Amidst the strange fusion of supply side economics and anti-globalization posturing in Donald Trump’s speech today, one idea stood out for not being product of either influence: The idea that parents should be able “to fully deduct the average cost of childcare spending from their taxes.”
Parents are well aware of how child care expenses devour the family budget, and economists have taken note: Rising child care costs are one reason that US birthrates are going down, which is a recipe for economic disaster and a major cause of anxiety for low-earning families as the job market improves.
It costs more to provide basic care for an infant than to pay for four years of public college tuition in some 33 states, including Florida, North Carolina, Colorado, and Iowa.
To address this, Trump’s plan purports to fully deduct the average cost of childcare spending—albeit with two loopholes.
The first? It’s a deduction, which means that it can be subtracted from the family’s pre-tax income (by contrast, a tax credit is subtracted from the family’s tax bill). That means the real value of the deduction depends on the top tax rate the family pays. If the family is paying less than 15% in federal taxes, like 80% of Americans, the deduction will only save $150 for every $1,000 in child are expenses the family deducts. But higher-earning families who deduct that same $1,000 in expenses would save $200 or more on their tax bill. In effect, this means someone earning less than $75,000 will receive a smaller benefit than someone earning $100,000 or more. And if a family is too poor to pay any income tax at all, there is no benefit at all.
Then there’s the question of how “average cost of childcare” is determined. It varies widely from state to state and between cities in states; the Economic Policy Institute estimates of infant care costs range from $4,822 in Mississippi to $22,631 in Washington DC.
It’s possible that the deduction won’t be set at some geographic level but instead based on an individual household’s average childcare spending. Such a policy might similarly preference wealthier households, because someone who pays thousands of dollars for a nanny or private school will be deducting expenses that a minimum-wage household couldn’t afford. (The Trump campaign has not released any details on this policy.)
Other ways to help low-income families with child care include president Obama’s push to simplify and expand the existing Child and Dependent Care Tax Credit to deliver more help for middle-class families, while increasing direct aid to low-income families who aren’t helped by tax policy. Hillary Clinton has focused more on the direct aid side of this equation, calling for universal pre-kindergarten, grants for parents who are attending college, and generous family leave policies to help cap child care costs at 10% of household income.