Yellen Warns of Stagflation

Yellen Warns of Stagflation

By Yuval Rosenberg and Michael Rainey
Wednesday, May 18, 2022

Happy Wednesday! President Joe Biden announced Wednesday evening that he would invoke the Defense Production Act, among other steps, to help address that national shortage of infant formula. Here’s what else is happening while we wait to see who won the Pennsylvania Republican Senate primary.

IRS Audit Rates Have Plunged Over the Last Decade, Especially for the Rich: GAO

Internal Revenue Service audit rates of individual income tax returns plunged over the last decade, with rates falling the most for taxpayers with incomes of $200,000 and above, according to a report released Tuesday by the Government Accountability Office.

Overall audit rates of individual returns fell from 0.9% to 0.25% from tax year 2010 to tax year 2019. While rates decreased across all income levels, they fell the most for higher-income earners, which IRS officials said was largely because those audits tend to be more complicated and time-consuming. "Average audit hours were generally stable for lower-income returns but more than doubled for incomes of $200,000 and above," the report notes. "IRS officials cited auditor attrition, major work disruptions, and tax law changes as the primary reasons for the increase in average audit hours."

Here’s a look at how audit rates fell over the last decade by income range:

* Up to $25,000: down 61%

* $100,000 to $200,000: down 81%

* $200,000 to $500,000: down 92%

* $500,000 to $1 million: down 85%

* $1 million to $5 million: down 87%

* $5 million to $10 million: down 90%

* $10 million or more: down 81%

Audit rates for higher-income taxpayers remained higher than those toward the low end of the income scale, but lower-income taxpayers claiming the Earned Income Tax Credit — a tax break targeted toward low- and moderate-income workers — faced a significantly higher-than-average rate of reviews.

That helps explain why taxpayers earning up to $25,000 faced higher audit rates than those earning between $200,000 and $500,000 (see chart below). "IRS officials explained that EITC audits are limited in scope and historically have high rates of improper payments and therefore require a greater enforcement presence," the report says. For fiscal year 2020, the IRS estimates that $16 billion, or 23.5%, of EITC payments were improper. That has led some Republican lawmakers to call for better designing the credit.

The IRS has faced pressure to ramp up audits of top earners and has started a project to do so. "There cannot be one tax system for the wealthy and one for everyone else. And yet, that is exactly what we have," Rep. Bill Pascrell (D-NJ), who chairs the House Ways and Means Oversight Subcommittee, said at a hearing Wednesday, according to MarketWatch.

IRS officials have long warned that, after years of budget cuts that have only recently started to be reversed by Congress, the agency is underfunded, understaffed, overwhelmed and "outgunned" by those who seek to avoid paying taxes. The omnibus spending bill for fiscal year 2022 passed by Congress earlier this year provided the IRS with a $12.6 billion budget, a $675 million increase over the previous year —the largest boost for the agency since 2001. The Biden administration has proposed investing $80 billion over 10 years to boost IRS enforcement and upgrade its technology and customer service, but that plan remains in limbo.


Yellen Warns of Stagflationary Risk as Gas Prices Soar

Treasury Secretary Janet Yellen said Wednesday that while food and energy costs should ease eventually, much of the globe could be hit with inflation and slow growth in the short run.

"Higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world," she told reporters at the G7 meeting in Berlin.

Yellen blamed Russian President Vladimir Putin for much of the problem, saying that soaring commodity prices were "due to Putin's choice to launch a war in Ukraine."

Yellen’s warning comes as gasoline prices hit new highs in the U.S., with some analysts calling for prices near $5 a gallon during the summer months.

"Consumer prices for both gasoline and diesel have soared to record high levels in the U.S. and show no signs of abating," energy consult Bob McNally told The Washington Post. "While not every recession was triggered by spiking oil prices," he added, "spiking oil prices always cause or contribute to recession."

Collapse in Afghanistan ‘Inevitable’ Without US Support: Watchdog

John Sopko, Special Inspector General for Afghanistan Reconstruction, issued a scathing report Wednesday that examines the causes of the shocking collapse of Afghan armed forces in August 2021.

His conclusion: Despite spending $90 billion over nearly two decades to train and equip the Afghan military, the U.S. was unable to stand up an independent force, and the agreement reached between the Trump administration and the Taliban to withdraw U.S. troops — on a timetable that was delayed but ultimately enacted by the Biden administration — all but guaranteed the defeat of a military that was incapable of operating without U.S airpower and, crucially, extensive technical assistance from military contractors.

The defeat was "inevitable," Sopko told Politico, once the decision to withdraw was announced, striking a severe blow to Afghan morale. "There was a red light blinking on Afghanistan for years saying ‘watch out,’" he said. "Once the morale collapsed, that was it."

In short, Sopko says the U.S. constructed an Afghan military that functioned like the American one, but without any of the local support it needed. As retired General David Barno told the investigators, "We built that army to run on contractor support. Without it, it can’t function. Game over … When the contractors pulled out, it was like we pulled all the sticks out of the Jenga pile and expected it to stay up."

One telling example: The U.S. provided the Afghan Air Force with a fleet of Black Hawk helicopters, which are more complex than the Russian-made Mi-17s the Afghan military was operating. But those Black Hawks required service by private military contractors, and the U.S. estimated that the Afghan military would be unable to function without those contractors before 2030. Soon after the contractors withdrew, the majority of Black Hawks were grounded, making it difficult to resupply troops and evacuate the wounded.

The U.S. knew that the Afghan military could not function on its own but took steps to make it look like it could to the outside world, Sopko said. "The quest to withdraw from Afghanistan dominated the United States’ military strategy, but the U.S. wanted to ensure the ANDSF [Afghan National Defense and Security Forces] had the appearance of success," the report concludes. "In essence, the U.S. created a false reality with the ANDSF."

Read the full SIGAR report here, as well as writeups at Politico and Roll Call.

Opinion of the Day: The Deficit as a Cudgel

The Senate appears set to send a $40 billion Ukraine aid bill to President Joe Biden’s desk this week.

Tax Policy Center Senior Fellow Howard Gleckman writes that the package raises a question: "Why is Congress prepared to spend billions of dollars for new aid to Ukraine without requiring offsetting tax increases or spending cuts at the same time lawmakers are demanding that more COVID-19-related therapeutics and testing be fully paid for?"

The answer, according to Gleckman, isn’t about the deficit, since the Ukraine aid package is about four times as large as the Covid funding bill Republicans insisted be fully offset. With a few notable Republican exceptions, the Ukraine spending has broad bipartisan support. "If you are worried about the budget deficit," Gleckman asks, "why fret about a $10 billion bill and ignore $40 billion in new spending?"

Trying to pay for the Ukraine aid by finding offsetting savings or tax increases would likely stall a bill that the Biden administration and others say is urgently needed, Gleckman says: "The merits of Ukraine funding would be long forgotten while lawmakers squabbled over how to pay for it. Odds are, they’d still be arguing well after Vladimir Putin’s victory parade."

So while the Ukraine aid is likely to be approved as soon as Thursday, the Covid bill — which the administration also says is urgently needed to avoid losing ground, and potentially losing lives, in the fight against the virus — remains mired in uncertainty.

The difference between the two aid bills highlights the reality of deficit politics, Gleckman argues:

"The real story, of course, is that the vast majority of politicians in either party do not care about the deficit. When they demand that new spending be paid for, they really are saying they don’t want to spend the money at all. That was the message Sen. Joe Manchin (D-WV) sent to his fellow Democrats when he blocked Biden’s Build Back Better social spending and climate bill last year. And it appears to be the message Republicans are sending with the pandemic funding.

"Lawmakers may appear to be fiscal hypocrites. But, really, their disinterest in the deficit is remarkably consistent. They just are using their alleged deficit concerns as a cudgel to kill bills they don’t like."


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