WEBVTT 00:00:00.000 --> 00:00:01.940 OK, so let's start with something that I think 00:00:01.940 --> 00:00:05.080 most people have seen, but maybe don't fully 00:00:05.080 --> 00:00:09.060 grasp just how powerful it is. The tax credit. 00:00:09.179 --> 00:00:11.099 You know, you look at your tax return. You see 00:00:11.099 --> 00:00:14.359 this big number you owe. Yeah. Say $5 ,000. The 00:00:14.359 --> 00:00:17.420 scary number. Yeah. The scary number. And then, 00:00:17.420 --> 00:00:20.440 boom, you apply this thing and suddenly you only 00:00:20.440 --> 00:00:24.100 owe $2 ,000. It's just it's a direct hit to your 00:00:24.100 --> 00:00:26.420 tax bill. It's a surgical strike. That's the 00:00:26.420 --> 00:00:28.079 perfect way to put it. I mean, we're all pretty 00:00:28.079 --> 00:00:29.899 familiar with the tax deduction, right? That 00:00:29.899 --> 00:00:31.920 just lowers your taxable income. So you text 00:00:31.920 --> 00:00:33.719 on a smaller amount of money. Right. A smaller 00:00:33.719 --> 00:00:36.380 pot. Exactly. But a credit, as you said, it's 00:00:36.380 --> 00:00:38.840 a dollar for dollar reduction of the actual tax 00:00:38.840 --> 00:00:41.539 you owe. If you have a thousand dollar tax bill 00:00:41.539 --> 00:00:44.219 and a thousand dollar tax credit, you owe nothing. 00:00:44.479 --> 00:00:48.479 Zero. It's pure direct value. And that purity, 00:00:48.600 --> 00:00:50.880 that directness is what makes it such an incredible 00:00:50.880 --> 00:00:55.179 tool for. social and economic policy. This isn't 00:00:55.179 --> 00:00:57.579 just some accounting trick. It's actual state 00:00:57.579 --> 00:01:00.200 power delivered right through the tax code. 100%. 00:01:00.200 --> 00:01:03.200 And for this deep dive, our source material is 00:01:03.200 --> 00:01:06.159 just. It's vast. It gives us this incredible 00:01:06.159 --> 00:01:08.879 global perspective. We've got everything from 00:01:08.879 --> 00:01:11.540 the huge renewable energy incentives in the U 00:01:11.540 --> 00:01:15.760 .S. to credits for adoption and education. And 00:01:15.760 --> 00:01:17.060 then there are these really specialized things 00:01:17.060 --> 00:01:19.200 like the VAT credit, which is fundamental to 00:01:19.200 --> 00:01:22.620 how Europe works. And then these And highly charged 00:01:22.620 --> 00:01:24.700 political systems like the low income assistance 00:01:24.700 --> 00:01:26.680 they used to have in the UK. It's a huge range. 00:01:26.939 --> 00:01:29.099 So our mission today is to get way past that 00:01:29.099 --> 00:01:31.620 surface level definition. We want to really uncover 00:01:31.620 --> 00:01:34.359 the political machinery behind it, the economic 00:01:34.359 --> 00:01:37.420 drivers and the, frankly, incredible social engineering 00:01:37.420 --> 00:01:40.200 power that tax credits have. I think by the end 00:01:40.200 --> 00:01:42.219 of this, you'll see a tax credit isn't just a 00:01:42.219 --> 00:01:44.219 number on a form. It's a government mandate. 00:01:45.140 --> 00:01:46.859 All right. Let's start with the absolute foundation, 00:01:46.959 --> 00:01:48.819 because the mechanics here, they really determine 00:01:48.819 --> 00:01:52.040 whether you're getting simple tax relief or a 00:01:52.040 --> 00:01:54.340 direct cash payment from the government. So what 00:01:54.340 --> 00:01:57.299 is the core simplest definition? OK. At its most 00:01:57.299 --> 00:02:01.719 basic, a tax credit is an incentive. It lets 00:02:01.719 --> 00:02:03.659 you subtract a certain amount directly from the 00:02:03.659 --> 00:02:05.939 total tax you owe the state. It's basically a 00:02:05.939 --> 00:02:08.560 rebate or kind of government discount. Right. 00:02:08.740 --> 00:02:11.800 And our sources really break these down into 00:02:11.800 --> 00:02:14.400 three main buckets. They're either an incentive 00:02:14.400 --> 00:02:16.520 to get you to do something, you know, buy an 00:02:16.520 --> 00:02:19.460 electric car, or they're a recognition of taxes 00:02:19.460 --> 00:02:21.699 you've already paid during the year, or sometimes 00:02:21.699 --> 00:02:23.620 they're just a general discount from the state 00:02:23.620 --> 00:02:26.620 for social reasons. That first distinction we 00:02:26.620 --> 00:02:28.460 made, credit versus deduction, that's vital. 00:02:28.800 --> 00:02:31.139 But the distinction within the world of credits 00:02:31.139 --> 00:02:33.560 is, I think, even more important. We have to 00:02:33.560 --> 00:02:36.419 drill down on refundable versus non -refundable. 00:02:36.580 --> 00:02:39.599 This one detail is the key to everything. You 00:02:39.599 --> 00:02:41.520 really can't overstate it. This is the hinge. 00:02:41.840 --> 00:02:44.099 This is the point that determines whether a taxpayer 00:02:44.099 --> 00:02:46.280 can get what's called a negative tax liability. 00:02:46.740 --> 00:02:48.319 Which means the government actually writes you 00:02:48.319 --> 00:02:50.560 a check. A check, even if you didn't pay in that 00:02:50.560 --> 00:02:53.159 much tax to begin with. Okay. Let's use the scenarios 00:02:53.159 --> 00:02:55.580 from the sources to make this super clear. Let's 00:02:55.580 --> 00:02:58.300 start with the most powerful one. Scenario A, 00:02:58.560 --> 00:03:02.159 the refundable credit. Okay. So I'm at a taxpayer. 00:03:02.560 --> 00:03:04.840 After all their calculations, they have a tax 00:03:04.840 --> 00:03:08.340 bill of $100. That's what they owe. Now they 00:03:08.340 --> 00:03:12.439 qualify for a $300 refundable tax credit. Okay. 00:03:12.810 --> 00:03:14.650 Because it's refundable, the credit doesn't just 00:03:14.650 --> 00:03:16.849 stop when the bill hits zero. It keeps going. 00:03:17.030 --> 00:03:19.969 It wipes out the $100 owed and then pushes the 00:03:19.969 --> 00:03:23.110 final liability into the negative, negative $200. 00:03:23.469 --> 00:03:26.810 That $200 difference, that is money the government 00:03:26.810 --> 00:03:29.689 pays back to the taxpayer. So to be really clear, 00:03:29.770 --> 00:03:31.669 if you're a low -income worker, maybe you earned 00:03:31.669 --> 00:03:33.830 so little you didn't pay any federal income tax 00:03:33.830 --> 00:03:36.409 at all. Or let's say only $50 was withheld from 00:03:36.409 --> 00:03:39.030 your paychecks. Yeah. You still get that $300 00:03:39.030 --> 00:03:41.870 refundable credit. You get the full $300 or, 00:03:41.930 --> 00:03:45.099 well. $250 back after covering your $50. The 00:03:45.099 --> 00:03:48.340 point is that refundable piece transforms the 00:03:48.340 --> 00:03:51.340 tax code into a direct subsidy. It becomes a 00:03:51.340 --> 00:03:53.860 social safety net and it's delivered super efficiently 00:03:53.860 --> 00:03:56.520 through the IRS or whatever the national tax 00:03:56.520 --> 00:03:59.460 agency is. Now let's flip that on its head. Scenario 00:03:59.460 --> 00:04:02.639 B, the non -refundable credit. Same situation. 00:04:02.819 --> 00:04:05.919 You owe $100, you have a $300 credit. What happens 00:04:05.919 --> 00:04:08.360 now? It's a totally different outcome. In the 00:04:08.360 --> 00:04:11.139 non -refundable case, the credit can only reduce 00:04:11.139 --> 00:04:14.639 your bill down to zero. So you pay nothing, which 00:04:14.639 --> 00:04:18.579 is still great, but you've only used $100 of 00:04:18.579 --> 00:04:21.459 that credit. The other $200 is just gone. It 00:04:21.459 --> 00:04:24.439 just disappears. It just vanishes. Now, some 00:04:24.439 --> 00:04:26.379 specific credits might let you carry it forward 00:04:26.379 --> 00:04:29.019 to the next year, but the main point is no cash 00:04:29.019 --> 00:04:32.420 back. The tax bill cannot go below zero. And 00:04:32.420 --> 00:04:34.759 there it is. That's the huge policy insight, 00:04:34.920 --> 00:04:37.259 right? Non -refundable credits, they mostly help 00:04:37.259 --> 00:04:39.480 people who already have a decent tax bill to 00:04:39.480 --> 00:04:41.139 begin with, you know, middle and upper middle 00:04:41.139 --> 00:04:43.600 class as an incentive for things like education. 00:04:43.740 --> 00:04:46.740 Exactly. But the refundable ones, they are explicitly 00:04:46.740 --> 00:04:49.000 designed to put money into the pockets of the 00:04:49.000 --> 00:04:51.540 lowest income people, even people who might not 00:04:51.540 --> 00:04:54.300 file a tax return otherwise, except to claim 00:04:54.300 --> 00:04:57.399 that specific benefit. One is relief. The other 00:04:57.399 --> 00:05:00.449 is a social payment. Perfectly put. Okay. Let's 00:05:00.449 --> 00:05:02.709 hit that third foundational piece, which is less 00:05:02.709 --> 00:05:07.610 about incentives and more about just good bookkeeping. 00:05:08.250 --> 00:05:10.290 Credits for payments you've already made. Right. 00:05:10.389 --> 00:05:11.769 These are really just accounting adjustments. 00:05:12.209 --> 00:05:15.069 They're designed to track money that's already 00:05:15.069 --> 00:05:18.389 moved from you to the government. And they're 00:05:18.389 --> 00:05:20.970 almost always refundable because it's your money 00:05:20.970 --> 00:05:22.850 you already parted with. And the most common 00:05:22.850 --> 00:05:25.089 example for an individual is just... Payroll 00:05:25.089 --> 00:05:27.689 withholding. Payroll withholding, exactly. PAYE, 00:05:27.790 --> 00:05:30.089 or pay as you earn, as they call it in the UK. 00:05:30.470 --> 00:05:33.670 Every paycheck, a little tax is taken out. At 00:05:33.670 --> 00:05:35.569 the end of the year, all those little payments 00:05:35.569 --> 00:05:37.410 are added up and credited against your final 00:05:37.410 --> 00:05:39.750 tax bill. If they took out too much, you get 00:05:39.750 --> 00:05:42.209 a refund. Simple. Another big one in this bucket 00:05:42.209 --> 00:05:44.949 is withholding on payments to non -residents. 00:05:45.550 --> 00:05:47.949 How does that work? So if a foreign company earns 00:05:47.949 --> 00:05:50.750 money in the U .S., for example, the U .S. company 00:05:50.750 --> 00:05:53.610 paying them is usually required to withhold a 00:05:53.610 --> 00:05:55.850 certain percentage of that payment and send it 00:05:55.850 --> 00:05:58.170 straight to the IRS. The foreign company then 00:05:58.170 --> 00:06:00.649 uses that withheld amount as a credit against 00:06:00.649 --> 00:06:02.850 whatever their final U .S. tax bill is when they 00:06:02.850 --> 00:06:05.209 file their own return. It's a way to ensure the 00:06:05.209 --> 00:06:07.189 government gets its cut from cross -border transactions. 00:06:07.709 --> 00:06:11.050 And then we get to the most complex one. the 00:06:11.050 --> 00:06:13.850 input credit for a value -added tax, or VAT. 00:06:14.009 --> 00:06:16.230 This is the engine that makes consumption taxes 00:06:16.230 --> 00:06:19.149 work in what, over 160 countries. Absolutely 00:06:19.149 --> 00:06:21.329 fundamental. So walk us through the mechanics 00:06:21.329 --> 00:06:23.649 of an input credit. This is how the system avoids 00:06:23.649 --> 00:06:25.529 taxing the same thing over and over again, right? 00:06:25.589 --> 00:06:28.170 That's exactly its purpose. Okay, so imagine 00:06:28.170 --> 00:06:31.350 a car manufacturer. They buy steel and they pay, 00:06:31.490 --> 00:06:35.250 let's say, 20 % VAT to the steel supplier. That 00:06:35.250 --> 00:06:38.189 VAT they paid is their input VAT. Got it. Now, 00:06:38.189 --> 00:06:40.490 when they sell the finished car to a dealership, 00:06:40.509 --> 00:06:44.029 they collect 20 % VAT on that sale price. That's 00:06:44.029 --> 00:06:46.269 their output VAT. They don't send all that money 00:06:46.269 --> 00:06:47.750 to the government. they only send the difference. 00:06:48.110 --> 00:06:50.810 The output VAT they collected minus the input 00:06:50.810 --> 00:06:53.649 VAT they already paid. The input VA acts as a 00:06:53.649 --> 00:06:56.170 credit. So if a business has a month where they 00:06:56.170 --> 00:06:58.329 buy a ton of new equipment but don't sell much, 00:06:58.610 --> 00:07:02.430 their input credit could be higher than their 00:07:02.430 --> 00:07:05.769 output VAT? Does the government owe them cash 00:07:05.769 --> 00:07:08.480 in that case? Yes. And that's why these credits 00:07:08.480 --> 00:07:10.579 are usually refundable after a certain period. 00:07:10.720 --> 00:07:13.699 This is especially vital for any business that 00:07:13.699 --> 00:07:16.040 exports. Why for exporters? Because exports are 00:07:16.040 --> 00:07:18.800 almost always VAT exempt. They're zero rated. 00:07:18.980 --> 00:07:21.920 So an exporter pays input VAT on all their supplies 00:07:21.920 --> 00:07:23.920 and labor. But when they sell their product overseas, 00:07:24.120 --> 00:07:26.939 they collect zero output VAT. That means their 00:07:26.939 --> 00:07:29.180 entire input credit balance is owed back to them 00:07:29.180 --> 00:07:31.259 by the government. It's how you make sure your 00:07:31.259 --> 00:07:32.899 country's products can compete on the global 00:07:32.899 --> 00:07:35.560 market without being burdened by domestic taxes. 00:07:35.860 --> 00:07:39.000 Wow. So we start with this simple idea, a tax 00:07:39.000 --> 00:07:42.079 reduction, and it immediately explodes into three 00:07:42.079 --> 00:07:45.480 totally different worlds. Refundable social payments, 00:07:45.720 --> 00:07:48.560 non -refundable middle class incentives, and 00:07:48.560 --> 00:07:51.379 these complex cash accounting systems for payroll 00:07:51.379 --> 00:07:55.220 and global trade. OK, now we are moving firmly 00:07:55.220 --> 00:07:57.660 into what you called social engineering territory, 00:07:57.839 --> 00:08:00.459 because at the individual level, this is where 00:08:00.459 --> 00:08:02.639 tax credits become these incredibly powerful 00:08:02.639 --> 00:08:05.589 and often really politically volatile. tools 00:08:05.589 --> 00:08:08.069 for income redistribution. We're talking about 00:08:08.069 --> 00:08:11.129 credits that act as low income subsidies. Absolutely. 00:08:11.430 --> 00:08:13.129 And as we just established, these are almost 00:08:13.129 --> 00:08:15.420 always refundable. The key insight here is that 00:08:15.420 --> 00:08:17.480 when you deliver social support through the tax 00:08:17.480 --> 00:08:19.339 code, when you call it a tax credit instead of 00:08:19.339 --> 00:08:21.519 calling it welfare, you can often get, you know, 00:08:21.519 --> 00:08:23.500 better political buy -in. And probably higher 00:08:23.500 --> 00:08:25.800 uptake, too. Exactly. People who might have a 00:08:25.800 --> 00:08:27.860 stigma about welfare often feel perfectly fine 00:08:27.860 --> 00:08:30.339 getting a tax refund. We have two amazing case 00:08:30.339 --> 00:08:32.799 studies that show the full power and the volatility 00:08:32.799 --> 00:08:36.000 of this. The historical system in the UK and 00:08:36.000 --> 00:08:38.720 the system in the US. Let's start with the UK's 00:08:38.720 --> 00:08:41.139 old tax credits. That was a really unique experiment. 00:08:41.559 --> 00:08:45.519 It was the old UK child tax credit and working 00:08:45.519 --> 00:08:49.460 tax credit. They were explicitly a form of means 00:08:49.460 --> 00:08:52.059 -tested support. But here's the detail that's 00:08:52.059 --> 00:08:53.740 kind of shocking to an American perspective. 00:08:54.350 --> 00:08:57.350 They had absolutely no connection to how much 00:08:57.350 --> 00:09:00.110 tax the person had actually paid. None. And none. 00:09:00.289 --> 00:09:02.929 They were pure cash payments delivered through 00:09:02.929 --> 00:09:05.309 the tax system. You could be a non -taxpayer 00:09:05.309 --> 00:09:07.570 and still get thousands of pounds. They weren't 00:09:07.570 --> 00:09:09.769 tax relief. They were social subsidies that were 00:09:09.769 --> 00:09:12.429 just cleverly rebranded. Let's get into the mechanics 00:09:12.429 --> 00:09:14.990 of the child tax credit then. So there was a 00:09:14.990 --> 00:09:17.950 baseline minimum amount that was payable to pretty 00:09:17.950 --> 00:09:19.950 much anyone with kids, as long as their income 00:09:19.950 --> 00:09:22.610 was below a fairly high limit. But the calculation 00:09:22.610 --> 00:09:25.570 itself was incredibly targeted. How so? The amount 00:09:25.570 --> 00:09:27.529 you got depended on your income, obviously, but 00:09:27.529 --> 00:09:29.250 also the number of children you had, whether 00:09:29.250 --> 00:09:31.190 any of them received disability living allowance, 00:09:31.330 --> 00:09:33.629 and even the education status of your older kids. 00:09:33.769 --> 00:09:36.789 Wow. So the state was really micromanaging family 00:09:36.789 --> 00:09:39.610 details to target the money. It sounds complex, 00:09:39.690 --> 00:09:41.950 but I guess it was theoretically very precise 00:09:41.950 --> 00:09:44.600 at finding need. It was. And then you had the 00:09:44.600 --> 00:09:47.279 working tax credit, the WTC, layered on top of 00:09:47.279 --> 00:09:49.059 that. That was the employment incentive. It was 00:09:49.059 --> 00:09:52.179 paid to low earners. If you were single and over 00:09:52.179 --> 00:09:54.779 25, you had to work over 30 hours a week. But 00:09:54.779 --> 00:09:57.580 if you had children, that work requirement dropped 00:09:57.580 --> 00:10:00.259 all the way down to 16 hours a week. To encourage 00:10:00.259 --> 00:10:02.679 part -time work, especially for parents. Exactly. 00:10:02.820 --> 00:10:05.220 It was trying to make work pay, even part -time 00:10:05.220 --> 00:10:07.559 work. But the moment a system gets that complex 00:10:07.559 --> 00:10:10.720 and that many people depend on it, it becomes 00:10:10.720 --> 00:10:13.539 a massive political target. I imagine the controversy 00:10:13.539 --> 00:10:15.740 was inevitable when someone proposed cutting 00:10:15.740 --> 00:10:19.519 it. Oh, it was huge. And the effects were immediate 00:10:19.519 --> 00:10:23.100 and measurable. Our sources cite a survey from 00:10:23.100 --> 00:10:26.120 the organization End Child Poverty, which estimated 00:10:26.120 --> 00:10:28.340 that when these cuts were proposed, it directly 00:10:28.340 --> 00:10:31.279 forced about 1 .5 million parents to cut back 00:10:31.279 --> 00:10:34.330 on essentials. We're talking food. fuel just 00:10:34.330 --> 00:10:36.269 to get by. And the political rhetoric around 00:10:36.269 --> 00:10:37.789 this was fascinating. I remember the point from 00:10:37.789 --> 00:10:40.149 the Resolution Foundation. Their argument was 00:10:40.149 --> 00:10:42.429 that you can't just cut these credits and expect 00:10:42.429 --> 00:10:44.850 employers to magically raise wages to fill the 00:10:44.850 --> 00:10:47.269 gap. Right. Their director called that saloon 00:10:47.269 --> 00:10:50.370 bar economics. He stressed that the credits were 00:10:50.370 --> 00:10:52.909 a necessary bridge, making sure low paid work 00:10:52.909 --> 00:10:55.110 could actually provide a minimum standard of 00:10:55.110 --> 00:10:57.629 living, regardless of what the employer was paying. 00:10:58.169 --> 00:10:59.929 And this all came to a head in Parliament, right? 00:11:00.049 --> 00:11:03.289 It absolutely did. In September 2015, the House 00:11:03.289 --> 00:11:06.289 of Commons voted to slash the income thresholds 00:11:06.289 --> 00:11:08.769 for these credits, which meant a big pay cut 00:11:08.769 --> 00:11:11.850 for a lot of low -income working families starting 00:11:11.850 --> 00:11:14.710 the next April. And the opposition, what was 00:11:14.710 --> 00:11:17.409 their immediate claim? That it would push the 00:11:17.409 --> 00:11:20.470 working poor deeper into poverty. And they weren't 00:11:20.470 --> 00:11:23.269 just guessing. The Institute for Fiscal Studies, 00:11:23.389 --> 00:11:26.000 the IFS, Backed them up with an analysis. They 00:11:26.000 --> 00:11:29.100 did. The IFS confirmed that even when you accounted 00:11:29.100 --> 00:11:31.559 for other government policies happening at the 00:11:31.559 --> 00:11:33.899 same time, you know, a small income tax cut, 00:11:33.940 --> 00:11:36.600 a rise in the national living wage, the net effect 00:11:36.600 --> 00:11:38.899 of cutting the tax credits was still a significant 00:11:38.899 --> 00:11:41.779 income loss for the poorest families. It really 00:11:41.779 --> 00:11:43.740 confirmed that the goal was to cut spending, 00:11:43.860 --> 00:11:46.559 even if it hurt those recipients. And what was 00:11:46.559 --> 00:11:48.480 the government's rationale for that? Their stated 00:11:48.480 --> 00:11:50.460 reason was that the system had just become too 00:11:50.460 --> 00:11:52.899 expensive, that it was being used for too long 00:11:52.899 --> 00:11:55.399 to subsidize low wages, and they needed to bring 00:11:55.399 --> 00:11:57.639 the spending back down to what they called sustainable 00:11:57.639 --> 00:12:01.100 2007 levels. But the fight wasn't over. This 00:12:01.100 --> 00:12:02.960 is where it gets really dramatic with the House 00:12:02.960 --> 00:12:06.919 of Lords. It does. In October 2015, in this highly 00:12:06.919 --> 00:12:09.679 unusual move, the unelected House of Lords actually 00:12:09.679 --> 00:12:12.360 voted to delay the cuts. They basically sent 00:12:12.360 --> 00:12:14.500 it back to the House of Commons and said, you 00:12:14.500 --> 00:12:16.720 need to reconsider the social damage this is 00:12:16.720 --> 00:12:19.610 going to do. That's a huge political move. It 00:12:19.610 --> 00:12:22.149 just underscores how critical this tax mechanism 00:12:22.149 --> 00:12:24.870 was to people's income. It was seen as essential 00:12:24.870 --> 00:12:27.710 income, not just a tax break. But in the end, 00:12:27.710 --> 00:12:29.929 the entire system, the child and working tax 00:12:29.929 --> 00:12:33.090 credits, was eventually phased out. It officially 00:12:33.090 --> 00:12:36.610 ended on April 5th, 2025, and was mostly replaced 00:12:36.610 --> 00:12:38.990 by the universal credit system. It just shows 00:12:38.990 --> 00:12:41.289 how these things are constantly evolving. OK, 00:12:41.350 --> 00:12:43.909 let's pivot now to the United States. Low income 00:12:43.909 --> 00:12:46.289 support is also delivered through the tax code 00:12:46.289 --> 00:12:49.330 here. But it's dominated by one massive refundable 00:12:49.330 --> 00:12:53.549 credit, the Earned Income Credit, or EIC. The 00:12:53.549 --> 00:12:56.610 EIC is really the bedrock of American anti -poverty 00:12:56.610 --> 00:12:59.409 policy. It's a refundable credit, and it's calculated 00:12:59.409 --> 00:13:02.169 as a percentage of the income you earn. But unlike 00:13:02.169 --> 00:13:04.230 some other credits, it's designed on a schedule 00:13:04.230 --> 00:13:06.570 that actively encourages work. What do you mean 00:13:06.570 --> 00:13:09.309 by that, the schedule? It starts small, but it 00:13:09.309 --> 00:13:12.070 ramps up very quickly as your income rises from 00:13:12.070 --> 00:13:15.029 zero, then it hits a maximum plateau, and then 00:13:15.029 --> 00:13:17.629 it phases out gradually once you're above a certain 00:13:17.629 --> 00:13:20.120 income threshold. That ramp up part is critical, 00:13:20.259 --> 00:13:22.100 isn't it? It gives people a direct financial 00:13:22.100 --> 00:13:25.519 reward for going from no work to some work or 00:13:25.519 --> 00:13:28.419 from part time to more hours. Precisely. You 00:13:28.419 --> 00:13:31.120 see a real tangible benefit as you work more. 00:13:31.259 --> 00:13:33.600 And to give you an idea of the scale, back in 00:13:33.600 --> 00:13:36.840 2016, the maximum credit for a family with three 00:13:36.840 --> 00:13:42.379 or more kids was over $6 ,000. $6 ,269. That's 00:13:42.379 --> 00:13:44.320 a huge cash injection delivered right through 00:13:44.320 --> 00:13:46.259 your tax return. It's one of the biggest anti 00:13:46.259 --> 00:13:48.429 -poverty programs in the U .S. It is. And the 00:13:48.429 --> 00:13:50.769 amounts are indexed to inflation, so its value 00:13:50.769 --> 00:13:53.210 doesn't get worn away over time. Beyond the EIC, 00:13:53.490 --> 00:13:55.750 the U .S. has a few other credits aimed at specific 00:13:55.750 --> 00:13:59.110 low -income groups. Right. There's the nonrefundable 00:13:59.110 --> 00:14:01.250 credit for the elderly and disabled. It's one 00:14:01.250 --> 00:14:03.350 of the older ones. It provides a relatively small 00:14:03.350 --> 00:14:06.169 fixed credit to low -income seniors and disabled 00:14:06.169 --> 00:14:09.049 people just to reduce their final tax bill if 00:14:09.049 --> 00:14:10.909 they have one. And then there's the retirement 00:14:10.909 --> 00:14:13.289 savings contribution credit, which a lot of people 00:14:13.289 --> 00:14:16.059 call the saver's credit. This is a brilliant 00:14:16.059 --> 00:14:18.220 example of using a credit to steer behavior. 00:14:18.559 --> 00:14:20.559 It's fantastic, and it's highly progressive. 00:14:20.759 --> 00:14:23.080 It's non -refundable, but it gives you a credit 00:14:23.080 --> 00:14:26.139 for up to 50 % of the first $2 ,000 you contribute 00:14:26.139 --> 00:14:29.759 to an IRA or 401k. But here's the progressive 00:14:29.759 --> 00:14:32.879 part. The phase -out is really steep. How steep? 00:14:33.360 --> 00:14:36.039 For the 2014 tax year, it started phasing out 00:14:36.039 --> 00:14:38.620 for single people making just over $18 ,000. 00:14:39.120 --> 00:14:42.080 If you earn too much, you get nothing. So it's 00:14:42.080 --> 00:14:44.200 exclusively focused on helping those who need 00:14:44.200 --> 00:14:46.559 the biggest boost to start saving. And finally... 00:14:46.779 --> 00:14:48.899 Tying social goals directly to the tax code, 00:14:48.940 --> 00:14:51.059 there's the premium tax credit. This came in 00:14:51.059 --> 00:14:54.379 with the Affordable Care Act. Yes, in 2014. This 00:14:54.379 --> 00:14:57.240 one is refundable, and it's for people who use 00:14:57.240 --> 00:14:58.960 the health care exchanges and have an income 00:14:58.960 --> 00:15:02.120 between 100 % and 400 % of the federal poverty 00:15:02.120 --> 00:15:04.960 line. It's a direct subsidy to help pay their 00:15:04.960 --> 00:15:07.539 health insurance premiums. The fact that it's 00:15:07.539 --> 00:15:09.940 refundable is key because it means even if you 00:15:09.940 --> 00:15:12.159 owe no tax, you still get the money to afford 00:15:12.159 --> 00:15:15.440 coverage. The pattern is just so clear. From 00:15:15.440 --> 00:15:18.899 the UK to the US, when the goal is a direct social 00:15:18.899 --> 00:15:21.820 subsidy, refundable credits. are the weapon of 00:15:21.820 --> 00:15:23.960 choice. And we see that perfectly in Canada. 00:15:24.059 --> 00:15:26.539 Canada has this whole suite of super specialized 00:15:26.539 --> 00:15:29.360 credits that target almost every possible financial 00:15:29.360 --> 00:15:32.019 need or social goal you can think of. So walk 00:15:32.019 --> 00:15:33.879 us through the Canadian model. Well, they start 00:15:33.879 --> 00:15:36.320 with the Canada Child Benefit, the CCB. It's 00:15:36.320 --> 00:15:38.179 a tax -free monthly payment to help families 00:15:38.179 --> 00:15:40.500 with kids. It's just a pure support payment, 00:15:40.600 --> 00:15:42.860 more like the old UK system. And then they have 00:15:42.860 --> 00:15:44.539 more targeted credits, right? Like for caregivers. 00:15:44.879 --> 00:15:47.500 Exactly. The Canada Caregiver Credit, it's non 00:15:47.500 --> 00:15:49.820 -refundable and it recognizes the unpaid labor 00:15:49.820 --> 00:15:51.799 of caring for a family member with an impairment. 00:15:52.179 --> 00:15:54.519 By making it non -refundable, it acts as tax 00:15:54.519 --> 00:15:56.720 relief for middle class taxpayers who are bearing 00:15:56.720 --> 00:15:59.179 that cost. And they have their own version of 00:15:59.179 --> 00:16:01.679 the EIC, the Canada Workers Benefit, which is 00:16:01.679 --> 00:16:04.289 refundable. and a non -refundable disability 00:16:04.289 --> 00:16:06.590 tax credit. Right. And then you see credits aimed 00:16:06.590 --> 00:16:09.049 at the future. There's a refundable Canada training 00:16:09.049 --> 00:16:12.129 credit to help pay for upskilling. And then non 00:16:12.129 --> 00:16:14.190 -refundable ones like the home accessibility 00:16:14.190 --> 00:16:17.009 tax credit for modifying a home for someone with 00:16:17.009 --> 00:16:20.190 mobility issues and a medical expense tax credit 00:16:20.190 --> 00:16:22.789 for high medical bills. The sheer number of these 00:16:22.789 --> 00:16:24.809 specialized credits in Canada really shows you 00:16:24.809 --> 00:16:28.269 if a government have a precise policy goal, the 00:16:28.269 --> 00:16:31.049 tax system is the most flexible, targeted delivery 00:16:31.049 --> 00:16:34.669 platform they have. Hmm. OK, so we're going to 00:16:34.669 --> 00:16:36.909 shift gears now. We're moving away from those 00:16:36.909 --> 00:16:39.129 low income subsidies, which really depend on 00:16:39.129 --> 00:16:41.350 the refundable nature of the credits. And we're 00:16:41.350 --> 00:16:43.330 going to look at incentives that are aimed mostly 00:16:43.330 --> 00:16:46.450 at the middle and upper middle classes. And these 00:16:46.450 --> 00:16:49.350 almost exclusively use nonrefundable credits. 00:16:49.570 --> 00:16:51.990 That's a really important shift because these 00:16:51.990 --> 00:16:55.129 are nonrefundable. They are by design for people 00:16:55.129 --> 00:16:57.409 who already pay a good amount of income tax. 00:16:57.529 --> 00:16:59.950 They aren't direct cash payments. They're incentives 00:16:59.950 --> 00:17:02.070 to spend your money in a way the government approves 00:17:02.070 --> 00:17:04.250 of. Let's start with. Family relief in the U 00:17:04.250 --> 00:17:07.390 .S. And the big one is the child credit. The 00:17:07.390 --> 00:17:09.309 child credit gives this really broad relief. 00:17:09.529 --> 00:17:13.130 It's up to $1 ,000 per child under 17. The policy 00:17:13.130 --> 00:17:15.410 goal is simple. Helping with the cost of raising 00:17:15.410 --> 00:17:17.769 kids. It's a straight dollar -for -dollar cut 00:17:17.769 --> 00:17:20.930 to your tax bill. But like pretty much every 00:17:20.930 --> 00:17:23.829 U .S. credit, it has these very specific phase 00:17:23.829 --> 00:17:26.230 -out limits. It's not for the super wealthy. 00:17:26.650 --> 00:17:29.470 The sources say that for every $1 ,000 of income 00:17:29.470 --> 00:17:32.730 you make over the limit, which is $110 ,000 for 00:17:32.730 --> 00:17:35.109 a married couple, the credit gets reduced by 00:17:35.109 --> 00:17:38.150 $50. Which tells you exactly who this is for. 00:17:38.289 --> 00:17:40.569 It's a policy aimed squarely at the middle class. 00:17:40.849 --> 00:17:42.869 Once you get into the upper middle class and 00:17:42.869 --> 00:17:45.849 higher, that credit just fades away. It shows 00:17:45.849 --> 00:17:47.829 you the government's targeting mechanism at work. 00:17:48.049 --> 00:17:50.049 Then there's the child and dependent care credit. 00:17:50.329 --> 00:17:52.589 It's also non -refundable. And this one reveals 00:17:52.589 --> 00:17:55.230 some really explicit government priorities about 00:17:55.230 --> 00:17:57.309 work. It does. So this credit lets you claim 00:17:57.309 --> 00:17:59.849 a percentage of up to $3 ,000 in expenses for 00:17:59.849 --> 00:18:02.309 dependent care, daycare for a child under 13. 00:18:02.569 --> 00:18:05.410 But here's the big restriction. You have to incur 00:18:05.410 --> 00:18:08.009 that expense because you're working or looking 00:18:08.009 --> 00:18:10.470 for work. Hold on. So if I work and I pay for 00:18:10.470 --> 00:18:13.309 daycare, I get the credit. But if my spouse is 00:18:13.309 --> 00:18:15.049 a stay -at -home parent who provides that care 00:18:15.049 --> 00:18:18.910 for free, we get nothing. Exactly. That is the 00:18:18.910 --> 00:18:21.410 policy message, loud and clear. If one parent 00:18:21.410 --> 00:18:23.789 is at home full time, the family gets no credit. 00:18:23.930 --> 00:18:26.349 So this credit isn't just about supporting kids. 00:18:26.430 --> 00:18:29.049 It's an explicit incentive to encourage dual 00:18:29.049 --> 00:18:31.390 income households and get more people into the 00:18:31.390 --> 00:18:34.049 workforce. That's fascinating. OK, moving to 00:18:34.049 --> 00:18:36.990 another family policy, the credit for adoption 00:18:36.990 --> 00:18:39.670 expenses. This one is also non -refundable and 00:18:39.670 --> 00:18:42.150 phases out for high earners. What's really striking 00:18:42.150 --> 00:18:44.390 here is how volatile the amount of the credit 00:18:44.390 --> 00:18:46.650 has been. The historical numbers tell a story 00:18:46.650 --> 00:18:49.509 of political negotiation. The sources show that 00:18:49.509 --> 00:18:52.410 in 2011, the credit was worth over $13 ,000. 00:18:52.970 --> 00:18:55.829 It dropped a little in 2012, but then in 2013, 00:18:56.069 --> 00:18:59.569 it plummeted just $5 ,000. A drop from over $12 00:18:59.569 --> 00:19:02.359 ,000 to $5 ,000 in one year. That's a massive 00:19:02.359 --> 00:19:04.660 policy change. Why would it drop so steeply? 00:19:04.720 --> 00:19:07.559 It tells you that Congress was actively reevaluating 00:19:07.559 --> 00:19:09.720 just how much they were willing to subsidize 00:19:09.720 --> 00:19:12.339 adoption. It shows that these credits are not 00:19:12.339 --> 00:19:14.819 fixed entitlements. They are active year to year 00:19:14.819 --> 00:19:18.099 legislative choices. The volatility itself is 00:19:18.099 --> 00:19:20.809 the story here. That idea of active choice brings 00:19:20.809 --> 00:19:23.710 us right to education subsidies. The U .S. has 00:19:23.710 --> 00:19:25.690 two major credits for education, but you can 00:19:25.690 --> 00:19:27.970 only claim one of them, which forces taxpayers 00:19:27.970 --> 00:19:30.230 to make a strategic choice. Right. The first 00:19:30.230 --> 00:19:32.730 one is the American Opportunity Tax Credit, the 00:19:32.730 --> 00:19:36.089 AOTC. This came out of the 2009 stimulus package, 00:19:36.349 --> 00:19:38.450 the Recovery Act, and it replaced the old Hope 00:19:38.450 --> 00:19:41.369 Scholarship Credit. The goal was huge, get people 00:19:41.369 --> 00:19:43.470 to spend money on higher education right away. 00:19:43.730 --> 00:19:46.210 And the calculation is pretty specific. It's 00:19:46.210 --> 00:19:49.819 a... Max benefit of $2 ,500 per student. How 00:19:49.819 --> 00:19:52.440 does that break down? It covers 100 % of the 00:19:52.440 --> 00:19:55.180 first $2 ,000 you spend on tuition and fees and 00:19:55.180 --> 00:19:57.920 then 25 % of the next $2 ,000. And here's the 00:19:57.920 --> 00:20:00.380 key. It was partially refundable up to $1 ,000. 00:20:00.500 --> 00:20:02.660 That made it a bit more progressive. And it was 00:20:02.660 --> 00:20:04.640 designed for those first four years of college. 00:20:04.880 --> 00:20:07.160 But the sources say critics complained about 00:20:07.160 --> 00:20:09.920 the complexity. If the goal was immediate stimulus, 00:20:10.279 --> 00:20:12.960 how did complexity get in the way? Because the 00:20:12.960 --> 00:20:15.480 eligibility rules, the paperwork you needed, 00:20:15.539 --> 00:20:17.299 and the fact you had to choose between two different 00:20:17.299 --> 00:20:20.579 credits. It meant a lot of people either claimed 00:20:20.579 --> 00:20:23.579 the wrong one or didn't even realize they qualified. 00:20:23.859 --> 00:20:26.319 So the actual benefit people got was often way 00:20:26.319 --> 00:20:29.220 lower than the theoretical maximum. Complexity 00:20:29.220 --> 00:20:31.299 can really kill the effectiveness of a policy. 00:20:31.559 --> 00:20:34.140 And what's the alternative to the AOTC? That's 00:20:34.140 --> 00:20:36.259 the lifetime learning credit. This one is purely 00:20:36.259 --> 00:20:38.880 non -refundable. It's designed more for ongoing 00:20:38.880 --> 00:20:41.660 education, like job training or grad school, 00:20:41.880 --> 00:20:45.160 not just that initial college push. It covers 00:20:45.160 --> 00:20:48.299 20 % of the first $10 ,000 of your total expenses. 00:20:48.579 --> 00:20:51.759 So it's less valuable per year, but much more 00:20:51.759 --> 00:20:53.940 flexible. And just like the child credit, they 00:20:53.940 --> 00:20:56.140 both had income phase -outs. Right, starting 00:20:56.140 --> 00:20:59.619 at $50 ,000 for single filers back in 2009. Again, 00:20:59.779 --> 00:21:01.720 these are designed to help the middle class with 00:21:01.720 --> 00:21:04.460 rising tuition. The lowest income students are 00:21:04.460 --> 00:21:06.380 usually covered by direct grants like the Pell 00:21:06.380 --> 00:21:08.539 Grant. These credits are for people who actually 00:21:08.539 --> 00:21:11.799 have a tax bill to reduce. And finally, we saw 00:21:11.799 --> 00:21:14.940 credits for specific lifestyle goals or stimulus. 00:21:15.259 --> 00:21:17.660 The first time homebuyers credit comes to mind. 00:21:17.759 --> 00:21:20.779 That was a pure economic stimulus play. It offered 00:21:20.779 --> 00:21:22.720 up to seventy five hundred dollars to get the 00:21:22.720 --> 00:21:24.640 housing market moving during the financial crisis. 00:21:25.059 --> 00:21:28.029 But it was super time sensitive. You had to close 00:21:28.029 --> 00:21:30.250 on your house before the end of September 2010. 00:21:30.730 --> 00:21:34.390 A classic example of using the tax code for macroeconomic 00:21:34.390 --> 00:21:36.650 steering. And of course, the ever -present energy 00:21:36.650 --> 00:21:39.130 efficiency credits. Yes. For things like new 00:21:39.130 --> 00:21:42.069 windows, insulation, solar panels. The rules 00:21:42.069 --> 00:21:44.089 on these change constantly because the technology 00:21:44.089 --> 00:21:47.130 is always changing. The complexity here is almost 00:21:47.130 --> 00:21:49.630 a necessary evil because the policy goal itself, 00:21:49.910 --> 00:21:52.710 getting people to adopt the latest, best technology, 00:21:52.970 --> 00:21:55.559 is a moving target. So the bottom line for this 00:21:55.559 --> 00:21:57.900 whole section is pretty clear. Tax credits are 00:21:57.900 --> 00:21:59.640 the government's favorite tool for guiding how 00:21:59.640 --> 00:22:01.900 individuals spend their money, whether it's on 00:22:01.900 --> 00:22:04.599 family, education, or making your home more efficient. 00:22:04.819 --> 00:22:07.539 So if individual credits are all about social 00:22:07.539 --> 00:22:09.940 engineering, then business tax credits are all 00:22:09.940 --> 00:22:11.640 about economic engineering. We're talking about... 00:22:11.880 --> 00:22:13.980 Directing huge amounts of capital, leveraging 00:22:13.980 --> 00:22:16.079 billions in private money towards things the 00:22:16.079 --> 00:22:17.900 government sees as a public good. That's the 00:22:17.900 --> 00:22:20.240 perfect way to frame it. These are incentives 00:22:20.240 --> 00:22:23.220 offered against income or property taxes to get 00:22:23.220 --> 00:22:26.380 businesses to invest in specific ways or in specific 00:22:26.380 --> 00:22:29.140 places. And because businesses can have enormous 00:22:29.140 --> 00:22:32.339 tax bills, these credits are usually non -refundable. 00:22:32.420 --> 00:22:35.019 But the unused part can often be carried forward 00:22:35.019 --> 00:22:38.200 for years to offset future profits. The legislative 00:22:38.200 --> 00:22:40.420 intent here is so important. It's often called 00:22:40.420 --> 00:22:43.430 the but -for. argument. The idea is that Congress 00:22:43.430 --> 00:22:45.789 is creating these incentives for investments 00:22:45.789 --> 00:22:48.809 that probably would not occur but for the credits. 00:22:48.990 --> 00:22:52.190 Exactly. The government is essentially co -investing 00:22:52.190 --> 00:22:54.470 with the private sector to get a public benefit. 00:22:54.769 --> 00:22:56.910 Let's start with a credit that perfectly blends 00:22:56.910 --> 00:23:00.009 economics and public good. the Federal Historic 00:23:00.009 --> 00:23:02.650 Rehabilitation Tax Credit. Right. This one is 00:23:02.650 --> 00:23:05.130 all about preserving and restoring historic buildings. 00:23:05.410 --> 00:23:07.730 It has a two -tier structure that came out of 00:23:07.730 --> 00:23:10.329 the 1986 Tax Reform Act. What are the two tiers? 00:23:10.630 --> 00:23:12.869 There's a 20 % credit for the certified rehab 00:23:12.869 --> 00:23:15.309 of a truly historic building, which encourages 00:23:15.309 --> 00:23:18.509 really careful, expensive restoration. And then 00:23:18.509 --> 00:23:20.910 there's a smaller 10 % credit for fixing up any 00:23:20.910 --> 00:23:22.789 non -historic building that was put into service 00:23:22.789 --> 00:23:25.990 before 1936. That's just to save older building 00:23:25.990 --> 00:23:28.789 stock in general. Why is this credit so... important 00:23:28.789 --> 00:23:31.450 for making these projects happen. A 20 % discount 00:23:31.450 --> 00:23:34.069 sounds nice, but is it really a game changer? 00:23:34.309 --> 00:23:37.039 It's way more than just a discount. The benefits 00:23:37.039 --> 00:23:39.240 are structured to create a reliable cash flow 00:23:39.240 --> 00:23:42.039 stream for the developer over six years. Historic 00:23:42.039 --> 00:23:45.140 rehab is incredibly expensive and risky. This 00:23:45.140 --> 00:23:47.480 reliable cash flow from the credit stabilizes 00:23:47.480 --> 00:23:49.740 the financing and makes the whole project attractive 00:23:49.740 --> 00:23:52.500 to big institutional investors who would otherwise 00:23:52.500 --> 00:23:54.819 just build something new. Okay, now let's move 00:23:54.819 --> 00:23:57.359 to probably the single most influential economic 00:23:57.359 --> 00:24:00.839 engineering tool the last 20 years, the Renewable 00:24:00.839 --> 00:24:03.940 Energy Investment Tax Credit, or ITC. This has 00:24:03.940 --> 00:24:06.490 completely changed the energy industry. The ITC 00:24:06.490 --> 00:24:09.829 is all about upfront capital investment for solar 00:24:09.829 --> 00:24:12.750 fuel cells and small wind projects. The credit 00:24:12.750 --> 00:24:16.009 is a massive 30 percent of the cost. And crucially, 00:24:16.049 --> 00:24:19.849 for big utility scale projects, there is no maximum 00:24:19.849 --> 00:24:21.829 limit on that credit. So if you're building a 00:24:21.829 --> 00:24:24.910 billion dollar solar farm, that's a 300 million 00:24:24.910 --> 00:24:28.109 dollar tax credit. That's enough to completely 00:24:28.109 --> 00:24:30.410 rewrite the financial model of the project. It 00:24:30.410 --> 00:24:33.430 is. Other technologies like geothermal or micro 00:24:33.430 --> 00:24:37.089 turbines get a 10 percent credit. So this tiered 00:24:37.089 --> 00:24:39.529 system shows Congress actively picking winners, 00:24:39.769 --> 00:24:42.470 pushing solar and wind hardest. And tell us about 00:24:42.470 --> 00:24:44.130 the timeline. These things are always on the 00:24:44.130 --> 00:24:46.450 verge of expiring, right? Constantly. The sources 00:24:46.450 --> 00:24:49.490 point to the big extension in 2015, which kept 00:24:49.490 --> 00:24:51.869 the 30 percent credit going through 2018 before 00:24:51.869 --> 00:24:54.089 it started to phase down. Developers get the 00:24:54.089 --> 00:24:56.269 credit, plus accelerated depreciation, which 00:24:56.269 --> 00:24:58.309 gives them a great cash flow advantage over six 00:24:58.309 --> 00:25:00.269 to eight years. There's a really important tech. 00:25:00.329 --> 00:25:02.470 technical detail in that extension. Eligibility 00:25:02.470 --> 00:25:04.789 was based on the date construction started, not 00:25:04.789 --> 00:25:07.369 when it was finished. Why is that little bit 00:25:07.369 --> 00:25:10.089 of wording so important? It is economically vital 00:25:10.089 --> 00:25:13.670 for these huge multi -year projects. A big wind 00:25:13.670 --> 00:25:15.950 farm might take three years to build. If the 00:25:15.950 --> 00:25:17.990 credit was based on the completion rate, no one 00:25:17.990 --> 00:25:19.529 would start building because they couldn't be 00:25:19.529 --> 00:25:21.230 sure the credit would still exist when they finished. 00:25:21.549 --> 00:25:23.710 Basing it on the start date provides financial 00:25:23.710 --> 00:25:26.569 certainty and triggers this massive rush of investment 00:25:26.569 --> 00:25:29.190 right before the deadline. And the sister incentive 00:25:29.190 --> 00:25:32.329 to the ITC is the production tax credit or PTC. 00:25:32.470 --> 00:25:35.230 So the ITC helps you build it. The PTC rewards 00:25:35.230 --> 00:25:37.650 you for running it. That's it. Exactly. The PTC 00:25:37.650 --> 00:25:41.009 is production based. You get an income tax credit 00:25:41.009 --> 00:25:43.549 for every kilowatt hour of electricity your facility 00:25:43.549 --> 00:25:45.849 generates from sources like wind or geothermal 00:25:45.849 --> 00:25:48.190 for the first 10 years of its life. And what's 00:25:48.190 --> 00:25:51.509 that worth? It started at 1 .5 cents per kilowatt 00:25:51.509 --> 00:25:54.970 hour back in 1992. But by 2013, it was inflation 00:25:54.970 --> 00:25:58.089 adjusted up to 2 .3 cents. The 2015. an extension 00:25:58.089 --> 00:26:00.089 for this was expected to drive something like 00:26:00.089 --> 00:26:02.789 $35 billion of investment for each energy type, 00:26:02.930 --> 00:26:05.990 wind and solar. The scale of economic activity 00:26:05.990 --> 00:26:07.930 directed by these things is just staggering. 00:26:08.250 --> 00:26:11.210 Okay, shifting to social infrastructure. There's 00:26:11.210 --> 00:26:13.930 the low -income housing tax credit. or LIHTC. 00:26:14.190 --> 00:26:16.509 This is how most affordable housing gets built 00:26:16.509 --> 00:26:19.230 in the U .S. It's a complex but brilliant financing 00:26:19.230 --> 00:26:22.230 system. The U .S. Treasury gives tax credits 00:26:22.230 --> 00:26:24.569 to state housing agencies based on population. 00:26:25.190 --> 00:26:28.289 The state then awards these credits to developers. 00:26:28.710 --> 00:26:31.170 But the developers don't use the credits themselves. 00:26:31.650 --> 00:26:33.569 Right. They sell them, don't they? They sell 00:26:33.569 --> 00:26:35.930 a future stream of tax credits to big corporate 00:26:35.930 --> 00:26:38.369 investors, usually banks or insurance companies. 00:26:38.609 --> 00:26:40.609 And why do they do that? Selling those credits 00:26:40.609 --> 00:26:42.930 raises immediate cash equity for the developer, 00:26:43.109 --> 00:26:45.890 which funds the actual construction. In exchange, 00:26:46.150 --> 00:26:48.089 the developer has to keep the apartments affordable 00:26:48.089 --> 00:26:50.730 for a long time. The corporate investor gets 00:26:50.730 --> 00:26:53.049 a guaranteed way to reduce their taxes for the 00:26:53.049 --> 00:26:56.369 next 10 years. It basically turns a future government 00:26:56.369 --> 00:26:58.990 tax break into immediate cash to build housing. 00:26:59.170 --> 00:27:01.789 That is just a fascinating way to finance infrastructure. 00:27:02.230 --> 00:27:04.450 The government becomes a silent partner through 00:27:04.450 --> 00:27:07.529 the tax code. And one last very specific example 00:27:07.529 --> 00:27:10.509 of this kind of financial engineering, the Qualified 00:27:10.509 --> 00:27:14.349 School Construction Bond, or QSCB. So QSCBs are 00:27:14.349 --> 00:27:16.650 bonds that help schools borrow money cheaply 00:27:16.650 --> 00:27:19.349 for repairs or new buildings. But the structure 00:27:19.349 --> 00:27:22.369 is unique. It is. Instead of the school district 00:27:22.369 --> 00:27:24.430 paying interest to the person who buys the bond, 00:27:24.609 --> 00:27:27.049 the bondholder gets a federal tax credit from 00:27:27.049 --> 00:27:28.670 the government instead of an indirect payment. 00:27:29.119 --> 00:27:31.839 This means the school can borrow money at almost 00:27:31.839 --> 00:27:34.539 zero interest because the federal government 00:27:34.539 --> 00:27:36.779 is effectively paying the interest through the 00:27:36.779 --> 00:27:38.819 tax credit. And this is where the financialization 00:27:38.819 --> 00:27:41.920 gets really wild. The sources say the tax credits 00:27:41.920 --> 00:27:43.819 themselves can be stripped from the bonds and 00:27:43.819 --> 00:27:46.910 sold separately. Explain what that means. So 00:27:46.910 --> 00:27:49.490 a bond is usually a promise to repay the principal 00:27:49.490 --> 00:27:53.230 and a promise to pay interest. With a QSCB, the 00:27:53.230 --> 00:27:56.190 interest is the tax credit. An investor might 00:27:56.190 --> 00:27:58.450 buy the bond but only really want the guaranteed 00:27:58.450 --> 00:28:00.970 federal tax credit. So they can literally strip 00:28:00.970 --> 00:28:03.589 that tax credit certificate off and sell it to 00:28:03.589 --> 00:28:05.849 another company that needs a tax break and then 00:28:05.849 --> 00:28:08.250 sell the underlying bond, the promise of principal 00:28:08.250 --> 00:28:10.809 repayment, to someone else. So the credit becomes 00:28:10.809 --> 00:28:13.410 its own tradable asset, completely separate from 00:28:13.410 --> 00:28:16.349 the original school bond. Exactly. It shows the 00:28:16.349 --> 00:28:19.049 evolution of the tax credit from a simple tax 00:28:19.049 --> 00:28:21.869 break into a fully -fledged, tradable financial 00:28:21.869 --> 00:28:24.650 commodity. So beyond those huge infrastructure 00:28:24.650 --> 00:28:27.789 credits, the federal government also uses credits 00:28:27.789 --> 00:28:31.250 to encourage specific business operations, especially 00:28:31.250 --> 00:28:34.769 around innovation and hiring. The Research and 00:28:34.769 --> 00:28:38.069 Development, or R &D credit, is a massive one. 00:28:38.269 --> 00:28:40.529 It is. The R &D credit is designed to do one 00:28:40.529 --> 00:28:43.200 thing. Keep high -value research and development 00:28:43.200 --> 00:28:46.059 jobs inside the United States. It's a credit 00:28:46.059 --> 00:28:48.619 for R &D costs that a company incurs domestically. 00:28:48.759 --> 00:28:50.539 And it's pretty valuable, right? Yeah. Generally 00:28:50.539 --> 00:28:53.380 worth about 7 % to 10 % of your qualified research 00:28:53.380 --> 00:28:56.200 spending. What makes it so strategic for businesses, 00:28:56.339 --> 00:28:58.380 especially for startups? It's the flexibility. 00:28:58.900 --> 00:29:01.059 Normally, you'd use a credit like this to offset 00:29:01.059 --> 00:29:02.740 your corporate income tax. But what if you're 00:29:02.740 --> 00:29:04.839 not profitable yet? Which a lot of startups aren't. 00:29:04.839 --> 00:29:07.460 They're just burning cash on R &D. Exactly. So 00:29:07.460 --> 00:29:10.160 for them, the credit would be useless. The brilliant 00:29:10.160 --> 00:29:12.440 part is that the R &D credit can be used to offset 00:29:12.440 --> 00:29:15.259 their payroll taxes instead. Ah, so it becomes 00:29:15.259 --> 00:29:17.420 immediately valuable. Gives them cash relief 00:29:17.420 --> 00:29:19.799 on their employment costs right when they need 00:29:19.799 --> 00:29:22.079 it most. It's a clear signal that the policy 00:29:22.079 --> 00:29:24.599 is about incentivizing the activity of research, 00:29:24.839 --> 00:29:26.980 not just rewarding companies that are already... 00:29:26.990 --> 00:29:29.829 And then moving to the labor market, there's 00:29:29.829 --> 00:29:33.940 the work opportunity tax credit. Or WOTC. This 00:29:33.940 --> 00:29:36.500 is a very socially focused credit. Highly targeted, 00:29:36.619 --> 00:29:40.099 yes. The purpose of WOTC is to give employers 00:29:40.099 --> 00:29:42.640 an incentive to hire people from groups that 00:29:42.640 --> 00:29:45.019 face really high unemployment rates. We're talking 00:29:45.019 --> 00:29:48.700 veterans, at -risk youth, people with disabilities. 00:29:49.220 --> 00:29:51.720 And the employer gets a tax benefit that's directly 00:29:51.720 --> 00:29:53.900 tied to how many hours that new employee works. 00:29:54.339 --> 00:29:56.779 It's a reward for taking on the extra risk or 00:29:56.779 --> 00:29:59.519 training costs. It is. And the history of WOTC 00:29:59.519 --> 00:30:01.599 also shows how these credits are just perpetual. 00:30:01.799 --> 00:30:04.220 political footballs. How so? Well, it was created 00:30:04.220 --> 00:30:06.779 in 1996, but it's always expiring and then getting 00:30:06.779 --> 00:30:09.500 renewed retroactively. The sources mention it 00:30:09.500 --> 00:30:11.779 being extended in late 2014 and then again in 00:30:11.779 --> 00:30:14.920 2015. This constant cycle of expiring and then 00:30:14.920 --> 00:30:16.799 being brought back to life shows, you know, both 00:30:16.799 --> 00:30:18.759 its political importance, but also the constant 00:30:18.759 --> 00:30:21.180 debate over whether it really works or if it's 00:30:21.180 --> 00:30:22.500 just the subsidy for hiring that would happen 00:30:22.500 --> 00:30:24.480 anyway. And just to give everyone a sense of 00:30:24.480 --> 00:30:26.579 the sheer scope, we should probably mention some 00:30:26.579 --> 00:30:28.819 of the other federal business credits. There's 00:30:28.819 --> 00:30:31.559 credits for alternative motor vehicles. for producing 00:30:31.559 --> 00:30:34.259 alternative fuels, disaster relief credits, and 00:30:34.259 --> 00:30:36.900 all sorts of credits for hiring people in specific 00:30:36.900 --> 00:30:39.920 geographic areas like economically distressed 00:30:39.920 --> 00:30:42.900 zones. The federal government really has a credit 00:30:42.900 --> 00:30:45.220 for almost everything. And if the federal system 00:30:45.220 --> 00:30:48.119 is complex, The state level must be a total mess. 00:30:48.619 --> 00:30:52.000 The sources say something like 43 states have 00:30:52.000 --> 00:30:54.359 their own special incentive programs. It's an 00:30:54.359 --> 00:30:56.619 absolute patchwork, and it creates this intense 00:30:56.619 --> 00:31:00.039 competition between states. You see credits for 00:31:00.039 --> 00:31:02.900 cleaning up polluted brownfield sites, for film 00:31:02.900 --> 00:31:05.420 production to attract Hollywood, for renewable 00:31:05.420 --> 00:31:08.779 energy, for historic preservation. And they all 00:31:08.779 --> 00:31:10.559 have different rules, different values. And this 00:31:10.559 --> 00:31:12.380 is where the marketability we talked about becomes 00:31:12.380 --> 00:31:14.740 so important for attracting capital into a state. 00:31:15.720 --> 00:31:17.400 are these structured so they can be bought and 00:31:17.400 --> 00:31:20.279 sold? Many states will literally issue a tax 00:31:20.279 --> 00:31:22.480 credit certificate that you can buy as an asset. 00:31:22.660 --> 00:31:25.500 The investor buys the right to reduce their future 00:31:25.500 --> 00:31:28.230 state tax bill. And who's buying these? They're 00:31:28.230 --> 00:31:31.190 very specialized financial products. The buyers 00:31:31.190 --> 00:31:34.029 are usually institutions with huge, predictable 00:31:34.029 --> 00:31:36.710 state tax bills. Think big banks or insurance 00:31:36.710 --> 00:31:39.170 companies. They can use these credits not just 00:31:39.170 --> 00:31:41.250 against their income tax, but often against things 00:31:41.250 --> 00:31:44.150 like a state's insurance premium tax. They buy 00:31:44.150 --> 00:31:46.150 the credits, often at a slight discount, as a 00:31:46.150 --> 00:31:48.589 guaranteed way to lower their tax payments. Let's 00:31:48.589 --> 00:31:50.650 use the example from the sources. The Oregon 00:31:50.650 --> 00:31:53.029 Residential Energy Tax Credit for solar systems. 00:31:53.210 --> 00:31:55.670 The numbers there tell a really interesting story 00:31:55.670 --> 00:31:58.029 about success in political... will. They do. 00:31:58.230 --> 00:32:01.789 The RETC was clearly working. In 2015, the state 00:32:01.789 --> 00:32:04.630 gave out over $12 million in these credits. That 00:32:04.630 --> 00:32:07.210 was up from just $4 .2 million the year before. 00:32:07.549 --> 00:32:09.730 So that tells you there was a massive boom in 00:32:09.730 --> 00:32:11.890 solar installations. But wait, if it was working 00:32:11.890 --> 00:32:14.329 so well, why did the governor's budget proposal 00:32:14.329 --> 00:32:18.170 in 2017 want to let it expire? Why pull the plug 00:32:18.170 --> 00:32:20.619 on a successful program? That is the fundamental 00:32:20.619 --> 00:32:23.400 tension. It's policy success versus budget cost. 00:32:23.640 --> 00:32:25.359 Even though the solar industry said the credit 00:32:25.359 --> 00:32:27.480 was their top priority proof that it was driving 00:32:27.480 --> 00:32:30.519 behavior, the governor ultimately decided it 00:32:30.519 --> 00:32:32.619 was just too expensive for the state budget to 00:32:32.619 --> 00:32:35.079 keep subsidizing solar at that level. That is 00:32:35.079 --> 00:32:37.400 the perfect example of a credit's life cycle. 00:32:37.500 --> 00:32:39.819 It's created to change behavior, but if it gets 00:32:39.819 --> 00:32:42.799 too successful or the cause gets too high, the 00:32:42.799 --> 00:32:44.619 government can just decide it's over. It's a 00:32:44.619 --> 00:32:48.769 continuous high -stakes negotiation. OK, let's 00:32:48.769 --> 00:32:50.910 broaden the lens one last time and look at how 00:32:50.910 --> 00:32:53.430 credits work in a couple of specific international 00:32:53.430 --> 00:32:56.589 and alternative tax contexts. We have to start 00:32:56.589 --> 00:32:58.490 with the one we touched on earlier, the value 00:32:58.490 --> 00:33:03.220 added tax or VAT input credit. Why is it so fundamental 00:33:03.220 --> 00:33:06.559 to global trade? The input credit is the absolute 00:33:06.559 --> 00:33:09.220 lifeblood of any VAT system. It's what makes 00:33:09.220 --> 00:33:11.740 it fair. As we said, a business collects VAT 00:33:11.740 --> 00:33:14.619 on what it sells. That's output VAT. But it also 00:33:14.619 --> 00:33:17.700 pays VAT on what it buys. That's input VAT. The 00:33:17.700 --> 00:33:20.059 input credit is what ensures tax is only paid 00:33:20.059 --> 00:33:22.279 on the value added at each step. Let's use a 00:33:22.279 --> 00:33:24.259 simple supply chain example to really nail this 00:33:24.259 --> 00:33:27.970 down. Okay, so a furniture maker. They buy lumber 00:33:27.970 --> 00:33:31.750 and they pay, let's say, $100 in input VAT to 00:33:31.750 --> 00:33:33.910 the lumber mill. Then they sell the finished 00:33:33.910 --> 00:33:36.829 table to a retail store for a price that includes 00:33:36.829 --> 00:33:40.410 $500 in output VAT. Okay. The furniture maker 00:33:40.410 --> 00:33:43.529 only sends $400 of that VAT to the government. 00:33:43.920 --> 00:33:46.720 The $100 they already paid on the lumber acts 00:33:46.720 --> 00:33:49.319 as a credit against the $500 they collected. 00:33:49.440 --> 00:33:51.799 So the tax is correctly applied only to the value 00:33:51.799 --> 00:33:53.980 they added, which is $400 worth. You mentioned 00:33:53.980 --> 00:33:55.819 the refundability is critical here, especially 00:33:55.819 --> 00:33:58.319 for exporters. It is. If that furniture maker 00:33:58.319 --> 00:34:00.559 sells their table outside the country, outside 00:34:00.559 --> 00:34:03.609 the VAT zone, they collect zero output VAT. But 00:34:03.609 --> 00:34:06.029 they still paid that $100 in input VAT on the 00:34:06.029 --> 00:34:08.750 lumber. In that case, the government has to refund 00:34:08.750 --> 00:34:11.409 the entire $100 input credit to the furniture 00:34:11.409 --> 00:34:14.070 maker. That ensures the product leaves the country 00:34:14.070 --> 00:34:16.250 completely tax -free and can compete on the world 00:34:16.250 --> 00:34:18.449 market. Okay, now for income tax. Let's talk 00:34:18.449 --> 00:34:20.590 about the Foreign Tax Credit, or FTC. This is 00:34:20.590 --> 00:34:22.429 all about preventing double taxation, right? 00:34:22.510 --> 00:34:24.670 It's essential for any country like the U .S. 00:34:24.710 --> 00:34:26.929 that taxes its citizens on their worldwide income. 00:34:27.260 --> 00:34:29.860 Exactly. So imagine a U .S. architect goes to 00:34:29.860 --> 00:34:31.780 work in Germany for a year. She's going to pay 00:34:31.780 --> 00:34:34.280 German income tax on her salary there. But because 00:34:34.280 --> 00:34:37.099 the U .S. taxes worldwide income, she still has 00:34:37.099 --> 00:34:39.860 to report that same salary to the IRS. Without 00:34:39.860 --> 00:34:42.739 the FTC, she'd get taxed twice on the same money. 00:34:42.880 --> 00:34:46.159 So the FTC lets her claim a credit for the German 00:34:46.159 --> 00:34:49.099 taxes she paid, either through U .S. law or a 00:34:49.099 --> 00:34:51.159 specific tax treaty. Right. It prevents that 00:34:51.159 --> 00:34:53.420 double hit. But here's the crucial limitation. 00:34:54.409 --> 00:34:57.090 It is non -refundable and it's strictly limited. 00:34:57.230 --> 00:34:59.730 You can only use it to reduce your U .S. tax 00:34:59.730 --> 00:35:02.269 bill on that foreign income down to zero. You 00:35:02.269 --> 00:35:04.190 will not get a cash refund from the U .S. government 00:35:04.190 --> 00:35:06.530 if the German tax rate was higher than the U 00:35:06.530 --> 00:35:08.829 .S. rate. So if her tax rate in Germany was 40 00:35:08.829 --> 00:35:11.130 percent, but her U .S. rate on that same income 00:35:11.130 --> 00:35:13.489 would have only been 30 percent, that extra 10 00:35:13.489 --> 00:35:16.010 percent is just lost. It's about relief from 00:35:16.010 --> 00:35:18.050 double taxation, not getting a refund. Correct. 00:35:18.130 --> 00:35:20.349 It's an administrative tool to make two different 00:35:20.349 --> 00:35:22.530 countries' tax systems play nice together. It's 00:35:22.530 --> 00:35:25.469 not a subsidy. And finally, let's look at credits 00:35:25.469 --> 00:35:27.610 in systems that have an alternative tax base, 00:35:27.750 --> 00:35:31.309 like the old US Alternative Minimum Tax, or AMT. 00:35:31.760 --> 00:35:34.579 These systems have a regular tax, but also a 00:35:34.579 --> 00:35:37.179 second parallel calculation that might result 00:35:37.179 --> 00:35:39.179 in a higher tax bill. Right. The whole point 00:35:39.179 --> 00:35:41.380 of the AMT was to make sure that high -income 00:35:41.380 --> 00:35:43.800 earners couldn't use a ton of deductions and 00:35:43.800 --> 00:35:47.460 loopholes to pay zero tax. If the AMT calculation 00:35:47.460 --> 00:35:50.079 came out higher than your regular tax calculation, 00:35:50.440 --> 00:35:52.820 you had to pay the higher AMT amount. And the 00:35:52.820 --> 00:35:55.079 credit comes into play when you pay that higher 00:35:55.079 --> 00:35:57.860 AMT amount. Yes, the amount of extra tax you 00:35:57.860 --> 00:36:00.699 paid because the AMT becomes a credit. But... 00:36:01.019 --> 00:36:02.940 And this is key. You can only use that credit 00:36:02.940 --> 00:36:05.420 against your future regular tax bill and only 00:36:05.420 --> 00:36:07.639 in a year when your regular tax is higher than 00:36:07.639 --> 00:36:09.539 what your AMT would have been. So you pay the 00:36:09.539 --> 00:36:12.239 minimum tax now and you essentially bank the 00:36:12.239 --> 00:36:14.940 extra amount you paid as a credit to use in a 00:36:14.940 --> 00:36:17.730 future higher tax year. It's a way to enforce 00:36:17.730 --> 00:36:20.650 a minimum tax rate year to year without permanently 00:36:20.650 --> 00:36:23.710 overtaxing someone. You get the money back eventually, 00:36:23.969 --> 00:36:26.469 but only when your income is structured in a 00:36:26.469 --> 00:36:28.610 way that you'd be paying higher regular tax anyway. 00:36:28.909 --> 00:36:31.269 It's complex, but it's designed for long term 00:36:31.269 --> 00:36:34.829 fairness. We have come through this whole deep 00:36:34.829 --> 00:36:37.309 dive into the architecture of tax credits. And 00:36:37.309 --> 00:36:39.469 I think the big picture that's emerged is that 00:36:39.469 --> 00:36:42.190 this is really less about tax relief and more 00:36:42.190 --> 00:36:44.710 about setting government priorities. What's the 00:36:44.710 --> 00:36:47.570 unified summary of the spectrum of power we've 00:36:47.570 --> 00:36:50.320 just seen? Well, we've seen this mechanism function 00:36:50.320 --> 00:36:53.260 across just an incredible spectrum. On one end, 00:36:53.300 --> 00:36:55.400 you have these really sophisticated social engineering 00:36:55.400 --> 00:36:57.139 tools, you know, the refundable earned income 00:36:57.139 --> 00:36:59.900 credit or the old UK tax credits. They target 00:36:59.900 --> 00:37:02.820 poverty. They subsidize education. They're really 00:37:02.820 --> 00:37:05.079 just efficient cash transfers delivered through 00:37:05.079 --> 00:37:07.260 the tax return. They completely blur the line 00:37:07.260 --> 00:37:10.219 between tax policy and social welfare. And then 00:37:10.219 --> 00:37:13.119 on the complete other end of that spectrum, you 00:37:13.119 --> 00:37:15.659 have these massive economic incentives that are 00:37:15.659 --> 00:37:18.500 driving infrastructure. We talked about the Renewable 00:37:18.500 --> 00:37:22.019 Energy ITC, the historic rehab credits, the low 00:37:22.019 --> 00:37:24.579 income housing credit. These are basically government 00:37:24.579 --> 00:37:27.280 contracts for private action. They steer billions 00:37:27.280 --> 00:37:29.760 of dollars in private capital toward public goods 00:37:29.760 --> 00:37:32.320 like clean energy and affordable housing. The 00:37:32.320 --> 00:37:34.559 key takeaway for you, for the learner, is this. 00:37:35.119 --> 00:37:37.179 Tax credits are the government's single most 00:37:37.179 --> 00:37:39.480 effective and nuanced tool for steering behavior. 00:37:39.780 --> 00:37:42.079 It doesn't matter if it's individual behavior 00:37:42.079 --> 00:37:44.780 like saving for retirement or adopting a child, 00:37:44.900 --> 00:37:47.300 or if it's corporate behavior like building a 00:37:47.300 --> 00:37:49.980 wind farm or hiring a veteran. The credit is 00:37:49.980 --> 00:37:52.199 the financial carrot they use to signal what's 00:37:52.199 --> 00:37:55.059 a priority and to reward you for complying. But 00:37:55.059 --> 00:37:57.099 the success of these credits, it often comes 00:37:57.099 --> 00:37:58.820 down to their structure and their complexity. 00:37:59.210 --> 00:38:01.610 And that brings us back to our final provocative 00:38:01.610 --> 00:38:03.969 thought about that financialization we talked 00:38:03.969 --> 00:38:06.050 about. Right. We saw that with things like the 00:38:06.050 --> 00:38:08.309 qualified school construction bonds or the state 00:38:08.309 --> 00:38:10.809 level credits, the tax credit itself can be stripped 00:38:10.809 --> 00:38:13.389 off and sold as a separate marketable certificate. 00:38:13.690 --> 00:38:16.369 And when tax credits get that complex, when they're 00:38:16.369 --> 00:38:19.829 openly traded like a commodity, they stop being 00:38:19.829 --> 00:38:22.630 a simple tax relief for the school or the developer. 00:38:22.769 --> 00:38:25.829 They become these sophisticated, tradable financial 00:38:25.829 --> 00:38:29.550 products. Which raises the big question. How 00:38:29.550 --> 00:38:31.730 much of the actual benefit of that credit goes 00:38:31.730 --> 00:38:34.489 to the intended target, the developer who needs 00:38:34.489 --> 00:38:36.550 the cash, the school that needs the funding, 00:38:36.690 --> 00:38:39.210 and how much of it just gets captured by high 00:38:39.210 --> 00:38:41.730 -income investors who are buying these credits 00:38:41.730 --> 00:38:44.190 at a discount to lower their own massive tax 00:38:44.190 --> 00:38:46.769 bills? It's that fascinating intersection where 00:38:46.769 --> 00:38:49.159 public policy meets high finance. And it's always 00:38:49.159 --> 00:38:51.420 worth asking who the true beneficiary of complex 00:38:51.420 --> 00:38:53.940 tax law really is. Something to think about the 00:38:53.940 --> 00:38:55.820 next time you're filing your own taxes and you 00:38:55.820 --> 00:38:57.539 see that dollar -for -dollar reduction finally 00:38:57.539 --> 00:38:59.880 kick in. Until next time, stay well informed.