On June 6, Treasury Secretary Janet Yellen met with the Senate Finance Committee to testify on President Biden’s fiscal year (FY) 2023 budget request. Senators were eager to question Secretary Yellen in her first appearance before the Finance Committee since the President released his budget request in April.
During this meeting, Secretary Yellen faced a number of questions about inflation. Specifically, Sens. Steve Daines (R-MT) and John Thune (R-SD) challenged Secretary Yellen on the causes and effects of today’s historically high levels of inflation.
Contrary to many economic studies, Secretary Yellen continued to insist that enormous government spending – such as the hundreds of billions of dollars spent through the American Rescue Plan – had no major contribution to high U.S. inflation rates. Unfortunately, the Secretary blatantly disregarded a San Francisco Federal Reserve study that specifically stated higher rates of inflation in the U.S. (compared to other wealthy countries) is in part due to heightened levels of government spending – a study that Sen. Daines directly mentioned in questioning the Secretary.
In addition, Secretary Yellen acknowledged that she expects “inflation to remain high” and admitted that she was wrong to say last year that inflation was “transitory.” At the questioning of Sen. Thune, Secretary Yellen claimed that at the early indications of high rates of inflation, she genuinely believed it was transitory. However, she claimed, due to unforeseen circumstances such as new COVID variants and a war in Ukraine, inflation persisted. In addition, she said that the White House will likely increase their inflation forecast for the year, which currently stands at 4.7 percent.
Several Senators also asked important questions about the international tax agreement Secretary Yellen and the Biden administration are trying to push to the finish line with the European Union (EU) and other nations around the world through 2022.
Sen. Pat Toomey (R-PA) asked the Secretary if she would share data on the potential impact of the two-pillar global tax agreement with Congress and the public. The Secretary was somewhat non-committal, noting that the administration and the Joint Committee on Taxation (JCT) have already offered fiscal and economic projections for the effects of Pillar Two (given Democrats included implementation of Pillar Two in their failed Build Back Better legislation last year) and that Pillar One continues to be negotiated. NTU continues to believe that the Treasury Department should be as transparent as possible regarding the potential economic and fiscal impacts of both Pillars One and Two of the Organisation for Economic Co-operation and Development- (OECD) brokered agreement, sharing any data with Congress, the general public, and non-partisan experts at JCT and the Congressional Budget Office (CBO).
Sen. Toomey also pressed ahead on his insistence that Pillar One requires approval by a two-thirds majority of the U.S. Senate through the treaty process. This broadly aligns with NTU’s view that Treasury should be working collaboratively, not competitively, with Congress on implementation of the global tax agreement.
As we wrote in February:
“...NTU expressed concern back in October that the Biden administration may attempt an “executive agreement” to implement P1 as opposed to a tax treaty reviewed and ratified by the Senate. It’s no secret that Senate Republicans have expressed significant concerns with P1 and its implementation in the U.S., but that is no excuse for the Biden administration to act against tax treaty precedent and work around – rather than with – Congress on P1 implementation.”
Sen. James Lankford (R-OK) also pressed Secretary Yellen on significant concerns that, under Pillar Two of the global tax agreement, many subsidies and refundable credits that our foreign competitors offer companies through their tax codes will not count towards companies’ 15 percent minimum tax obligations while U.S. tax incentives will count. (More background on that here via Politico’s Weekly Tax.)
Finally, Sen. Daines expressed concern that China would not “play by the rules” of the two-pillar global agreement, asking Secretary Yellen what the Treasury Department would do if China fails to comply. Secretary Yellen argued that the enforcement rules in the global agreement would allow other countries to collect the taxes that China refuses to collect, but (as with other stakeholders) NTU is seeking further clarity on enforcement mechanisms under Pillar Two.
The hearing with Secretary Yellen was ultimately a welcome effort by Members of Congress to conduct necessary and effective oversight of the Treasury Department. We encourage the Treasury to continue working collaboratively with Members of Congress in both parties to tackle the root causes of inflation, and to keep America’s tax code competitive with other nations and oriented towards wage and economic growth here at home.