A $16 Trillion Hit to the Economy

By Yuval Rosenberg

Coronavirus Will Cost US Economy Nearly $16
Trillion, CBO Says
The coronavirus pandemic will shrink U.S. economic
output by $15.7 trillion over the next decade, or $7.9 trillion
after adjusting for inflation, the Congressional Budget Office
estimated
on Monday.

In response to a request by Senate Minority Leader Chuck
Schumer (D-NY), CBO Director Phillip Swagel laid out how the
pandemic has caused the budget office to dramatically revise
projections it had issued in January, reducing its forecast for
total U.S. economic output by a cumulative, inflation-adjusted 3%
from 2020 through 2030.

Swagel said that the projections come with an
“unusually high degree of uncertainty” given that it's not clear
how the pandemic will play out, how social distancing will affect
the economy, how past and future policy responses may affect the
economy and even how economic data will be compiled amid the
disruption caused by the virus.

Schumer and Sen. Bernie Sanders (I-VT) responded to the
report by urging the Senate and Majority Leader Mitch McConnell
(R-KY) to “act with a fierce sense of urgency” and not wait another
month to pass the next coronavirus aid package.

“How can Senator McConnell look at these catastrophic
economic numbers and believe there is no ‘urgency’ to protect
America’s working families?” they said in a statement. “At a time
of massive wealth and income inequality, how can President Trump
believe that what this country needs is another huge tax break for
the top one percent?"

The Battle Over State Bailouts

States are confronting massive budget shortfalls as tax
revenues plunge and social safety net spending soars, but there’s
no clear sense in Washington about how to approach the problem.
Despite strong evidence that federal assistance was both necessary
and effective during the last recession, a political battle has
broken out over state aid,
says Michael Grunwald of Politico, leaving many
local leaders wondering if they will receive the help they
need.

Democrats are pushing for nearly a trillion dollars in
additional aid to states and cities, as part of an effort to limit
the damage caused by layoffs and reduced spending. The CARES Act
signed into law in March provided $150 billion in direct aid for
state, local and tribal governments, and Democrats have proposed
$915 billion more in the HEROES Act that passed in the House in
May. But Republicans say they have no intention of taking up the
bill and have started pushing back against the idea of further aid,
particularly any assistance that could be seen as a bailout of
Democratic-led blue states.

“Polls show that most voters want Washington to help states
avoid layoffs of teachers, police officers and public health
workers,” Grunwald writes, “but Senate Majority Leader Mitch
McConnell, Fox News personalities, and other influential
Republicans are trying to reframe state aid as Big Government
Democratic welfare spending.”

The experience of the Great Recession: In an effort to
prevent layoffs and cutbacks that could make the recession even
worse, President Obama proposed $200 billion in aid for states in
2009 as the economy was still deteriorating. Democratic and
Republican lawmakers pushed back against the unprecedented size of
the aid package, whittling it down to $140 billion. Still, the aid
was effective, and there is widespread agreement among economists
that it helped ease the recession, even though the relatively small
size limited its effects.

“There were at least a dozen papers written on the state aid,
and the evidence is crystal clear that it helped,” says former
Obama economic adviser Jason Furman. “Unfortunately, it was
incredibly hard to get Congress to do more of it, and that
hurt.”

The pivot to austerity: Most states have balanced-budget
rules, which force governors to cut back on spending during
recessions as revenues fall. Those cuts make the recession worse,
most economists agree, by further reducing spending at a time when
local economies are already shrinking. In the wake of the
coronavirus, states have started announcing layoffs and budget
cuts, moves that will almost certainly amplify the effects of the
contraction.

“There wasn’t a lot of evidence that state aid would be good
stimulus in 2009, but now there’s a lot of data, and it all adds up
to juice for the economy,” Moody’s chief economist Mark Zandi told
Grunwald. “It’s baffling that this is getting caught up in
politics. If states don’t get the support they need soon, they’ll
eliminate millions of jobs and cut spending at the worst possible
time.”

A plea from a governor: Larry Hogan, the Republican
governor of Maryland, wrote an
op-ed Monday asking Congress to move quickly to
provide more assistance. “The revenue losses states are projected
to face are more than double what we experienced during the Great
Recession,” Hogan said, adding that “no amount of fiscal prudence
could have fully prepared any state for the scope of this
challenge.”

Hogan argued that another round of federal aid will help keep
the nearly 15 million people employed by state and local
governments on the job, providing essential services that help keep
the country afloat. Forcing those employees off the payrolls would
not be “a fiscally responsible choice,” Hogan said, since it would
simply increase the unemployment rolls while further slowing the
economy.

“In past times of war, natural disaster and economic
depression, Americans have put aside partisan bickering to find
common ground on the urgent challenge right in front of us,” Hogan
pleaded. “In that spirit, Congress came together to swiftly pass
the CARES Act to deliver aid for America’s businesses and workers.
That is what is required of us once again.”

Next Coronavirus Bill Should Address Rising Debt, Says
Bipartisan Group of House Members

Congress is likely to pass another coronavirus relief
bill at some point, but doing so may require addressing the
mounting deficit concerns of a bipartisan group of lawmakers. A
group of 60 House members from both parties wrote a
letter to House Speaker Nancy Pelosi and House
Minority Leader Kevin McCarthy on Monday asking that any further
pandemic response ensures that the nation will address the national
debt, budget reforms and projected trust fund shortfalls for Social
Security and other programs once the economy is stronger.

“Though emergency borrowing is necessary now, we must have a
credible plan for responsibility to bring the debt burden to
sustainable levels as the pandemic recedes and the economy
recovers,” the group, led by Reps. Scott Peters (D-CA) and Jodey
Arrington (R-TX), wrote.

The members of Congress behind the new letter aren’t calling for
specific future tax increases or budget cuts. Instead, they propose
a few steps to ensure a future focus on budget and debt issues:

  • They want the Government Accountability Office to issue
    an annual report on the fiscal health of the nation.
  • They back a
    bill     introduced last year that would create
    bipartisan, bicameral “rescue committees” to recommend fixes for
    Social Security, Medicare and other federal trust funds facing
    future insolvency.
  • They propose establishing goals for managing the budget
    and national debt, such as setting targets for the ratio of debt to
    gross domestic product. Such a process, they say, would reduce
    debt-limit brinkmanship as well.

The Congressional Budget Office projected
in April that the federal deficit would be close to $4 trillion for
fiscal year 2020 and debt held by the public would likely exceed
the size of the economy by the end of the year. Senate Republicans
have cited debt concerns in recent weeks as they advocated a
“pause” before any additional coronavirus aid.

Poll of the Day: Coronavirus vs. the Economy

Most Americans think it’s more important to
control the coronavirus than to reopen the economy, according to a
Washington Post-ABC News
poll released Monday. Fifty-seven percent of
respondents said controlling the virus is the top priority right
now, even if it hurts the economy. The partisan split on the
question is stark, however, with 81% of Democrats focused on the
virus, as opposed to just 27% of Republicans. A majority of
Republicans (66%) say that opening the economy is most important,
even it if harms efforts to control the virus.

IRS Letting High-Income Tax Cheats Dodge Billions in Payments:
Watchdog

The Internal Revenue Service is failing to crack down on
hundreds of thousands of high-income people who owe billions of
dollars in taxes, according to a new
report by the agency’s government watchdog.

The Treasury Inspector General for Tax Administration identified
almost 880,000 individuals making $100,000 a year or more who
didn’t file tax returns from 2014 to 2016. Collectively, those
“nonfilers” owed an estimated $45.7 billion in taxes.

An estimated 1,891 nonfilers owed more than $1 million apiece,
or about $13.5 billion collectively. The top 100 nonfilers owed an
estimated $9.9 billion in total.

The inspector general’s audit found that the IRS did not
investigate or try to collect in more than 40% of those roughly
880,000 cases, representing an estimated total tax bill of $20.8
billion. The IRS never entered 326,579 of the cases into its
compliance system, and another 42,601 cases were closed out of the
system without the agency ever working on them.

The more than 510,000 remaining cases, with $24.9 billion
in estimated taxes due, “will likely not be pursued as resources
decline,” the report says. The IRS has faced repeated budget cuts
until recently and the report says that collections staff declined
by 19% from fiscal year 2013 through fiscal year 2018.

“Pursuing nonfilers is one of the IRS’s most efficient
enforcement strategies because issuing nonfiler notices can be a
cost-effective tool that requires little more than automated
notices,” the report says. “Previous IRS research studies from
decades ago noted that at that time, the IRS pursued most nonfiler
leads. However, with some exceptions, that no longer appears to be
the case.”

The watchdog report makes seven recommendations, including
that the IRS reallocate resources to ensure that most or all
high-income tax cheats are subject to enforcement action. It also
says that the IRS is missing out on opportunities to fully crack
down on repeat tax cheats by working on cases one tax year at a
time. IRS management disagreed with one of the recommendations,
agreed with two and partially agreed with the other
four.

Why it matters: Beyond the obvious
implications for the federal budget and IRS funding, tax cheats
also cost the rest of us who do pay taxes. As Bloomberg News

reports: “The average U.S. household is paying an
annual surtax of
more than $3,000 to subsidize taxpayers who aren’t
paying all they owe, the Taxpayer Advocate Service, an independent
oversight office within the IRS, found in January. The calculation
is based on the assumption that the government is seeking to
collect a fixed amount of revenue, leaving compliant taxpayers to
pay more to subsidize noncompliance.”

Millions of Tax Returns Piling Up at the IRS

About 10,000 IRS employees are returning to their
offices today as coronavirus restrictions ease, and it looks they
have a lot of work to catch up on: Nearly 5 million paper tax
returns are waiting to be processed at various regional offices,
the tax agency estimates in a report obtained by
Politico, part of roughly 10 million pieces of
mail that need to be opened and reviewed. More than half of the
agency’s 81,000 employees have been working from home during the
crisis, though that number is expected to decline in the coming
weeks as offices reopen.

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