IRS Audits, Economic Growth, and Climate Change Impacts

Tax Policy:

March 31: Income Taxes for All? Rick Scott Has a Plan, and That’s a Problem

Senator Rick Scott of Florida, the somewhat embattled head of the Senate Republicans' campaign arm, said one utterly indisputable thing on Thursday when he stood before a packed auditorium of supporters at the conservative Heritage Foundation: His plan for a G.O.P. majority would make everyone angry at him, Republicans included.

“Washington’s full of a bunch of do-nothing people who believe that no conservative idea can ever happen, nothing will change for the better as long as they’re in charge, and that’s why we’re going to get rid of them,” the senator said, ambiguous about who exactly “they” were. "So Republicans are going to complain about the plan. They'll do it with anonymous quotes, some not so anonymous. They'll argue that Democrats will use it against us in the election. I hope they do."

Mr. Scott's plan has allowed Democrats to talk about the alternative: what Republicans would do with power. Fellow Republicans are not rushing to embrace Mr. Scott's plan.

In Arizona, Jim Lamon, a Republican seeking to challenge the Democratic incumbent, Senator Mark Kelly, first called the plan "Pretty good stuff" only to have his campaign retreat from that embrace. Senator Marco Rubio, Republican of Florida, said of the plan, "It's good that people offer ideas." His Democratic challenger, Representative Val B. Demings, nevertheless ran an ad on social media accusing him of embracing it.

At a Republican Senate debate in Ohio on Monday, the current front-runner, Mike Gibbons, called the plan "a great first draft in trying to set some things we all believe in," adding, "The people that don't believe them probably shouldn't be Republicans."

March 30: Taxpayer advocate urges IRS to use scanners to cut backlog

Collins wrote in a blog post Wednesday about the Taxpayer Advocate Directive she issued Tuesday, which urges the IRS to leverage optical character recognition, 2-D bar coding and other machine-reading scanning technology within the next two filing seasons. As of March 18, 2022, the IRS still has 15 million tax returns backlogged from the 2020 and 2021 filing seasons, she noted.

"Scanning technology would speed return processing, substantially reduce or eliminate transcription errors, and enable the IRS to reassign employees from data entry jobs to other positions, ultimately saving tens of millions of dollars," Collins wrote.

The budget proposal would provide $310 million for IRS business systems modernization, which would be 39% above the 2021 enacted level, to accelerate development of new digital tools to enable better communication between taxpayers and the IRS. The Professional Managers Association, a group of management officials at the IRS, agreed with the extra funding request.

"2-D barcoding technology is well established," Collins wrote. "In discussions with state tax agencies, we have been told that some states use both 2-D barcoding and OCR," Collins noted.

"Where a return is prepared with software and a barcode can be applied, the barcode provides near 100 percent accuracy. Where a return is not prepared with software or if a barcode cannot be read, OCR is used, and despite its slightly lower accuracy level, it still reduces the need for manual data transcription and eliminates errors attributable solely to human error in hitting the wrong key."

March 30: IRS continues to audit the poorest families more heavily

The latest report examined IRS tax audits through the end of February. The IRS headquarters in Washington, D.C.Andrew Harrer/Bloomberg TRAC found that not only are total correspondence audits up so far this year, but the IRS seems to be increasingly targeting them against the poorest families.

"I'm tired of having to deal with this issue. We audit high-income taxpayers more than any other category in the Internal Revenue Service. Taxpayers reflecting over $10 million of income are audited at a rate exceeding 7%. Taxpayers at the $25,000 level, which is primarily the Earned Income tax Credit taxpayer, would be the only people we would look at, are audited at 1.1%. Those are correspondence audits." At the hearing, Rettig cited the IRS Data Book as evidence, but TRAC pointed out that the IRS omitted statistics on completed IRS audits for the first time from its latest data book for fiscal year 2020.

TRAC had earlier sued the IRS to force it to include the current audit statistics in its previous annual reports. The Professional Managers Association, a group representing IRS management officials, separately issued a statement Wednesday that seemed to confirm that the IRS is auditing low-income taxpayers at a higher rate than others.

"In the absence of robust enforcement funding, the IRS disproportionately audits low-income Americans, often people of color, with the simplest tax returns to review," said PMA executive director Chad Hooper in a statement.

"These taxpayers are also the least likely to receive taxpayer assistance services. Meanwhile, the IRS infrequently audits high-income earners with complex tax returns due to a lack of time and resources. Our members do not have access to the tools and resources necessary to ensure high-wealth taxpayers are complying with our Tax Code." He cited the Biden administration's recent budget request for $14.1 billion for the IRS for the fiscal year 2023.

March 29: Biden again proposes taxing wealthy, but Manchin nixes billionaire levy

The Biden administration's suggested $2.5 trillion in tax hikes is on top of $1.5 trillion in tax increases embedded in a stalled version of the Build Back Better bill.

Here's what affluent investors and financial advisors need to know: A 20% tax on centi-millionaires and billionaires on all of their "Income": The "Billionaire Minimum Income Tax" would require ultra rich people to pay at least 20% in taxes on their income and - crucially - unrealized gains.

The Green Book said that "Reformed taxation of capital income would even the tax treatment of labor and capital income and eliminate a loophole that lets some capital gains income escape income taxation forever." Under current "Step-up in basis" rules, someone who inherits an asset that swelled in value in prior years doesn't have to pay income tax on the increase.

Why? Because less-wealthy people who have to spend their savings during retirement pay income tax on their realized capital gains.

Capital gains: Long-term capital gains and qualified dividends for people earning more than $1 million would be taxed at the proposed top ordinary rate of 39.3%, plus 3.8% for the Affordable Care Act. Currently, capital gains are taxed at 23.8%, including the Obamacare levy. A donor could exclude, or not owe tax on, $5 million of unrealized capital gains on property transferred by gift or owned at death.

Economic News/Policy: 

April 5: The U.S. Economy Is Booming. So Why Are Economists Worrying About a Recession?

Employers are adding hundreds of thousands of jobs a month and would hire even more people if they could find them. Consumers are spending, businesses are investing, and wages are rising at their fastest pace in decades. So naturally, economists are warning of a possible recession.

Rapid inflation, soaring oil prices, and global instability have led forecasters to sharply lower their estimates of economic growth this year, and to raise their probabilities of an outright contraction. Investors share that concern: The bond market last week flashed a warning signal that has often — though not always — foreshadowed a downturn.

Such predictions may seem confusing when the economy, by many measures, is booming. The United States has regained more than 90 percent of the jobs lost in the early weeks of the pandemic, and employers are continuing to hire at a breakneck pace, adding 431,000 jobs in March alone. The unemployment rate has fallen to 3.6 percent, barely above the prepandemic level, which was itself a half-century low.

But to the doomsayers, the recovery’s remarkable strength carries the seeds of its own destruction. Demand — for cars, for homes, for restaurant meals and for the workers to provide them — has outstripped supply, leading to the fastest inflation in 40 years. Policymakers at the Federal Reserve argue they can cool off the economy and bring down inflation without driving up unemployment and causing a recession. But many economists are skeptical that the Fed can engineer such a “soft landing,”, especially in a moment of such extreme global uncertainty.

Demand - for cars, for homes, for restaurant meals, and for the workers to provide them - has outstripped supply, leading to the fastest inflation in 40 years. Policymakers at the Federal Reserve argue they can cool off the economy and bring down inflation without driving up unemployment and causing a recession.

William Dudley, a former president of the Federal Reserve Bank of New York, called a recession "Virtually inevitable." He is among the economists arguing that if the Fed had begun raising interest rates last year, it might have been able to rein in inflation merely by tapping the brakes on the economy. Even slower wage growth, he said, wouldn't worry him, as long as pay increases didn't fall further behind inflation.

For much of last year, Fed officials shared Mr. Sojourner's view, seeing inflation as a result of pandemic-related disruptions that would soon dissipate. The last time that happened, the Fed under Paul A. Volcker had to induce a crippling recession in the early 1980s to bring inflation to heel. The year-over-year rate of inflation hit a 40-year high in February, and almost certainly accelerated further in March as gas prices topped $4 a gallon in much of the country.

April 3: Economy Week Ahead: Federal Reserve in Focus

Minutes from the Federal Reserve's March meeting and remarks from Fed officials highlight a relatively light week for economic data. The U.S. trade deficit hit a fresh record in January as consumers and businesses snapped up vehicles, energy supplies, and other goods produced overseas. Strong demand is expected to keep the trade gap running at a high level for much of the year, though economists forecast that it narrowed in February as exports rose faster than imports during the month.

April 2: Economists Seek Recession Clues in the Yield Curve

When short-term interest rates are higher than long-term interest rates, a phenomenon Wall Street mavens call an inverted yield curve, it is sometimes a signal of recession. On Friday, the yield on two-year Treasury notes hit 2.44% and on 10-year notes, it lagged behind at 2.38%. Steve Englander, an investment strategist at Standard Chartered Bank, saw similar signals coming out of eurodollar futures markets, where traders make bets on future rates. The interest rate for a three-month loan, in other words, should be less than the interest rate for a two-year loan, which should be less than on a 10-year loan.

The logic goes like this: Investors expect the Fed to push up interest rates so much in the short run to fight off inflation that it ends up squeezing credit, causing a recession and having to reverse those rate increases further down the road. The high short-run interest rate is driven by expectations of Fed interest-rate increases and the long-run rate is driven by expectations of recession, a subsequent drop in inflation, and Fed rate cuts later on.

Sometimes a yield-curve inversion and recession is the necessary price to bring down high inflation, as happened in the early 1980s when then-Fed Chairman Paul Volcker used high-interest rates to tame double-digit inflation. Yield curves can be measured using interest rates across a wide spectrum of maturities, from overnight to 30 years, and some inversions matter more than others. If inflation doesn't recede as hoped and the central bank presses forward with rate increases further into 2023 or beyond, then recession might become more of a threat than it is now.

April 1:  Economy adds 431K jobs in March, unemployment down to 3.6 percent

The U.S. added 431,000 jobs and the unemployment rate dropped to 3.6 percent in March, according to data released Friday by the Labor Department. Job growth fell slightly short of expectations, as consensus estimates from economists projected a gain of roughly 490,000 jobs in March and a decline in the jobless rate to 3.7 percent.

The Labor Department also revised the January and February job gains up by a combined 95,000, bringing the total of jobs added by the U.S. economy in 2022 to 1,685,000 million. "The March jobs report is another strong report," said Gordon Gray, director of fiscal policy at the American Action Forum, a right-leaning think tank.

The leisure and hospitality industry added 112,000 jobs in March, with restaurants and bars adding 61,000 jobs and accommodation businesses adding 25,000. The U.S. has gained an average of 562,000 jobs each month in 2022 - the same rate as in 2021 when the country added a record-breaking 6.8 million jobs. While job growth, consumer spending, the stock market, and property values rebounded rapidly from the recession, a 7.9 percent annual increase in prices has wiped out the political benefit of a strong economy otherwise.

March 31: Biden announces largest-ever oil reserve release

The White House on Thursday announced plans for the largest-ever release of oil from the United States' strategic reserves. In remarks on the plan on Thursday, President Biden called on the oil industry to produce more, while also criticizing industry profits. The White House also said that Biden would authorize the use of the Defense Production Act to support the production and processing of minerals for batteries used in clean energy and electric vehicles, part of an effort to transition the U.S. to clean energy over time and reduce dependence on oil.

Officials did not offer specific estimates for how much the strategic reserve release would impact gas prices or when Americans could expect to see prices come down. Later Thursday, Biden estimated that prices could be reduced by 10 cents or 35 cents per gallon, but said the impact his move will have is not yet known. Oil is traded globally, so the market is shaped by the entire world, not just the U.S. While global factors, rather than White House actions, have been largely responsible for the price hike, Republicans nevertheless doubled down on their criticism of Biden's energy policies in the wake of Thursday's announcement.

"President Biden has once again resorted to tapping into the nation's oil reserve to try and cover up the ramifications of his disastrous anti-American energy policies," Sen. Steve Daines said in a statement.

March 31: Rising Wages Could Complicate America’s Inflation Cool-Down

Economists have been waiting for Americans to shift from buying goods, like furniture and appliances, and toward spending on vacations, restaurant meals, and other services as the pandemic fades, betting the transition would take pressure off supply chains and help inflation to moderate. While positive for workers, that could keep overall inflation brisk as companies try to cover their labor costs, speeding up price increases for services even as they begin to moderate for goods.

A big chunk of what the government defines as "Services" inflation comes from rental housing costs, which often move up alongside wage growth, as households can afford more and bid up the cost of a limited supply of housing units.

Jason Furman, a Harvard economist who served as a top adviser to President Barack Obama, said the shortage of workers in many service industries meant that if demand for services went up, prices would, too. That means a shift in spending back to services won’t necessarily result in an overall slowdown in price increases.

“An awful lot of services are incredibly constrained,” he said. "As we shift back to services, we'll get more services inflation and fewer goods inflation, and I don't think it's at all obvious that the result of that is less inflation."

March 31: U.S. Inflation Rises to 40-Year Peak in February by Fed’s Preferred Measure

The Commerce Department said Thursday that its personal-consumption-expenditures price index climbed 6.4% in February from a year ago, faster than the 6% increase for the year that ended in January. The so-called core PCE price index, which excludes volatile food and energy costs, rose 5.4% in February from a year before, compared with the 5.2% increase for the year through January.

Fed Chairman Jerome Powell said on March 16 that the central bank is watching one-month changes in inflation closely to strip away distortions caused by high inflation in the spring of 2021. The latest inflation readings add to pressure on Fed officials to keep raising interest rates this year to lower price pressures.

Energy prices surged by 25.7% in February from a year earlier, down slightly from the pace of the previous three months, the Commerce Department said, fueled in part by a surge in oil prices following Russia's invasion of Ukraine in February. Most of them projected core PCE inflation would end the year at 4.1%. Thursday's data follow four-decade-high inflation readings from the Labor Department. In February, the consumer-price index leaped 7.9% from a year earlier, with core CPI up 6.4%. Producer prices rose 10% on a 12-month basis in February, though the pace of gains slowed slightly in February from January.

Ukraine Crisis/Russia’s Economic Impact: 

March 30: U.S. Trade Chief Outlines Policy Shift, Citing Ukraine War and Pandemic

Trade Representative Katherine Tai said Wednesday that the U.S. must shift the focus of its trade policy to rebuilding its domestic manufacturing industries, and lessening ties to unfriendly economies.

Appearing before the House Ways and Means Committee, Ms. Tai said that global events such as Russia's invasion of Ukraine and the supply-chain disruptions triggered by the Covid-19 pandemic point to the need for new priorities.

Environmental Policy:

April 4: White House details ‘immense’ risks of climate change for federal budget

The White House's Office of Management and Budget on Monday issued its first risk assessment for the impact of climate change on the federal budget, calling the fiscal risks associated with climate change "Immense." OMB personnel cited estimates by the Network for Greening the Financial System, a network of dozens of central banks around the world that develops best practices for climate finance, which said the current trajectory of climate change could lead to a 3 to 10 percent drop in the gross domestic product by the end of the 21st century.

OMB analyses determined climate change could cost federal revenues about 7.1 percent, or $2 trillion a year, by the end of the century. Under a 10-foot sea-level rise, the replacement cost of more than 12,000 federal buildings would come to more than $43.7 billion.

The analysis calls for a number of the priorities outlined in President Biden's fiscal 2023 budget to be enacted to counteract these risks, including more than $7 billion to reduce emissions from the power sector and more than $5 billion to transition the transportation sector to renewable energy. The budget has no realistic chance of passing Congress but outlines the president's priorities, particularly after ambitious climate provisions within the Build Back Better package stalled out in the Senate last year.

"Investments to confront the climate crisis will reduce greenhouse gas emissions, drive down clean energy prices, make our Nation more resilient, present new opportunities for American innovation and well-paying jobs, provide benefits to historically underserved communities, and work to protect against the long-term fiscal risks identified in the new Budget analyses released today," the OMB document states.

April 4: UN calls for ‘substantial reduction’ in fossil fuels to limit climate change

The United Nations' climate change panel is calling for a "Substantial reduction" in the global use of fossil fuels in order to avoid the worst impacts of climate change. To make the necessary reductions, the report calls for limiting the use of fossil fuels.

Combustion of fossil fuels and industrial processes are responsible for about 78 percent of climate-warming emissions over the past several decades. To limit warming to 2 degrees Celsius - which would allow substantially more climate-caused harm - the use of these fuels would need to be cut by 85 percent, 30 percent and 15 percent, respectively, by 2050 compared to their 2019 level.

At last year's global climate summit, fossil fuel language was weakened as countries including India opposed calling for a "Phase out." This third installment of the Intergovernmental Panel on Climate Change's sixth climate report focuses on climate solutions. While fossil fuels are the main driver of climate change, other sectors like agriculture and construction also contribute to warming temperatures, and the report calls for limiting their emissions as well.

April 2: As Gas Prices Soar, Biden’s Climate Ambitions Sputter

With gasoline prices surging after the Russian invasion of Ukraine and images receding of last summer's climate disasters - wildfires that raged through seven states, heat waves and floods - Republicans and oil companies are newly emboldened in calling for more drilling and less emphasis on climate change.

"We need to choose long-term security over energy and climate vulnerability. We need to double down on our commitment to clean energy and tackling the climate crisis with our partners and allies around the world. And we can do that by passing my plan that's literally before the Senate right now, the United States Congress right now." President Biden said.  Still, the administration has advanced some climate policies, certainly more than Mr. Biden's predecessor, who mocked climate change.

Senator John Barrasso of Wyoming, the ranking Republican on the Senate Energy and Natural Resources Committee, attacked Mr. Biden's proposed 2023 budget as "Climate extremism" because he is seeking $45 billion for governmentwide efforts to reduce pollution, expand conservation, research clean energy technologies and prepare for and respond to extreme weather events.

Mr. Biden's best hope for climate action is in the $2.2 trillion climate and social spending legislation stalled on Capitol Hill, which includes about $300 billion in tax incentives designed to galvanize markets for wind and solar energy and electric vehicles. Senator Manchin's idea of a climate package would also include provisions to expand domestic oil and gas drilling - a step that climate experts say could undermine the emission reductions goals of the bill.

"If you ask me to handicap it, it's probably less than 50-50," said John Podesta, a Democratic strategist and former top climate adviser to Mr. Obama, of the probability that some portion of the climate legislation could be enacted this year, although he added, "But it's not zero!".

ICYMI: 

April 4: Democratic, GOP Senate bargainers reach $10B COVID agreement

Senate bargainers have reached an agreement on a slimmed-down $10 billion package for countering COVID-19, the top Democratic and Republican negotiators said Monday, but the measure dropped all funding to help nations abroad combat the pandemic. Around 980,000 Americans and over 6 million people worldwide have died from COVID-19. Schumer blamed the GOP for the lack of global assistance, saying he is "Disappointed that our Republican colleagues could not agree to include the $5 billion" from an earlier version of the measure.

The accord represents a deep cut from the $22.5 billion President Joe Biden initially requested, and from a $15 billion version that both parties' leaders had negotiated last month. The $15 billion plan had included about $5 billion for the global effort to fight COVID-19, which has run rampant in many countries, especially poorer ones. Bipartisan Senate bargainers have agreed to a slimmed-down $10 billion package for countering COVID-19, but without any funds to help nations abroad combat the pandemic, Democrats and Republicans familiar with the talks said Monday.

Romney's fact sheet says those savings include $2.3 billion from a fund protecting aviation manufacturing jobs; $1.9 billion from money for helping entertainment venues shuttered by the pandemic; another $1.9 billion from a program that helps states extend credit to small businesses; and $1.6 billion from agriculture assistance programs.

April 1: House passes bill decriminalizing marijuana; Senate fortunes unclear

The House on Friday passed legislation that would remove marijuana from the federal schedule of controlled substances, a move that comes as an increasing number of states have passed decriminalization laws. White House press secretary Jen Psaki said at a regular press briefing Friday afternoon that Biden "Agrees that we need to rethink our approach" to marijuana laws.

The bill also would provide for the expungement of federal marijuana convictions dating to 1971 and bar the denial of federal public benefits or security clearances on the basis of marijuana offenses.

Decriminalizing marijuana at the federal level would not end the vast majority of cannabis-use prosecutions, which occur in state courts. In late 2020, a Gallup survey found that 68 percent of Americans said the use of marijuana should be legal, the highest support for marijuana legalization since the polling organization first asked in 1969.

In remarks on the House floor Friday morning, Rep. Barbara Lee argued that the legislation would help repair the damage done by the war on drugs and the country's "Failed policy of marijuana prohibition, which has led to the shattering of so many lives, primarily Black and brown people."

"Whatever one's views are on the use of marijuana for recreational or medicinal use, the policy of arrests, prosecution and incarceration at the federal level has proven both unwise and unjust," he said.

March 31: House Passes Bill to Limit Cost of Insulin to $35 a Month

A bill to limit the cost of insulin to $35 a month for most Americans who depend on it passed the House on Thursday, raising Democrats' hopes that the party could take at least one step toward fulfilling its promise of lowering drug costs. The insulin bill represents a substantial scaling back of Democratic ambitions to tackle high drug prices for all Americans.

A broader prescription drug package, written as part of the $2.2 trillion social spending and climate bill that has stalled in the Senate, would limit price increases on all prescription drugs, improve the generosity of Medicare's drug coverage, and allow the government to negotiate directly on the price of some drugs used by Medicare patients, while also limiting insulin co-payments.

The insulin bill may be the Democrats' best chance of passing part of their popular prescription drug agenda, as the future of the larger package remains unclear.

The pharmaceutical industry opposed the drug price regulations in the social spending and climate legislation, but it has not vocally opposed the insulin bill. While the bill would lower costs for many individual patients who take insulin, it would do nothing to reduce the prices paid to the companies that make it. Consumer insulin costs have emerged as a politically potent problem, given how widespread diabetes is in the United States and one that is relatively easier to solve than the prices for prescription drugs overall.

For Fun: 

April 4: The secret to better coffee? The birds and the bees

A groundbreaking new study finds that coffee beans are bigger and more plentiful when birds and bees team up to protect and pollinate coffee plants. Without these winged helpers, some traveling thousands of miles, coffee farmers would see a 25% drop in crop yields, a loss of roughly $1,066 per hectare of coffee.

For the experiment, researchers from Latin America and the U.S. manipulated coffee plants across 30 farms, excluding birds and bees with a combination of large nets and small lace bags. They tested for four key scenarios: bird activity alone, bee activity alone, no bird and bee activity at all, and finally, a natural environment, where bees and birds were free to pollinate and eat insects like the coffee berry borer, one of the most damaging pests affecting coffee production worldwide.

The combined positive effects of birds and bees on fruit set, fruit weight, and fruit uniformity-key factors in the quality and price were greater than their individual effects, the study shows.

One of the most surprising aspects of the study was that many birds providing pest control to coffee plants in Costa Rica had migrated thousands of miles from Canada and the U.S., including Vermont, where the UVM team is based. The team is also studying how changing farm landscapes impact birds' and bees' ability to deliver benefits to coffee production.