On Wednesday, March 9, 2022, the White House released the Executive Order on Ensuring Responsible Development of Digital Assets (EO) and Fact Sheet.

While this EO is written in fairly broad terms, it recognizes that digital assets present potential risks as well as potential benefits. The EO asks a variety of regulators and agencies to prepare reports on the risks presented by digital assets in an effort to develop a strategy for digital asset regulation going forward.

As highlighted in these documents, digital assets have grown exponentially, with market capitalization of digital assets growing from 15 billion to 3 trillion in the past five years alone and continuing to grow. Given this rapid growth and the relatively limited guidance regarding the treatment of digital assets, the White House recognizes the need for regulation in this area in order to ensure stability in the economy and consumer safety. Additionally, recent events in the Ukraine have highlighted the potential for countries to avoid economic sanctions through the use of digital assets. The EO demonstrates that the White House recognizes the need to protect against potential national security risks as well.  

The EO asks a variety of federal government agencies and regulators to propose rules to regulate digital assets. The EO specifically requests recommendation regulations needed to:

• Ensure the protection of businesses, consumers and investors. 
• Protect the global financial market in order to promote stability. 
• Mitigate any national security risks associated with the misuse of digital assets (e.g., money laundering, cybercrime, evasion of sanctions, etc.).
• Continue to promote US leadership and the global economy, particularly as it relates to digital assets.
• Ensure safe, affordable and equitable access to financial services. 
• Consider the potential of a Central Bank Digital Currency (CBDC defined under the EO as “a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank”) system in the US.

While the EO does not focus specifically on the taxation of digital assets, the EO contains broad direction to the Treasury Department and other agencies to develop a framework for interagency international engagement with their foreign counterparts to enhance “global compliance” which presumably would include compliance with U.S. and foreign tax laws.  Taxpayer should expect proposals designed to enhance global tax compliance and information reporting and to enhance global cooperation around digital asset taxation.

Taxpayers should expect to see proposals in response to this EO in the next one to two years.  

RSM has a robust team of professionals who will be able to provide various levels of support to clients with digital assets. Our team will continue to monitor this space and will provide updates as they develop.

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This article was written by Ramon Camacho and originally appeared on Mar 14, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/executive-order-provides-path-to-regulation-of-digital-assets.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

On March 9, 2022, the SEC released proposed rule amendments regarding various required cybersecurity-related disclosures. Among other stipulations, the proposed amendments would require:

• Current reporting about material cybersecurity incidents on Form 8-K within four business days after the registrant determines that it has experienced a material cybersecurity incident. The SEC would not expect a registrant to publicly disclose specific, technical information about its planned response to the incident or its cybersecurity systems, related networks and devices, or potential system vulnerabilities in such detail as would impeded the registrant’s response or remediation of the incident. However, to the extent the information is known at the time of the Form 8-K filing, the disclosure should include:
  • When the incident was discovered and whether it is ongoing
  • A brief description of the nature and scope of the incident
  • Whether any data was stolen, altered, accessed or used for any other unauthorized purpose
  • The effect of the incident on the registrant’s operations
  • Whether the registrant has remediated or is currently remediating the incident
• Periodic reporting on Form 10-Q and Form 10-K to provide updated disclosure about previously reported cybersecurity incidents and to require disclosure, to the extent known to management, when a series of previously undisclosed individually immaterial cybersecurity incidents has become material in the aggregate
• Annual reporting in Form 10-K to provide disclosure about:
  • The registrant’s policies and procedures, if any, for the identification and management of risks from cybersecurity threats, including, among other matters, whether the registrant considers cybersecurity as part of its business strategy, financial planning and capital allocation
  • The registrant’s cybersecurity governance, including the board of directors’ oversight role regarding cybersecurity risks
  • Management’s role, and relevant expertise, in assessing and managing cybersecurity-related risks and implementing related policies, procedures and strategies
• Annual reporting or proxy disclosure about the board of directors’ cybersecurity expertise, if any, including the name(s) of any such director(s) and any detail necessary to fully describe the nature of the expertise
• The cybersecurity disclosures to be presented in Inline eXtensible Business Reporting Language

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This article was written by RSM US LLP and originally appeared on Mar 10, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/financial-reporting/sec-proposes-rules-regarding-cybersecurity-related-disclosures.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Wage increases and rising inflation are now of paramount concern to policymakers and businesses.

While conditions are not yet ripe for the kind of wage-price spiral that wracked businesses in the 1970s, the economic growth and emboldened labor market of the past year require a different policy response than the previous two business cycles.

For the Federal Reserve and Congress, that means striking a careful balancing act of reining in inflation while preserving hard-won wage gains among the nation’s workers is no easy task.

To this end, monetary authorities have started to take measured steps to contain price increases while not crimping advances in productivity or growth. At the same time, we would hope that Congress would create incentives for businesses to address shortages of housing and energy that are pushing inflation higher.

Make no mistake: The recent wage increases are not high enough to pose an immediate risk to economic stability, corporate profits or inflation. Instead, the rising wages have been supported by higher productivity among businesses.

Productivity and wages

The economy can support higher wages as long as productivity increases at a faster rate. And this has indeed been happening. Productivity has been increasing since late 2016 because, in no small part, of the private sector continued investment in its competitiveness.

Consider corporate profits. The 4% increase in the employment cost index during the fourth quarter of last year and the near 7% increase in average wages have yet to put a dent in those profits. This implies that productivity is rising as the economy booms.

In the 1970s, by contrast, cost-of-living increases were built into labor contracts, and wage growth was unresponsive to changes in productivity. But this time around, the pandemic has become the catalyst for a significant shift in the labor market, with wages in the private sector now more a function of the supply and demand for labor and its productive abilities than in previous generations.

During the fourth quarter of last year, nonfarm productivity increased by 6.6% amid a 9.2% increase in overall output. For businesses, the cost of labor should correspond to its contribution to profits, with labor churn a welcome sign of engaged employees working their way up the income ladder. As firms experience an increase in productivity and profits, they are in a position to retain their workforce via higher wages and salaries.

A more efficient marketplace for labor

Wage growth in an open economy is a traditional measure of economic growth. And as with general price increases, a lack of wage growth signals stagnation. This was observed during the decade of slow wage growth and disinflation between the financial crisis in 2008-09 and the shock of the pandemic in 2020.

Today, that is not the case. Instead, the delivery of sophisticated technology to workers computers and work sites is resulting in greater output per worker that supports improved wages even as it dampens inflation on the margin.

At the same time, and perhaps more important for the future of the economy, technological advances have created a functioning marketplace for labor. Workers are better able and more willing to match information on employment opportunities with their personal and financial choices.

Time spent at home during the pandemic and government income assistance gave workers the time and the means to reassess their priorities. Yet this two-year window is only part of a longer-term trend of worker advancement. As a result, workers have quit their jobs at record rates.

Workers, after all, quit their jobs because they can, whether it’s for a better opportunity or because they can afford to.

So when the bottom fell out of the economy in 2008-09, there were limited choices in employment and income, and the quit rate plunged.

As the economy slowly recovered, employment opportunities and the quit rate increased. We have been seeing a similar pattern of labor churn in recent months.

Over the past two decades, wage growth has been generally higher for job switchers than for workers who remain in their jobs. In the latest month, workers who switched employment had wage growth of 4.6% per year, while wages for those who stayed in their job grew by 3.4% per year. It makes sense that employees would walk away for a higher-paying job.

There are other signs of change, such as increases in the wage growth for part-time workers. We expect this labor churn to continue. It is a sign of a vibrant economy and should be welcomed by businesses looking for workers with entrepreneurial, self-selecting bent.

A shrinking supply of labor

Just as the Federal Reserve finds that supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation, we find similar circumstances in the labor market.

While we would expect wages to grow during an economic recovery as employers compete for employees, the distribution among occupations has not been uniform. It should be obvious to anyone who has had to wait for restaurant food or fuel oil delivery; a shortage in the number of service workers has driven up the cost of labor.

There has been a well-documented account of workers no longer willing to work in unhealthy or dangerous conditions or for salaries that do not cover basic expenses like child care.

Because of the shrinking supply of workers, wage growth in the lowest quartile of incomes increased from a 12-month average 4.2% rate of increase to a 5.4% rate. Wage growth in the second quartile increased from 3.6% to 4.1%.

By comparison, and at the other end of the income spectrum, wage growth in the third quartile was virtually flat on the year, and there was a decrease in the rate of wage growth from a 3.3% to 2.8% rate in the highest quartile.

The result is a smaller supply of labor to meet the growing demand for low-wage services, which pushes up the wage requirements for those willing to perform those services. The policy answer is a rational immigration program, which seems unlikely in the current political environment.

Each worker has a reservation wage, defined as the lowest wage for which they would be willing to trade their time and effort. For a young family, it takes simple arithmetic to decide who works and who doesn’t.

For example, the cost of child care in Massachusetts eats up roughly 25% of earnings for the average family. If a family member’s take-home pay is less than the annual $21,000 cost of child care, then it’s simply not worth it for them to go to work. In Mississippi, that cost is $5,400 for a single infant, which is still unaffordable for many families.

The collision of a lack of affordable child care options and the need for families to protect their children during the pandemic has resulted in everything from unrecoverable loss of workdays as families care for children when day care centers are closed due to a drop in labor force participation among the prime working-age population, which is again an unrecoverable loss of workdays.

At the other end of the age spectrum, wage growth for older employees has hovered around 2.1% per year since 2015, barely keeping up with the cost of living. Health concerns and a sense of going nowhere have sparked an increase in the reservation wage for workers 55 and older, resulting in about 3 million workers retiring.

The takeaway

There is no denying that the rapid recovery of economic activity has led to price and wage increases.

The economy is now operating above its pre-pandemic level and near full employment. Policy normalization in the guise of rising interest rates is not going to define the next few years but rather managing a policy that will protect the wage gains of low-income households by minimizing damage to their purchasing power caused by inflation.

Workers might not have the bargaining power of earlier generations, but technology has given them the ability to optimize their earnings and their ability to meet family obligations.

Rather than a concern for business, this should be seen as a way to maintain an engaged workforce able to adapt to changes in production even if labor force growth continued to diminish.

Without the return of immigration on a wider scale, firms should expect low-wage workers to remain in short supply and expensive relative to pre-pandemic levels.

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This article was written by Joe Brusuelas and originally appeared on Mar 01, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/economics/inflation-and-the-middle-market.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.