Treasury Pick Yellen Likes Carbon Taxes And More Pandemic Relief, But Not The TCJA

Janet Yellen, president-elect Joe Biden’s pick for Treasury Secretary, would come to the job with largely predictable views on tax policy for a mainstream, center-left economist.

A labor economist by training, Yellen has spoken in favor of additional short-term stimulus to help sustain the economy during the covid-19 pandemic. She has been a strong supporter of a carbon tax. And she has argued that insufficient tax revenue, not rising costs for programs such as Medicare and Social Security, are largely to blame for exploding budget deficits. 

If confirmed, Yellen would arguably be the most influential public policy economist of our time. Previously, she was the first woman to chair the Federal Reserve Board. She headed the Council of Economic Advisers under President Bill Clinton. Before that, she was an economics professor at Harvard and the University of California at Berkeley.

As an expert in labor economics and, of course, monetary policy, Yellen has not written or spoken prolifically on taxes. But she has made her views known on several key tax issues. Here’s a closer look at her thinking:

Carbon tax. Yellen was a founding member of the Climate Leadership Council, a bipartisan group of influential economists and business leaders that aims to find a “cost-effect climate policy solution.” The group’s top priority: A carbon tax.

She also has worked with international groups to build consensus for such a levy. The concept has broad support among economists across the political spectrum because it harnesses market forces to solve an environmental problem. But Yellen’s coming role as Treasury Secretary could boost prospects for the idea.   

While Biden made climate change a key element in his agenda, he has not endorsed a carbon tax. Yellen, however, has been an outspoken backer. In an October 8 interview with Reuters, Yellen was even upbeat about its political chances:  “There’s no question that if…the Biden administration comes into place then climate change will be a very high priority… I do see Republican support, and not only Democrat support, for an approach that would involve a carbon tax with redistribution. It’s not politically impossible.”

Tax cuts and deficits. In an April 8, 2018 Washington Post column written jointly with four former CEA chairs, Yellen was sharply critical of the Tax Cuts and Jobs Act that Congress enacted four months earlier.  She and her coauthors wrote, “The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.”

To reduce debt over the long term, government should run smaller deficits when the economy is strong. Yet, they said, “Last year’s Tax Cuts and Jobs Act turned that economic logic on its head. The economy was already at or close to full employment and did not need a boost.”  Yellen is likely to play a key role when the Biden Administration attempts to confront a burgeoning national debt.  

Social Security. In that same essay, Yellen and her coauthors said the growth of Medicare, Medicaid, Social Security, and other federal entitlement programs was not the primary cause of rising federal debt. Insufficient revenue was. However, they also urged government to restore Social Security solvency through “adjustments in both spending and revenue.”

They added, “Additional revenue is critical because Social Security has become even more vital as fewer and fewer people have defined-benefit pensions.” Biden is likely to address other issues first, but with Social Security scheduled to become insolvent by 2035 or sooner, keep an eye on Yellen’s views.

Income inequality. Yellen has been concerned about income inequality for years and has explored several solutions. Notably, using the tax code to redistribute income, an idea favored by some Democrats on the left, is not among her priorities. Her focus has been on increasing wealth and income opportunities for low-income people rather than reducing the wealth of those at the top of the income distribution.

In one of her first speeches as Fed Chair, Yellen outlined four “building blocks” to increase incomes and build wealth: Resources for children, affordable higher education, and opportunities for business ownership and inheritances. Through his presidential campaign, Biden seemed to echo many of Yellen’s ideas, especially her views on the importance of education and business ownership. And inequality will be an important issue for his presidency.

Stimulus: In joint testimony before the House Select Subcommittee on the Coronavirus Crisis on July 17, Yellen and former Fed Chair Ben Bernanke called for further aggressive pandemic relief: “With interest rates extremely low and likely to remain so for some time, we do not believe that concerns about the deficit and debt should prevent the Congress from responding robustly to this emergency. The top priorities at this time should be protecting our citizens from the pandemic and pursuing a stronger and equitable economic recovery.” 

Yellen said the top economic priorities of that measure should be assistance to state and local governments. She said, “federal support should be substantial and conditions on the aid should not be overly restrictive.”

In Janet Yellen, Biden has chosen a Treasury Secretary who is highly respected among her peers and who is largely in sync with his own economic views. She’ll likely play a key role in building his economic agenda.