Yellen Leaves Door Open to Tax Increase on Wealthy

Topics spanned climate change to sanctions policy and moves to maintain the dollar’s status as the world’s main reserve currency. Following are some highlights from Yellen’s comments:

Tax Policy

• Yellen promised to “work with members of Congress” on whether households earning less than $400,000 a year will be protected from any reversal of President Donald Trump’s 2017 tax cuts — something Biden pledged on the campaign trail.
• She also dodged the question of whether a repeal of the cap on state and local tax deductions, as proposed by Biden, would deliver a big tax cut to wealthy Americans while doing next to nothing for those in the bottom half of income distribution.
• She was more direct in responding to criticism of Biden’s plan to reduce the threshold for the federal estate tax, saying “about the wealthiest six out of every thousand estates would face any tax” under the plan
• Biden’s team will develop tax proposals through the budget process, including one based on his pledge to raise the corporate rate to 28% from 21%, she said.

Treasury-Fed Ties

• Yellen suggested that she won’t mount a fresh fight to revive several Federal Reserve lending facilities that were phased out by her predecessor. “The Federal Reserve will continue to provide support to the economy through its ongoing programs and the use of its available tools but as mandated by Congress, the 13(3) facilities funded by the Cares Act will not be available,” she wrote, referring to a section of the law governing the Fed.
• At the same time, she said, “Right now, taking too little action poses the greatest risk.
• She also pledged not to pressure the Fed on the scope of its asset purchases, a point of concern among some politicians and economists. given the scale and impact of Fed bond buying. “I understand deeply why it is so important to maintain the tradition of the independence of the Fed in monetary policy,” said the former Fed chief.

Exchange Rates

• Yellen reiterated her pledge from Tuesday that the U.S. won’t seek a weaker currency, and didn’t refer to the “strong dollar” policy the Treasury once pursued.
• She said the administration will work, across agencies, “to put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage.”
• Yellen singled out bilateral deficits as an indicator of unfair trade practices, which she said she will “vigorously oppose,” although she said the gaps should be assessed in the context of the U.S.’s broader trade relationship with each country rather than a “single catch-all metric.”

China Policy

• Yellen reiterated that there will be no immediate lifting of tariffs on China and that the Biden administration will be monitoring China’s adherence to pledges made in the Trump administration’s “phase one” bilateral trade deal.
• She also repeated that the administration will use the “full array of tools” to counter China’s “abusive economic practices.” The strategy will include working with allies to take on China’s “unfair” actions.
• Yellen said that it’s important that aid from the IMF, World Bank and elsewhere to help countries around the world combat Covid-19 doesn’t end up going to repay Chinese loans.
• More broadly, Yellen said the U.S. needs to compete with China’s “economic statecraft” around the world and build partnerships distinguished from President Xi Jinping’s signature Belt and Road Initiative.

Debt Issuance

• Yellen said she will review the Treasury’s debt-issuance strategy, including the weighted average maturity of federal debt.
• She didn’t immediately suggest major changes. “Today, the demand for existing Treasury instruments remains robust and is sufficient to meet U.S. financing needs. Introducing new, ultra-long-term instruments would add new complexities to this market and deserves further study.”

Climate Change

• “We cannot solve the climate crisis without effective carbon pricing,” Yellen wrote. “The president supports an enforcement mechanism that requires polluters to bear the full cost of the carbon pollution they are emitting.”
• She also said tax policy should be used to provide incentives for individuals and businesses to adopt “climate-friendly policies.”
• But she raised concern about proposals to impose stress tests on banks to measure their ability to withstand the economic impact of climate change on assets and loans. “Generating environmental regulation is not the mission of financial regulators.” Such tests are an “indirect punishment” for holding fossil-fuel assets, she said.
• Yellen warned that “stranded assets” could result from the development of new forms of clean energy.

Foreign sanctions

• Yellen said the Treasury would “conduct a careful review of sanctions to ensure that they are targeted, effective, and minimize unintended consequences.”
• The Trump administration imposed a wide range of sanctions on companies, individuals and even oil tankers tied to Iran, North Korea, China, Venezuela and Russia — often unilaterally.

Iran Deal

• Yellen said she will ensure Iran takes steps to “resume compliance” with the nuclear deal struck under the Obama administration, which will be needed to warrant sanctions relief.
• She also said she agreed that Iran is the world’s largest sponsor of state terrorism.
• “I will ensure that Treasury continues its important work to combat Iran’s support for terrorism and abuse of human rights.”

(Updates with further responses starting with ‘Exchange rates’ section.)

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