SACHA PFEIFFER, HOST:
Is the child tax credit the start of something bigger? Congress and the Biden administration are pushing money into the economy in a new way this week. As part of pandemic relief, the U.S. turned a child tax credit into a monthly payment for millions of families. The first of those payments are reaching bank accounts this week. It amounts to just a few bucks for people with higher incomes, but hundreds of dollars per month can truly matter for low-income families. And the administration says the money could matter enough to quickly cut child poverty by 50%. Treasury Secretary Janet Yellen told Noel King she wants to keep this going.
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NOEL KING, BYLINE: Right now the child tax credit is a temporary program. Do you think it should become permanent?
JANET YELLEN: Yes, I do. I think it's a very important program that will do a huge amount to relieve child poverty, which has been a tremendously important problem in the United States. So I think this is something that's very important to continue.
PFEIFFER: Yellen is the first woman to serve as Treasury secretary, and she came on the line yesterday just as Senate Democrats proposed extending the tax credit.
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KING: Cutting child poverty in half is a noble goal. How will the country pay for it, though, especially if it becomes permanent?
PFEIFFER: So the president has proposed in his American Families Plan and the American Jobs Program - he's proposed essentially three different ways to pay for the programs. One is by raising the U.S. corporate tax rate back - not all the way but somewhat back to its previous level, from 21% up to 28%, importantly by closing tax loopholes that have allowed many firms to avoid paying that tax through use of offshore tax havens. And we have just really concluded a global agreement that 132 countries have recently agreed, including all of the G20 countries, that we will work together, agree to raise our minimum global corporate tax rates in order to make sure that companies all around the world and in the U.S. pay their fair share. So that will be an important source of funding.
And President Biden has also proposed raising the capital gains tax rate and closing the so-called step-up of basis loophole for wealthy families, not to hit anyone - his promise is ironclad that no one earning under $400,000 will see their taxes increase, but very high-income taxpayers will see an increase. And finally, we have an enormous tax gap. By that, I mean the difference between the amount that the Internal Revenue Service actually collects and what it estimates it's really due if all the taxpayers, companies and individuals, were paying what they owe under our laws. And it's estimated that over the next decade, that will amount to $7 trillion.
The IRS has been starved for resources, and we're proposing $80 billion over 10 years of additional resources for the IRS to be able to appropriately audit individuals and companies where it's estimated that there's underpayment of taxes that are owed. And we've also proposed to give the IRS a little bit more information that will help them identify where the tax shortfalls are. So the proposals are fully paid for, and we're looking forward to seeing this embodied into law, both in the bipartisan infrastructure bill and also in the reconciliation bill that we hope Congress will pass.
KING: OK. So a better-informed and better-resourced IRS is one solution. You mentioned that the Biden administration wants to close tax loopholes to pay for its agenda. We know that some very rich people pay very little in taxes, and that is legal. A lot of Americans are very upset about this. How do you change the tax code? What needs to be done to change the tax code to ensure that wealthy people have to pay taxes?
YELLEN: Well, absolutely. I mean, there are two important ways in which wealthy individuals legally avoid taxes. One is that the rates we charge on capital gains, at 20% and dividends, are much lower than what many wage earners pay on their labor income. And President Biden feels that for individuals making over $400,000 a year, that it's appropriate to raise the capital gains rate so that it comes more closely into alignment with what people - wage earners pay on their incomes - so increasing the capital gains rate for high-income households.
And, second, if an individual holds an asset until death, then when the person dies, the individual who inherits it benefits from step-up of basis. And what that means, in effect, is that capital gains that are not actually realized during a person's lifetime can pass to heirs without any capital gains tax ever being paid. And President Biden has proposed to change that so that capital gains would be taxed when an individual dies, although there - certainly want to protect family farms. Small businesses would not be burdened by that change.
KING: Would Congress have to agree to these changes, just briefly? And would that not be difficult, given the divisions in Congress now?
YELLEN: Well, I hope that Congress will agree. Yes. Congress has to enact these proposals. I'm encouraged by the news that I hear that Congress is working toward drafting a budget resolution that will provide a roadmap for a reconciliation bill to be passed in the fall and that the tax writing committees will, you know, enact sufficient changes both on the corporate and individual side that we will be able to make the proposed changes we've been talking about.
KING: OK. I'd like to ask you about inflation. The Biden administration and the Federal Reserve have said they think higher prices are a temporary phenomenon, a result of reopening the economy. I know our listeners would like to know, how long is temporary, do you think?
YELLEN: Well, it's very difficult to reopen an economy that's been shut down. And as vaccinations has increased and people are able to go back to a more normal way of living, spending has increased very, very rapidly. And that's leading to a situation where there are bottlenecks and a difficulty in expanding the supply of some goods and services rapidly enough to meet surging demand. We're seeing that particularly in motor vehicles, where there have been semiconductor shortages that have forced automakers to reduce production well below planned or desired levels. We saw that in lumber, where supply hadn't increased during the pandemic, although that's an area where we've seen improvement lately.
So as the economy gets back to normal and, you know, also pandemic-affected sectors like hotels and airfares, where prices had fallen during the pandemic - those prices are rapidly moving back toward normal levels, as well. But I don't think that this is a phenomenon that will continue over the medium term. We shouldn't expect it to disappear next month, but certainly over the medium term, I don't believe it will continue. But, of course, we need to watch inflation very, very carefully.
KING: I wonder if I might jump in and ask why you think it won't continue over the medium term. And the reason I ask is this - as you know, sometimes higher prices do become permanent. Businesses raise prices. Workers demand higher wages. It is a cycle. At what point do you become concerned that what were assumed to be temporarily high prices get baked into economic expectations, and then they become permanent?
YELLEN: Well, I think you're absolutely right to mention expectations. We did see a wage price spiral of the type you're describing in the 1970s. And it's because inflation wasn't addressed, and businesses and households began to assume that it would be something that would continue. Workers tried to protect themselves against inflation by demanding cost-of-living increases, and firms believe that their rivals would be raising prices and that they could, too. So we absolutely don't want that type of dynamic to emerge, and there's not the slightest evidence that it's doing so. Inflation expectations are very well anchored. They remain at levels consistent with price stability. When you see a 10-year treasury rate in the neighborhood of 1.3%, that's telling you that market participants believe this is a transitory phenomenon, and they're not expecting inflation to continue like this over the medium term. So watching inflation expectations to make sure that channel of inflation doesn't become operative is really of critical importance.
KING: Last question to you - when do you think we will see Harriet Tubman on the $20 bill?
YELLEN: As soon as possible. I'll do everything I can to expedite it.
KING: All right. Treasury Secretary Janet Yellen, thank you for taking the time this morning. We appreciate it.
YELLEN: OK. Thank you.
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