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Here’s how tax credits could impact American’s finances

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John Delaney, Former Congressman, Presidential candidate, and Current Board Member for the Bipartisan Policy Center, joins Yahoo Finance to discuss outlook on tax credit and Biden’s plans child tax credits.

Video Transcript

[MUSIC PLAYING]

KRISTIN MYERS: Time now for our Funding Our Future segment. Let's look at the expansion of tax credits to help struggling Americans. We're joined now by John Delaney, former Congressman from Maryland, presidential candidate, and the current board member for the Bipartisan Policy Center. Good to have you with us here.

So I want to start with some of these tax credits. They typically get bipartisan support. I'm curious to know, however, how we might pay for some of these expansions, and do you think that would get Republican support, especially as we've seen Republicans balking at some of the price tags for some of those stimulus plans?

JOHN DELANEY: Well, you know, that's obviously difficult to predict. Importantly, the tax credits are actually very popular and have proven to be very effective, whether it's the child tax credit or the earned-income tax credit. In some ways, increasing the earned-income tax credit is the simplest and most powerful thing we could do to help American workers. And it was actually a Republican idea, originally.

So I think these kind of tax credits are very popular, and I think there are some opportunities to raise taxes to pay for them, as we should. I mean, we need to be fiscally responsible, and we need to spend taxpayer dollars wisely. And we should be allocating it towards things that have the biggest impact. And things like child tax credit or earned-income tax credit, these have very big impacts, and there's other tax provisions that don't have the kind of impact-- carried interest, things like that. And so we should clearly be cleaning up the tax code and putting money where it really helps people.

ALEXIS CHRISTOFOROUS: So you make the point that--

KRISTIN MYERS: So--

ALEXIS CHRISTOFOROUS: Oh, sorry there.

KRISTIN MYERS: No, go ahead, Alexis.

ALEXIS CHRISTOFOROUS: Yeah, we make the-- you make the point that we need to be financially sustainable when it comes to these tax credits. So then how can you make sure that the money is targeted and is going to those who need it most, similar to what we were going to do with the stimulus checks. But the government said, logistically, it was too tough to really pinpoint who was going to need them the most. How do you do that with the tax credits?

JOHN DELANEY: Well, that's what's so great about the child tax credit and the EITC, as it's called, the earned-income tax credit, is these are existing tax credits and they're proven to work. And there's substantial data showing how they perform and that the incidents of mistakes or fraud, which people tend to allege, are incredibly, incredibly small. So-- and since they're tied to people's tax returns, right? And their existing relationship with the government in the IRS, you know the right people get them because they're tied to your income. If you make too much money, you're not eligible for these things. But if you're below certain income levels, you're eligible for them, to different degrees. So it is, by definition, a highly-targeted program that only delivers the money to those who need it, who Congress intends to get it. And we've got significant history with them, and we know they work.

KRISTIN MYERS: So I just wanted to circle back to something you said just a moment ago about paying for some of these tax credits. You mentioned raising taxes. I'm curious to know by how much, which groups you think should be paying for this through a tax increase.

JOHN DELANEY: Well, look, I think tax reform should be done on a holistic basis, right? We have things in our tax code right now, for example, the carried interest loophole, as it's commonly called. It allows people in the private equity business and the hedge fund business to effectively pay capital gains taxes on income they earn where most people would view that as ordinary income. So for example, closing that loophole would create funds to pay for the expansion of the earned-income tax credit or the child tax credit, for example. I mean, that's one loophole that you could close.

There are other business tax deductions that have been proven to be less successful. For example, the research tax credit deduction has been proven to be very successful for businesses, and it encourages research and development. And particularly at this time, we don't want to get rid of that. But things like accelerated depreciation on equipment spending, there's been lots of studies that indicate that doesn't really change behavior.

So what we really need to be looking at these various tax deductions is finding out which ones work-- and we all kind of know which ones work-- and which ones don't. And we should be taking money from things that don't work and closing those loopholes and eliminating those deductions and taking that money and applying it towards things that work. In some ways, it's pretty simple.

ALEXIS CHRISTOFOROUS: I want to pivot for a moment and talk a little Social Security--

JOHN DELANEY: Sure.

ALEXIS CHRISTOFOROUS: --because we all know-- very depressing-- that the trust fund is going to be depleted in the next 10 to 12 years. What would you like to see the Biden administration do, and is any of it possibly bipartisan?

JOHN DELANEY: Oh, I think so. Listen, Social Security is arguably-- arguably-- the most successful anti-poverty program this country's ever had. It has enjoyed enormous bipartisan support, and it is the-- kind of the backbone of not only the American retirement system, but ensuring that we have financial security. I mean, when Social Security was created, I think 50% of seniors lived in poverty. That number is down to 10% today. The last time Social Security was adjusted or reformed was in 1980, and the poverty rate of seniors back then was about 20%. So what that shows is that working together, Democrats and Republicans have constantly made adjustments to Social Security to ensure that it's financially viable without undermining the success of the program.

So I think what President Biden has proposed on this makes a lot of sense. And it's kind of a-- they call it the donut approach, which is right now, you get taxed on a certain amount of your income, and then it ends. And what the president has proposed is that you continue to tax income, but not until income levels above $400,000. So you kind of skip a lot of the middle class, and then you resume payroll taxes on a certain percentage of income over $400,000. That creates an enormous amount of continued sustainability for Social Security.

It's really important when we talk about Social Security that we remind people that the system's not broke or bankrupt. Historically, more money has been paid into Social Security than has been paid out. A lot of people don't believe-- realize that.

The problem is, starting about now and continuing for a period of time, we're going to start paying out more than we take in. And by 2030 or '31 or '32-- the numbers move around-- that'll go negative, meaning we'll have paid out more than we've taken in. So we just need to make some modest adjustments, very modest adjustments now, do it soon. The longer you wait, the more drastic those adjustments have to be. Modest adjustments now can continue the solvency of Social Security for another 75 years.

When I was in Congress, I introduced with Representative Tom Cole, Republican from Oklahoma, something called the Social Security Commission Bill, which was modeled after what they did in 1980, which was to create a bipartisan commission to kind of come up with proposed solutions for Social Security. There are a lot of them out there. Most people know what they are, and President Biden has proposed a good one.

KRISTIN MYERS: All right, former Congressman John Delaney, thanks so much for joining us for our Funding Our Future segment.