Donald Trump has what he calls a “child care plan” (in reality it is merely an “idea” since Trump is not a member of Congress and it is Congress that writes the tax laws). The crux of it seems to be that a family with N children can deduct N*(average cost of day care) each year from income.
At first glance this looks sort of reasonable. Businesses pay tax on their profits, not on their revenues. If you consider a parent’s W-2 job as revenue then the cost to park children in day care is a business expense and the appropriate thing to tax is the difference (profit).
But on the other hand, where does this stop? A person who decides not to work won’t have a daily commute and can get rid of the car. So shouldn’t the cost of one car per working adult in a household be deductible? A person who decides not to work will have time to cook meals from scratch using inexpensive ingredients such as lentils and potatoes. So shouldn’t the cost of 10 restaurant meals per week be deductible (5 individual lunches plus 5 family dinners that the working parent wouldn’t have had time to cook)?
Currently there are a lot of Americans who are in a greater-than-100-percent tax bracket due to (a) various programs, such as public housing, that are means-tested, and (b) the fact that many expenses associated with working are not deductible. (See Book Review: The Redistribution Recession for more on this subject.) The declining labor force participation rate suggests that quite a few Americans have figured out that it is not economically rational to work (check Singapore’s stats going back to 1990, especially for prime-age males, to see what happens under a system in which it does make sense for the average person to work).
Perhaps Trump’s idea actually makes some sense (this sentence alone would be enough to get me defriended on Facebook!).
When we dig deeper, though, it gets stranger. The web site says “Mr. Trump’s plan will ensure stay-at-home parents will receive the same tax deduction as working parents, offering compensation for the job they’re already doing, and allowing them to choose the child care scenario that’s in their best interest.” Thus this begins to look like a straight-up “pay people to have kids” plan. (See When and why did it become necessary to pay Americans to have children?) It is no longer about taxing people on net income rather than gross income.
As befits a person of, um, rather advanced years, Trump’s plan seems to reflect an obsolete view of American society. Pew says that only a minority of today’s American children live “in a home with two married heterosexual parents in their first marriage.” How does Trump’s plan interface with the American divorce, custody, and child support industry? Consider the Massachusetts resident who has obtained custody of three children with three different co-parents, each of whom earns $250,000 per year. The revenue yield from the three kids is a minimum of $40,000 per year under the child support guidelines plus payment of any actual kid-related expenses, such as day care. Congress enacts the new Trump idea. If consistent with current child-related federal tax deductions, the person who gets hold of the child can take the deductions even if all of the money is coming from someone else and the child is a cashflow-positive asset. Day care in Massachusetts is kind of expensive compared to the national average so perhaps the parent here gets $12,000 per year per child as a deduction? So in addition to the $120,000 per year in tax-free child support and any reimbursements for actual expenses, the successful child support plaintiff in Massachusetts now has an extra $36,000 per year in tax deductions. So this person can now earn perhaps $50,000 per year tax-free (total tax-free income now of $170,000 per year, equivalent to $350,000 per year in pre-tax income for a childless American under likely future tax rates)? If we add this to the existing American family law system under which it is more lucrative to have a one-night sexual encounter with a high-income person than a long-term marriage to a medium-income person, will this accelerate the trend away from two-parent households for children?
A final question is why this makes sense for older children. Consider a 17-year-old who is in a public high school and working an after-school job sufficient to pay for clothing, entertainment, etc. The “child” is not costing the parent or parents any money yet is generating a tax deduction the same as a 4-year-old who needs to be in day care? Trump doesn’t say anything about reducing the deduction when children enter public school and are cared for 7 hours per day at taxpayer expense.
Readers: What do you think? Does this plan make any economic sense or it is just a way to pander to voters with children?
As you say, Congress would re-write the plan anyway. Don’t take the details too seriously.
I think the key difference is that raising children confers positive externalities on society (creation of ideas, future work productivity), whereas having a car confers negative externalities (pollution, road congestion).
A tremendous beautiful plan. The best!
A minority of children live in a home with a single parent, as far as that goes. Anyway a majority of white or Asian children do live in a home with two married parents, and that’s a majority of households with children.
The deduction is capped at 5k, incidentally. I like the plan as a SAHM since I get the money whether I use part-time childcare or go it alone (SAHMs use part time childcare at moderate rates, a quarter to a third of them regularly, possibly a majority infrequently/occasionally). It’s not too bad as such things go, mildly natalist and not penalizing married couples with one earner, which the current system heavily does.
> this begins to look like a straight-up “pay people to have kids” plan
Obviously that’s the point. It’s supposed to be a eugenic policy. It’s a favor handed directly to middle to upper middle class couples to encourage them to breed more.
I’d have to think through the whole thing more but that seems like an ok idea to me.
What we have at the moment is a system that encourages smart people to be sterile and encourages really dumb people to have as many kids as possible.