Donald Trump wants to make your child care expenses tax deductible.
This was probably the most original of several ideas in an economic policy speech the Republican presidential nominee gave on Monday. Of course, Trump's address was short on policy specifics — he promised details in the coming weeks — and long on sweeping promises of future greatness. But in typical Trump fashion, this is a big and brash idea. And to his credit, it addresses a real problem for everyday Americans that policymakers have allowed to fester for too long. Child care expenses can take up one-third of a typical household's spending, and they're rising at twice the rate of inflation.
But Trump's policy is also awfully obtuse in its design.
Calculating your taxes is a two-step process: (1) Figure out how much of the money you make counts as income that you need to pay taxes on; and (2) Calculate what portion of that taxable income you have to give the government.
Tax deductions (like the ones Trump proposes) are part of the first step. Essentially, all the money you spend on child care can be deducted from your taxable income. So if you make $40,000 a year, and pay $5,000 for child care, and have no other deductions, your taxable income is $35,000.
Sounds great, right? Well, there are some problems here.
As Mitt Romney infamously pointed out, roughly half of Americans pay no federal income taxes. It's not because they're lazy. It's because most of the effort America puts into helping poor and working families is in the form of tax breaks. Plenty of these families get creamed by child care costs. But since they already pay no income tax, being allowed to deduct child care from their taxable income won't help them at all. If the tax you owe is already $0, who cares if you can deduct another $5,000? It doesn't do you a bit of good.
Tax deductions like this are enormously tilted in favor of the wealthy in other ways, too. If your family is hard-pressed financially, you'll look for child care you can afford — maybe you'll pay $5,000 a year. By contrast, a rich family can spend extravagantly on the fanciest child care they can find — maybe they'll pay $20,000. When tax time comes, the rich family can subtract $20,000 from their taxable income — four times as big of a tax break as the poorer family gets.
So what's the right way to help American families with child care costs?
The plan put forward by Trump's opponent, Hillary Clinton, would use tax credits to make sure no American family pays more than 10 percent of their income for child care. Essentially, once you figure out your taxable income, and what percentage you owe to the government, tax credits come in and reduce the amount you owe by a set number.
America already has a tax credit for families with children that knocks some money off the costs of child care. You can claim $3,000 or $6,000 in expenses on child care, and the credit will take up to 35 percent of those expenses out of your tax bill. So depending on how much you pay in child care and how high your income is, you can get a tax credit up to $2,100. Crucially though, this existing child care tax credit isn't refundable. Clinton wants to change that. With refundability, if the credit is worth $2,100, but you only owe the government $1,000 in taxes, the credit wipes out the $1,000 and you get the remaining $1,100 back.
As you can see, with a tax credit, the tax break doesn't get perpetually bigger the more money you make, so tax credits are more equitable in how much help they give the rich versus the poor.
Now, Clinton's plan isn't perfect. It's overly complicated and clunky. But the contrast between the probable effects of her plan versus Trump's is stark.
Trump's plan play-acts at being a populist measure, geared to help the working Americans Trump claims to speak for. But it actually showers the bulk of its benefits on wealthier Americans. That's probably not because Trump is a fraud, but because he can't be bothered to learn the actual landscape of American policy, and thus how best to reshape it to help working people.
Indeed, one of the most striking evolutions in Trump's campaign in recent months is the degree to which he's made peace with Republican economic orthodoxy. In the past, Trump sounded positive on progressive ideas like universal health care, a higher minimum wage, and even deficit-financed infrastructure spending. But now, most of these talking points have been reversed, turned to mush, or simply evaporated into thin air.
With the exception of his opposition to the modern era of globalized trade deals, what was left in Trump's big economic speech was an agenda any ideological Republican donor could be proud of: Paul Ryan's income tax plan, the elimination of the estate tax, and a seemingly enormous but thoroughly abstract commitment to roll back all sorts of government regulation.
It was an economic agenda that assumes the workings of the capitalist free market are perfectly fine just as is, and the only help working Americans need is to get the government off their backs. Offering a tax deduction for child care expenses is perfectly in line with that thinking.
Editor's note: This article originally mischaracterized the details of America's existing child care tax credit. It has since been corrected. We regret the error.
