true.
 
However, an increase in overall tax revenue is contingent on government not increasing its spending. The Kansas state government increased its spending over the same years they cut tax rates. Bad policy.
George N Romey Added Dec 19, 2017 - 8:39am
Then how did the deficit and the debt double in the 1980s? Seems to me RR and Obama were one in the same on their views of government.
A. Jones Added Dec 19, 2017 - 8:42am
if the government reduces spending to accommodate the tax cuts, private sector suppliers of goods and services, as well as their employees, social security beneficiaries and so on will be adversely affected.
 
Only those private sector suppliers whose revenue was dependent on taxpayer money from government spending will be adversely affected. The additional money back in the hands of the taxpayers who earned the money in the first place would be spent on different private sector suppliers . . . or saved and invested, leading to additional economic growth in the private sector.
 
What changes with reduced tax rates is the pattern of spending/investing. But so what. That would occur anyway with ordinary changes in consumer tastes.
 
You're making the typical mistake in economics of only looking at one particular sector of the economy and not the entire system. Don't worry. Lots of people make that mistake; even Nobel laureates like Paul Krugman.
Bill Kamps Added Dec 19, 2017 - 9:09am
George, I dont disagree with what you say the Fed is doing, just that what they are doing is pretty widely known.  It is commented on pretty often in the financial press.   Does the average person who rides the bus to work know or care about this, no not really, but most people like you and me are well aware of it.
 
the validity of the crowding out effect is real. When the government borrows scarce money, it is not available to the private sector. 
 
I disagree.  The government is not borrowing scarce money.  People/companies/countries are buying US Treasuries as part of an investment plan.  It is not the case that if they dont buy low risk US Treasuries they will instead invest in start up companies.  Those do not have the same risk profile.  If an insurance company decides not to buy Treasuries because  they are too expensive, they will buy  some other bond instead, probably a bond from another relatively low risk country. 
 
Perhaps at the margin some may buy a high grade corporate bond, but often times they dont have that option, based on how their investment charter reads.  In any event they wont lend the  money to small businesses or start up businesses, these are too risky for most who buy Treasuries. 
 
Most private sector investments come with much more risk than US Treasuries.  In fact many institutions are chartered to buy US bonds because of the low risk.  They dont have the option of putting that money into start ups, or buying Tesla stock instead. 
 
If money was scarce, and the demand for US bonds was low, interest rates would have to be higher to attract the investors.  Interest rates are at historic lows, which says that there is high demand for US bonds and plenty of money is available.  If people want to lend money at very low interest rates to the US government, why not take it ?
 
Cliff M. Added Dec 19, 2017 - 9:23am
Bill, What does the convergence of interest rates of short and longer term treasuries signal? I am not sure what the relevance and possible ramifications are.
George N Romey Added Dec 19, 2017 - 10:06am
Bill traditionally its been part of an investment portfolio to have some portion of low risk, which traditionally was US treasuries.  I believe that with a near $21 trillion debt and massive deficits from now until the cows come home attitudes are starting to change.  When central banks enter the government debt markets interest rates get distorted just like when central banks enter the equities market (the Bank of Japan has a huge holding of US stocks).  That's the point of central bank interloping into markets, take away the natural direction of markets based upon perceived risk and reward. 
Bill Kamps Added Dec 19, 2017 - 10:32am
George, what you say is true to a degree.  However its not always straightforward.  Countries like Japan and China have large amount of dollars on hand from trading surpluses.  They have to put the dollars into something, they arent just going to box up $100 notes, and put them in a warehouse.  So Treasuries, and US stocks are convenient places to park their dollars.  Treasuries in particular, because they can be used to pay for transactions, stocks have to be more longer term.
 
Usually interest rates going up are a sign that things are becoming a problem. However, since interest rates can change faster then government policies, the  risk is that if you George are correct and problems are looming then the government may not be able to react.  On the other  hand people have been predicting problems for a long time, and so far interest rates are low, signally things are ok at the moment.
Bill Kamps Added Dec 19, 2017 - 10:48am
Cliff, traditionally when long term rates are lower than short term rates, it is a signal that there will be a possible recession.
 
Interest rates are a pure signal of supply and demand.  Normally long term rates are higher, because people need to be compensated for the risk of the longer term, and the effects of inflation over the longer term.  When short term rates are high, it  means there is high demand for short term notes, and that people find treasuries more attractive than capital investments.  They are avoiding the risk of capital investment, and this signals recession in the future. 
 
Right now the interest rate curve is not inverted, ( higher short term rates than longer term), but it is pretty flat compared to normal.
 
However, things are being distorted, some countries recently have had negative interest rates which is clearly an artificial distortion.  So it is possible we are getting an incorrect picture.  Interest rates have been held down by the actions of central banks all over the world by putting debt on their books.  George's comments are correct about what is happening, what is in debate is what will be the result and when it might happen.
 
Its possible that short term rates are fine, but the long term rates are being held down because central banks are buying their own bonds, and keeping demand for the long term notes high, and rates low. 
 
Certainly the actions of central banks are unprecedented.  They have never before created so much debt, and this distorts the market and the signals it gives.  All central banks can create money to pay their debt with their own currency, the issue is whether people will accept their currency.  For example, few places will accept the Russian Ruble in payment, while nearly everyone will take the  US Dollar and Euro.  This puts the Russians at a big disadvantage, compared to the US and Europe.  The Russians cant create Rubles to pay all their bills, the US and Europe can, for now.  Worse are countries with even less convertible currencies like Mexico, or even worse Zimbabwe. 
 
George's contention is that people may not always accept the dollar.  Its possible, but doesnt seem likely in the short term because alternatives are much  more risky  than the dollar or euro. 
Cliff M. Added Dec 19, 2017 - 12:41pm
Bill, Thanks for the enlightenment. The real question I have with interest rates so low for so long why has inflation remained so low. If all of this money was in play "in the economy " wouldn't inflation haven't done more than inflate wall street?
Dr. Byron A. Ellis Added Dec 19, 2017 - 1:27pm
One way of controlling on the trillions of dollars given to banks is to pay them interest on reserve. Thus, removing the incentives for banks to lend to the public. 
Cliff M. Added Dec 19, 2017 - 1:54pm
Dr., Out of all off the trillions given to the banks including o interest loans how much do you think actually got back into the main street economy? And now these tax cuts appear to be more of the same payback.
George N Romey Added Dec 19, 2017 - 3:04pm
Cliff inflation remains low because demand is low. Just look at retail. Pricing has collapsed because people either buy more on demand or when things are cheap. It’s happening on the wholesale end too. And yes technology has made pricing transparency much easier.
 
Unfortunately as the 1930s showed its extremely hard to stop the never ending snowball effect. Unlike 1941 we have no conventional world war to halt the slide. I’m not sure what the answer is.
 
As far as the trillions. Most went back to the Fed in which banks get paid interest on cash balances. A chunk went to corporate America to buy back stock and cover acquisitions. Little went to small business.
Dr. Byron A. Ellis Added Dec 19, 2017 - 8:20pm
Cliff M., money gets into circulation through the credit channel (loans).  Table CB11, Federal Deposit Insurance Corporation Loans and leases, indicate that net loans and leases were about $6.7 trillions in 2008 and about $8.5 trillions in 2016. So, banks created about $1.8 trillions in loans, but the initial loan amount would be less than $1.8 trillions, due to fractional-reserve banking.
Dr. Byron A. Ellis Added Dec 19, 2017 - 8:36pm
Bill K, economists arrive at crowding out based on the national income accounts, where they view gross domestic product (GDP) as a flow of either product or income, c + i + g = y = c + s + t. By rearranging these variables, they arrive at the saving-investment balance equation, so that i + g = s + t and by moving government spending, g, to the right, we have i = s + (t -g). That is, investment is equal to savings, s, plus taxes, t, minus g. As you can clearly see, if taxes are less than government spending, private investment will be crowded out.
A. Jones Added Dec 19, 2017 - 9:01pm
with interest rates so low for so long why has inflation remained so low.
 
People aren't borrowing the money.
 
If all of this money was in play "in the economy " wouldn't inflation haven't done more than inflate wall street?
 
The money isn't in play.
 
In order for the aggregate price level to inflate, three things must occur:  1) an increase in the quantity of available money or credit; 2) an increase in borrowing and spending; and 3) the quantity of money and the increase in spending must outpace any increase in production (i.e., if a tech revolution vastly increases production, the ensuing increase in the supply of goods will mask the inflation. Prices, however, would still be higher than they otherwise would be had the quantity of money or credit not been increased).
 
The additional money doesn't even have to be borrowed first. If a clever counterfeiter printed a billion dollars and spent it all on luxury items — and assuming there was no increase in production in the economy — a billion new fiat dollars would be injected into the economy and prices would begin to rise as other people acquired the counterfeiter's money and re-spent it. If there had only been a billion dollars in play before the counterfeiter injected his own billion, then the quantity of money in play will have doubled (two billion dollars now in play). As the counterfeiter's money is re-spent and re-spent again, the "aggregate price level" must roughly double — and there's your price inflation.
 
An increase in the quantity of money or credit is necessary but not sufficient for price inflation to occur.  Increased spending and static or sluggish rates of production must also exist.
 
The important point to remember about inflation is not just that it "increases prices". The important point is that it distorts prices, making them different from what they otherwise would have been had there been no inflation. The distortion in prices translates into a distortion of productivity: large clusters of investment errors in the basic economic resources of land, labor, and capital. Those clusters of investment errors are called a "recession" (or a "depression" if large enough).
 
That's why there are only two remedies: 1) let the clusters of errors sort themselves out, investor by investor, business liquidation by business liquidation, etc. (think of this as going "on the wagon" after the inevitable hangover period caused by a night of heavy drinking); or 2) re-inject more money in "play" into the economy, i.e., re-inflate, incentivizing producers to borrow and spend again (think of this as taking some of the "hair of the dog that bit you" to counter the hangover). This last is politically more acceptable (it makes government appear as if it's "proactive" and "caring") and thus more popular but it's obvious that it simply leads to another inevitable cluster of mistaken investment errors some time later — preferably during someone else's presidential administration, so that the recession can be blamed on them rather than on previous policies from previous administrations.
Dr. Byron A. Ellis Added Dec 19, 2017 - 9:26pm
The banking system can also prevent monetary expansion and hinder economic recoveries by hoarding reserves. The U.S. Congress in 2006 passed legislation that gave the Fed authority to pay interest on reserve (IOR) balances beginning in October 2011. However, the effective date for paying IOR was moved up to October 1, 2008 by the Emergency Stabilization Act of 2008. Thus, Congress provided an incentive for bank hoarding by passing legislation allowing the Fed to pay interest on reserves. If IOR was not in effect, banks would incur a cost for hording money. The Fed requested that Congress enact legislation for paying IOR, as a tool for controlling inflation or limiting job growth.
 
Hamilton Added Dec 19, 2017 - 10:20pm
Cliff M,
And Jeff Michka is another cowardly Leftist who simply pidgeon-holes people with whom he disagrees because he's too afraid to take a stand and justify that stand.  Perhaps you're not like him.
Hamilton Added Dec 19, 2017 - 10:46pm
Cliff M,
You asked,  "I do not understand how you are for reducing  the size and cost of government on one hand while on the other support funding the MIC corporate interest's and their shareholders which is by far the largest expense and still growing out of control."
 
If I understand you correctly, the MIC refers to our total military spending. Looking at our 2015 budget as a representative example, we have the following:
SS, unemployment and labor = 33.26%
Medicare and Health = 27.42%
Military  = 15.88%
 
So at 15.88%, the military is not the largest expense. And, if you combine the SS, unemployment and labor with the medicare and health, because they're all health and human services related, they represent 60.68% of our budget. That's pretty spectacular, given that the Constitution specifically mentions that the government is supposed to raise an army whereas it doesn't specifically mention health and human services expenses.
 
Yes, I'm in favor of shrinking government and that 60.68% is the place to start. If there's corruption in the military budget (if SOBs are getting rich off it), then we should eliminate it, prosecute the a'holes and put them in front of a firing squad. I could use the practice. But to downgrade the military because of the corruption in there would be like throwing the baby out with the bath water.
 
Cliff M. Added Dec 19, 2017 - 10:55pm
Hamilton,  I just try to be pragmatic and try to understand what works and what does not. It just so happens the current economic policy is a pretty sweet deal for the top of the food chain while not for most. I would like to see something a little more even handed. The current store bought economic policy is an insult to the majority of Americans.
Cliff M. Added Dec 19, 2017 - 11:04pm
I hope I'm wrong but it appears putting a positive spin on this latest take the money and run tax scam will be equivalent to putting whipped cream on shit.
Hamilton Added Dec 19, 2017 - 11:20pm
Dr. Byron,
 
My "A" and "B" was an analogy which you completely missed. I was pointing out that your arguments are highly debatable even among your fellow economists. The answer America needs won't be found in an economics book or in a lengthy, protracted debate over deductions, exemptions, tax rates, and sunset provisions. The fact that that's our status quo IS the problem. We have a government that has evolved into a massive behemoth of conflicting priorities, many of which are extra-constitutional and have been added in error, IMHO, stretching back incrementally for around 200 years or more. Witness this government's budget. Witness our incomprehensible tax code. Witness the fact that Americans fear the IRS more than anything else in this life.
 
I don't need to evaluate "countries with contracting, stagnated or no governments" in order to support a reduction in the size and scope of our own government. Our society is virtually completely different from all other nations on the planet because of our constitution and our bill of rights. To compare us to other nations doesn't help. It's not even like apples and oranges. It's more like apples and potatos.
 
There's also no reason for you to conclude that I don't want anything regulated - but stitches? - and no reason for you to conclude that I don't want a government or that I don't want our government to spend any money.  I want a government, and I realize that we need taxes to fund it, but I just don't want a government controlled by swamp creatures.
 
I just think we have to realize the results of the passing generations of politicians and realize that they have grown government. Government is full of dreamers who sit back and think of nice things the government could provide to the people. Perhaps it's because some people enter government to do good things, or that some people enter government because they want to control things. The end result has been a series of bad precedents which include the government redistributing taxpayers' money over to nontaxpayers. That is not a community expense. What some see as "the right thing to do" is essentially an immorality closer akin to larceny.
 
I suggest you put your economics books on the shelf for a spell and begin to look at the human factors - the motivations for why people enter government and what has become a free-for-all of politicians promising their constituents their piece of the Treasury pie.
Flying Junior Added Dec 20, 2017 - 2:12am
What will happen in the next couple of days will bring about the largest debt ever owed by any nation in the history of the world.

Even if this destructive bill is repealed in 2021, it will have been in place for four years. God help the seniors on Medicare. Ryan is not ashamed to admit that he will seek further cuts to SS and Medicare.

We are not dealing with a problem in Argentina or Puerto Rico or even the debt owed by the state of California.

The national debt of the United States is already more than double that of any other debtor nation. What once was, or possibly may still be the largest and most powerful economy in the world will descend into an unsustainable debt that simply defies repayment. To simply continue to service this massive debt will cripple the economy.

This is not what was intended to happen. Our favorite republican Bill Clinton had steered us into a national surplus. That would have been the first step towards repayment or debt reduction. Clearly in an economy as large as that of the U.S. some debt can be sustained and in certain times is needed to keep the ship of state and its peoples safe from the rocky shallows. The theory that a national debt is a healthy component of good governance seems easy to disprove today.

President Cheney led us into the modern age of tremendous debt. Obama used federal treasure judiciously to plot a correction course. Unfortunately, with our military commitments and other imbalances, federal spending remained extremely high. Yet the deficit itself was reduced.

What will happen next is unprecedented. No one really knows what the future will hold for the United States or for our many allies and friends. There will be hell to pay. But that's simply not important to Paul Ryan and the monster. There may be hard consequences. Creditors have rights.

Just like causing the next great depression is similarly a matter of small consequence.

It just doesn't make sense. Every one of you down to the last man or woman cry to the heavens about the debt increase under Obama. Yet you support this suicidal tax plan.

It's some kind of death wish mentality.
opher goodwin Added Dec 20, 2017 - 3:14am
I see - the USA borrows huge amounts of money that it gives to the large corporations in the hope that they use some of this to expand and invest so that it stimulates the economy.
The hope is that the CEOs won't just pour this cash into their own pockets or take it offshore.
We give tax reductions to others in the hopes that they will declare more of their income and that will broaden the tax base and actually bring more money in.
Good luck.
George N Romey Added Dec 20, 2017 - 8:09am
Ultimately the US will either monetize all of the debt by the Fed or simply print what is needed to fund the shortfall. There are developing too many potentially lucrative opportunities with the Belt and Silk Road initiatives for investors to dump money into riskier treasuries that will pay next to nothing.
 
The question how long will the US get away with that strategy?
Dr. Byron A. Ellis Added Dec 20, 2017 - 8:22am
Mr. Hamilton, I appreciate your views and they are helpful in our attempts to achieve common ground and advance peaceful and productive societies. It is, however, unacceptable to dismiss the quest for learning. Economics is both normative and positive. Normative deals with evaluating the ways things (interactions) ought to be and positive deals with the way things are. Your position appears to be more normative than positive and that's how changes are introduced. An example of a positive economics is the normal demand curve that tells us that as the quantity of a good falls, its price increases. This is an observable phenomenon that is reflected in books as the demand schedule. 
The problem with government is not that there are too many academics. Rather, it is the lack of administrative capacity, which comes from learning best practices. Many individuals in the USA place little or no value in academics and could care less about best practices emanating from abroad. In essence, they think that the USA is the center of the universe.
A. Jones Added Dec 20, 2017 - 8:33am
In essence, they think that the USA is the center of the universe.
 
Whereas, academics are quite sure that the center of the universe is at Harvard.
 
Rather, it is the lack of administrative capacity, which comes from learning best practices.
 
Both theory and history strongly suggest that the best practice for a peaceful, prosperous commonwealth is to have as small and limited a capacity for administrative interference in people's daily interactions as possible.
A. Jones Added Dec 20, 2017 - 8:35am
the motivations for why people enter government and what has become a free-for-all of politicians promising their constituents their piece of the Treasury pie.
 
That's actually a well established sub-discipline of economics. It's called Public Choice Theory.
Bill Kamps Added Dec 20, 2017 - 8:44am
Bryron, the equation you display is very simplistic, and the economy is not.  First the potential buyers are international, so we are looking at international GDP.  Second the world wide money  supply is not fixed, many governments, including the US are busy creating more money, which adds to the amount available.
 
Most important, because money is fungible, we think that investments in A(treasuries) can be easily traded for investments in B(growth opportunities), if A is not available or too expensive.  That isnt really true.  Money targeted for US Treasuries, is not taking money away from startup companies, or investments in small businesses.  Money targeted towards Treasuries, is targeted towards very liquid, very low risk places to park money.  If the US government restricts the supply of Treasuries, then interest rates will go down, and people will find other very liquid very low risk places to park their money.  They wont just go to other investments in the US necessarily.
 
So while money is fungible, not all investments are fungible, and they dont all have the same risk profile.
A. Jones Added Dec 20, 2017 - 8:56am
I would like to see something a little more even handed.
 
For example?
Bill Kamps Added Dec 20, 2017 - 8:59am
Cliff, inflation is low, because we have spent the past few decades moving production into the lowest cost countries and locations.   Therefore wage growth is low.
 
George says demand is low.  One can always argue that demand is lower than it might be if the economy were growing faster,  so that could be part of it.  But the US is making more cars than it ever has, so demand cant be THAT low.  World wide production of stuff is higher than it ever has been.  So if demand is low, who is buying all that stuff?
 
However, there is very little pricing power in the market place.  Most companies cannot raise the price of their stuff, they have to find a lower cost way to produce it, to make more money.  This has been going on for some time, and is one of the reasons for George's daily rants. 
 
Rather than say demand is low, I would prefer to say that competition is very high.  If you cant make a product for the lowest possible price, someone else will. 
 
Competition is high because we now have more countries that have industrialized.  If the price of steel in the US is too high, you can buy cheap steel from China, South Korea, Brasil, etc.  Often countries are subsidizing these prices. 
 
It used to be that when countries added to the money supply, they created inflation.  However, if when you add to the money supply, you subsidize the price of steel, farm goods, and other products, you are holding prices down with the new money you created. 
 
Economies are very complex and have gotten more complex as there are now more players in the industrial economy.  There is always more than one possible explanation for things, and the resulting economy is the mix of a great many cross currents.   So many forces are acting at the same time.   Anyone who presents a single, simple reason for things, doesnt appreciate the cross currents that are running in the economy.
A. Jones Added Dec 20, 2017 - 9:01am
Florida, Arizona, Texas and Indiana?
 
They all cut tax rates and increased their total tax revenues as a result. They did this by not increasing their state spending.
 
I'll point out, however, that the rationale for cutting tax rates is that it returns wealth to those who have earned it, to spend or invest as they please. The rationale for cutting tax rates is not that it helps swell government coffers. Governments will misspend it anyway.
A. Jones Added Dec 20, 2017 - 9:11am
the cut in corporate tax rates will benefit corporations.  What percentage of the benefits will flow to shareholders, corporate executives, workers, communities, etc, is unknown and will vary by company. 
 
Whether corporate tax rates are high, low, or in the middle, doesn't affect corporations at all. Corporations, per se, don't literally "pay taxes." That's a myth. Corporations collect taxes, and the payments are made by individuals affiliated with the corporation: the taxes are paid by means of reducing benefits or wages to employees; or the taxes are paid by reducing payments to shareholders. All of the empirical evidence points to that.
 
Your statement that all of this is just one big "unknown" is false.
A. Jones Added Dec 20, 2017 - 9:32am
https://en.wikipedia.org/wiki/Rahn_curve
 
The Rahn Curve plots economic performance (measured in GDP) vs. government spending (measured as a percentage of GDP). The result is an inverted, irregular "U" shape indicating that the optimal amount of spending vs. private sector performance is about 15%: enough to maintain a court system, a military, and state/local police forces. You don't need bloated positions like a "Department of Labor" or "Department of Agriculture" or "Department of Education."
 
Many European Union welfare states spend 50% or more of their private sector GDP on government. That goes a long way toward explaining their slow rates of growth (usually less than 1%) and high, long-term unemployment. New jobs and new wages come from new private-sector growth.
Bill Kamps Added Dec 20, 2017 - 9:35am
Jones, I have run multiple companies.  If my company's income tax is reduced, I have more cash at my disposal.  This assumes I sell the same number of products at the same price.  Your assumption is that I will reduce my prices because I dont need to pay the tax, that the tax I pay is simply at add on to the price I charge, like a sales tax.
 
I would agree with your statement regarding a sales tax.
 
Corporate income tax, is not like a sales tax, a simple add on to the prices I charge.  If my corporate tax rate is reduced, then some combination of things will happen.  Reducing my prices will only happen if the market place forces me to do it.  It might.  More likely some of that extra cash will go to more profits for the shareholders, some will go to hire people to expand the business, some goes to higher wages, some may be spent in the community for charities, etc.
 
In the end a combination of things will happen.  Since the benefits of a reduced corporate tax rate will vary a great deal between companies, and because all companies have very different needs for cash, the results will vary a great deal by company.
 
 
 
George N Romey Added Dec 20, 2017 - 10:28am
There is no compelling evidence that business owners will use tax breaks to expand the business organically and hire people.  Again, we've had the low interest rates of mankind over the past 10 years but where's all the expansion?
 
Bill, in many areas demand has been supported by lowering prices.  Have you've been into a Best Buy lately?  A couple of years ago I was on a project and got to talk with the CEO of HH Gregg, a now defunct electronics retailer that was in business for decades.  In our chat he was very vocal on how margins were getting crushed not only from online retailers but from consumers that just didn't have the kind of money to buy a $2K piece of entertainment equipment. 
 
Over the past five years I've done some contract consulting.  Number one complaint I hear from CEOs, CFOs, and COOs-pricing competition in order to sustain current sales levels.  From blood banks to fire fighting equipment.
 
 
 
 
 
 
 
A. Jones Added Dec 20, 2017 - 10:29am
Alan J. Auerbach, University of California , Berkeley and NBER (2006)
http://www.nber.org/chapters/c0065.pdf
"Who Bears the Corporate Tax? A Review of What We Know."
 
And,
 
Arnold Harberger, University of Chicago (1962)
http://www.uib.cat/depart/deaweb/webpersonal/amedeospadaro/workingpapers/bibliosecpub/harberger.pdf
"The Incidence of the Corporation Income Tax"
 
Both of these papers (the second one by Harberger being the seminal one that first inspired research in this area) conclude that individuals pay the corporate income tax (not a fictitious entity called a "corporation"), and that those individual are mainly the stockholders (i.e., the so-called "owners of the corporation's capital"). The reason the analysis is difficult is that often the owners of stock might not be individuals, per se, but rather other corporations and other institutions (e.g., pension funds). But to the extent that a tax burden can be traced back to individuals at all, research shows that it falls on the stockholders. Harberger wrote in his conclusion (page 23 of the above-linked PDF):
 
"I conclude from this exercise that . . . capital probably bears close to the full burden of the tax."
 
Other analyses have shown that while the tax incidence falls mainly on stockholders ("capital"), it can fall to some degree on "labor", i.e., on employees of the corporation, as well as on lower wages of new employees in other companies outside of a particular corporation, since the tax reduces the amount of capital available for investment in the larger economy.
 
Corporate income tax, is not like a sales tax
 
No one claimed that a corporation tax falls on consumers by raising the prices of products or services offered by a particular corporation.
Bill Kamps Added Dec 20, 2017 - 10:46am
Jones,  ok I would generally agree with that.  It is reasonable to assume that most of the benefit of the reduction of corporate tax would go to the owners.  They would get the benefit from increased dividends, and from higher stock prices. 
 
So when I said that most of the benefits would go to corporations, yes that means the owners of corporations.  However, it is still debatable what  percent that will be, and in fact since most corporations dont pay the 35% tax rate, the benefit will vary greatly from one  company to the next. 
 
When you said that the income tax is a pass through, I was confused in what you meant, since the sales tax truly is a pass through. 
 
In our chat he was very vocal on how margins were getting crushed not only from online retailers but from consumers that just didn't have the kind of money to buy a $2K piece of entertainment equipment. 
 
Margins are getting crushed, agreed.  He states online retailers and sluggish demand.  However demand online, is robust, so how much is failing demand is open for debate. If I were going out of business I might claim low demand as well.  Demand for cars is high, and number of housing sales just set a new record.  If cars are selling and homes are selling then it is difficult to say that a sluggish economy is the primary reason for low inflation.   But as I said, higher demand always helps prices, so that can always be a contributor.
Jeff Michka Added Dec 20, 2017 - 11:00am
Bill H notes: If anyone actually thinks that the "excess profits" for corporations will be used to either improve infrastructure, quality, service, or increase wages, then I have a bridge I will sell you.-But Bill, you must be a Commie if you don't think the tax cut to preserve the Republican donor class won't flow into the pockets of workers, increase hiring, and only benefit the Middle class, after all the Orange Turd sez it will.  He would never lie to his "base," now, would he?  LOL.  Wait until it comes to hurting people, there will be plenty of that.  After all, "those people" need to be hurt further, so white people can feel better about getting screwed without condoms or lube.  "Now you people take those low wage jobs!  We'll make sure "those people" lose all their food stamps and starve."
Jeff Michka Added Dec 20, 2017 - 11:00am
America: Fix it or f**k it.
Bill Kamps Added Dec 20, 2017 - 11:05am
pricing competition in order to sustain current sales levels.
 
George, no doubt.  We arent debating that inflation is low, and that companies have no pricing power.  I said that in the comments I made. 
 
We are debating why companies cant raise their prices.  We have many factors reducing the price of goods, including lower labor costs, greater automation, and more competition from overseas.  The online retailing is taking another cost factor out of the distribution chain. 
 
Both demand and competition enter into the equation.  It is a question of which is dominant.  However, demand cant be falling greatly if gross sales are rising, if car and home sales are at a record.  This is not 2009. 
Bill Kamps Added Dec 20, 2017 - 11:40am
Jeff true enough.  Pay raises will happen, when there is higher demand for labor, not when companies just simply make more money.   However, anyone who owns an IRA, 401K or some kind of pension plan is a stockholder, and will see benefits when the stocks of companies rise.  Granted it is somewhat of a secondary benefit since most people dont have large stock holdings.
 
Will the rich benefit more? yes of course.  It is difficult to give people massive income tax cuts when they dont pay a lot of income tax.  Most than 40% of workers dont pay income tax.  They pay all kinds of other taxes, like FICA, sales tax, and property taxes.  Want to help the lower middle class, reduce the FICA tax which is a very regressive tax.
George N Romey Added Dec 20, 2017 - 11:53am
Cars were selling at one time because of availability of subprime loans. No different from the housing market of the 00s. Online retail is soaring because of change in shopper habits and availability of merchandise but retail as a whole is sucking wind, even traditional retailers that have a strong online presence like Macy’s.
Cliff M. Added Dec 20, 2017 - 1:53pm
Cars are selling but loan delinquencies are also climbing. Average life of used cars are about 12 years old and need replacement.Cars are a need for most and not an option. Most of the homes selling are higher priced.
A. Jones Added Dec 20, 2017 - 2:04pm
It is difficult to give people massive income tax cuts when they dont pay a lot of income tax. 
 
You're claiming the wealthy don't pay a lot of income tax?
Cliff M. Added Dec 20, 2017 - 2:04pm
Bill K,  The fica tax is one of the biggest for low income earners. Self employment tax is one of the largest taxes thrown on the gig economy.At 15+% is one of the largest expenses that is extremely difficult for the self employed to get around. As a self employed carpenter I have payed a small fortune in self employment taxes over my career. I hope raising the fica tax like Reagan did or cutting benefits which aren't that much now don't get involved with the latest tax cut scam.
Cliff M. Added Dec 20, 2017 - 3:21pm
Jones, I was looking into your Florida tax cuts. Before Scott cut taxes in 2015 there was close to a 1 billion surplus. Now there is a 1 billion deficit looming for 2018. Smells familiar.
Cliff M. Added Dec 20, 2017 - 5:55pm
It appears these tax cuts are little more than legal extortion by our elected officials.
A. Jones Added Dec 20, 2017 - 11:09pm
Before Scott cut taxes in 2015 there was close to a 1 billion surplus. Smells familiar.
 
I'm  afraid the only thing that smells familiar is your hasty research. That's what you get for merely "looking into" an issue rather than studying it.
 
Before Scott cut taxes (when he first entered office in 2011), budget officials were projecting a shortfall of $3.7 billion, i.e., they were projecting that Florida would have to spend $3.7B more than what they projected taking in as revenue. The shortfall was actually projected at $3.6B but then the state legislature voted to increase the states "General Revenue Fund" (basically, a cash-holding slush fund culled from tax revenues) by $1B, making the total shortfall $3.7B.
 
Florida's state constitution forbids deficits and mandates a balanced budget, so governor Scott began his tenure in office by slashing as much state spending as possible in order to balance the projections. As the fiscal year progresses, if the state legislatures notice that an actual deficit is beginning to creep in, they make "micro-adjustments" (usually by cutting some spending) where they can in order to comply with their constitution. The result was a surplus of $1.2B. That surplus was accomplished by cutting spending, not by raising taxes. That surplus also did not include any siphoning away into a "General Revenues Fund".
 
During Scott's administration from 2011 to the present, Florida state spending increased by more than 10% while cutting many taxes. The overall result has been "slim" budget deficits (the latest was $52 million) wiped out mainly by Hurricane Irma this past September.
 
The Florida legislature obviously has a spending problem (as do most governments, whether local, state, or federal) but the result of Scott's persistent tax cuts has been similar to President Reagan's tax cuts: robust growth in spite of increased spending and threats of shortfalls, including growth in revenues.
 
This paper ranks all 50 states according to a broad range of criteria in order to assess their fiscal health:
 
https://www.mercatus.org/system/files/norcross-fiscalrankings-2017-mercatus-v1.pdf
 
Page 28 of the PDF lists the states' overall fiscal condition (with the several criteria weighted in different ways to reflect the short-term condition, while unweighted reflect the long-term). The weighted scores for fiscal condition lists as the top 5 the following:
 
1. Florida
2. North Dakota
3. South Dakota
4. Utah
5. Wyoming
 
Unweighted, the top 5 are the following:
 
1. Nebraska
2. Oklahoma
3. South Dakota
4. Florida
5. Tennessee
 
In a later part of the above-linked PDF, Florida is listed as having the best "long-run solvency."
 
FYI, the three states ranked last for fiscal condition, both short-term (weighted) and long-term (unweighted) are Massachusetts, Illinois, and New Jersey.
A. Jones Added Dec 21, 2017 - 12:48am
Regarding tax revenues in Arizona since tax cuts have been implemented, total revenues between 2010 and 2016 were as follows:
 
2010 - $11.0B
2011 - $12.3B
2012 - $13.0B
2013 - $13.6B
2014 - $13.1B*
2015 - $13.8B
2016 - $14.3B
 
Except for 2014, the trend has been up as tax rates have gone down.
 
Whether or not there were "shortfalls" in any given year is irrelevant — it's certainly not always possible for the coffers (however obtained) to keep pace with state spending. What's relevant is that cutting taxes increased the taxpayer base and thus increased revenues.
 
Data are from the Annual Reports of the Arizona Department Of Revenue (AZDOR.GOV)
Cliff M. Added Dec 21, 2017 - 8:02am
Jones, What's you take on this new tax cut plan that increases taxes on states that make the largest revenue contributions ? I am from New Jersey where a whole lot more revenue is given to the treasury than is received in return.New Jersey along with many of the other states that contribute the most are high cost of living states. Won't this approach have a negative effect on the tax base.
George N Romey Added Dec 21, 2017 - 8:33am
Florida unlike most states derives a hell of lot of revenue from sales tax due to tourism. It’s why we pay no state income tax. In particular over the past 10 years a huge influx of tourists to Southern Florida, Orlando and more recently The Panhandle from South America, Europe and Asia has brought a nice chunk of change into the state coffers.
 
Id take my hat off to the Office of Tourism. And it has become popular for rich South Americans and Europeans to have 2nd homes in Florida.
George N Romey Added Dec 21, 2017 - 8:34am
Cliff didn’t Christie play accounting games to make the state finances look much stronger than they really were?
Dr. Byron A. Ellis Added Dec 21, 2017 - 9:33am
Demand is a function of income and prices. Citizens with higher incomes demand more goods and services than those with lower incomes. When a nation's policy suppresses jobs and wage growth, individuals income (wages) and hence their demand for goods will be less than it should otherwise be. Moreover, the nation will be saddled with an army of discouraged and unaccounted unemployed workers.
Bill Kamps Added Dec 21, 2017 - 9:39am
it is difficult to give people massive income tax cuts when they dont pay a lot of income tax. 
 
You're claiming the wealthy don't pay a lot of income tax?
 
No I cam claiming it is difficult to give low income people an  income tax cut, because the bottom 45% of W2 earners pay no income tax.  I stated this in previous comments.  So yes the wealthy got the income tax cuts, because they pay income tax.
 
If we want to help those at the bottom, they need to have the FICA part of the payroll tax cut.  That is a very regressive tax.  Im not saying whether this is good or bad policy, just from the math this is the only way to cut their taxes, other then a rebate, which this tax bill does do, but it isnt very large.
 
George, Cars were selling at one time because of availability of subprime loans. 
 
Yes but there are no more subprime loans, and NOW, THIS YEAR, both car sales and home sales are setting records.  This is not a sign of a failing economy.  I will grant you the economy is not perfect, but it cant be failing under these circumstances.  Someone is buying the cars and homes, and all that stuff in the internet.  So there is demand, but I agree margins suck for a number of reasons.
Cliff M. Added Dec 21, 2017 - 9:58am
George,  Here's a good one for you. The state sued exon for polluting the meadowlands. The court awarded a settlement of over $200 million dollars. Christie settled with Exon for $8 million. Cleanup from hurricane Sandy was extremely political.If you did not support him help was denied. The whole bridgegate scandal was because the mayor of Fort lee was asked to support him and he chose not to.Christie's big battle was to try to fix his budget by cutting public sector pensions.Hoboken was denied help from Sandy because they chose not to support him.He also canceled building a new tunnel under the Hudson to midtown that was well under way . The tunnel was a Port Authority project. He took the remaining funds and used them on the Pulaski Skyway which was not part of the Port Authority. This was supposedly illegal.He is leaving with the lowest favorability rating of any governor on record.He did Nothing to stimulate N.J. after the recession and a recovery lagged way behind the rest of the country. He is being replaced by a progressive democrat. Big change is coming.
Cliff M. Added Dec 21, 2017 - 12:32pm
During Reagan economic growth was created by mainly 2 major policies. Cutting taxes drastically and major government spending which tripled the deficit . One of his advisors ,Laffer was a proponent of the large tax cuts.He also stated that tax cuts would be effective if taxes were in the prohibitive range.A 70% top rate and a 46% corporate rate are arguably prohibitive.Currently they are much lower with minimal investment planned.
Dave Volek Added Dec 21, 2017 - 1:02pm
A Jones
I would say that the increase in tax revenue in Arizona is probably more due to an economy slowly recovering from recession.
Dr. Byron A. Ellis Added Dec 21, 2017 - 8:33pm
Often, the public only see fiscal policy as a mean for economic growth and of course politicians want the public to think that it is fiscal policy  (them) that create jobs. However, it is monetary policy that creates booms and busts. If we look at the Effective Federal Funds Rate graph (at https://fred.stlouisfed.org/series/FEDFUNDS) we will see that in every instance that the Federal Reserve remove money from the economy (raising interest rate), a recession occurs and when it lower interest rates (putting money in the economy), economic growth occurs. Cutting taxes does not put more money in the economy, it merely reallocates money from the government to others, in this case corporations and the wealthy.
A. Jones Added Dec 22, 2017 - 4:28am
I would say that the increase in tax revenue in Arizona is probably more due to an economy slowly recovering from recession.
 
If that were the explanation, you'd have to explain why other states with much higher tax rates (not to mention much higher spending) have not increased their overall tax revenues in spite of an overall improving national economy.
A. Jones Added Dec 22, 2017 - 4:31am
What's you take on this new tax cut plan that increases taxes on states that make the largest revenue contributions ?
 
I don't remember seeing that in descriptions of the new tax-cut plan. Below is a link to the bill. Can you point out the relevant section?
 
https://www.congress.gov/bill/115th-congress/house-bill/1/text
Cliff M. Added Dec 22, 2017 - 2:17pm
Jones, Mortgage interest deductions and state and local income tax deductions have been cut.Housing ,incomes and taxes accrued are much higher on the coast's and urban area's than many fly over states. These are a large part of many who can itemize.
A. Jones Added Dec 23, 2017 - 2:59am
Mortgage interest deductions and state and local income tax deductions have been cut.
 
"It keeps deductions for charitable contributions, property taxes, mortgage interest, and retirement savings. It limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren't affected."
 
https://www.thebalance.com/trump-s-tax-plan-how-it-affects-you-4113968
Jeff Michka Added Jan 1, 2018 - 5:41pm
This "tax cut" stuff was ran through with the goal of cutting and privatizing things like Medicare and Social Security by raising debt so the cry will be "get rid of the debt, nothing else matters.  THE GREAT REPUBLICAN WET DREAM: GETTING Medicare and SS TOTALLY DEPENDENT OF THE WHIMS OF THE STOCK MARKET.  Finally, getting FDR in his grave of shame they've wanted for decades.