Donald Trump’s proposal to make child-care expenses tax-deductible became a little less vague on Thursday — and significantly more expensive.
In a statement pushing against Hillary Clinton’s “wild lies” about the proposal — note: not wild lies, just attempts to interpret Trump’s single-sentence proposal about a complicated matter — the Trump campaign provided more detail on how the deduction would work:
- The deduction would be “above the line.” That means that it would appear before Line 37 on Form 1040, and therefore the deduction would come out of your income before calculating adjusted gross income. Here’s why it matters where on the form the deduction goes: You can take “above the line” deductions on top of the standard deduction, without itemizing your other deductions. As a result, more taxpayers could take advantage of this deduction, including taxpayers who don’t make enough money to itemize. Itemizing is generally for people who pay a significant amount of mortgage interest or state and local tax.
- The deduction would apply against one-half of payroll tax, not just income tax. Clinton and others have pointed out that a new income-tax deduction would be of no value to low-income parents who don’t make enough money to pay income tax. Making the deduction also applicable against the employee-paid half of payroll tax would provide some savings to anybody with labor income. The benefit wouldn’t be huge — it would equal 7.65% of the amount deducted — but that’s not nothing.
But there are still two big problems with Trump’s proposal.
One is that, like any tax deduction, the value of the deduction is directly linked to the tax rate you pay. Suppose two families each deduct $4,000, but one family has an income so low that they pay only payroll tax, while the other family has a high income and pays at Trump’s proposed top rate of 33%.
The low-income family would have a tax savings of $306, while the high-income family would save either $1,320 or $1,626. I don’t know the exact figure for the wealthier family because the proposal is ambiguous about whether taxpayers can take the deduction against both income and payroll tax or must pick one.
“More detail will be rolled out soon after the plans [sic] other elements,” according to a statement on Trump’s website.
Either way, the benefits are disproportionately aimed at higher-income families.
The other problem is that we have no idea how much the proposal would cost, and the clarifications announced on Thursday would make it more expensive.
Trump’s campaign has said that there will be some sort of income cap on the deduction, but it hasn’t specified what the cap would be or how it would work. Income caps are tricky to design. A high cap with a long phaseout would make this proposal very expensive, and a lot of its benefits would go to rich people. A low cap with a short phaseout would impose a high effective tax rate on working families, as they would lose child-care subsidies with each additional dollar they earn.
If Trump really wanted to make this proposal less tilted toward the wealthy, then he would structure it as a tax credit — which reduces your tax bill by the same amount regardless of your tax rate — instead of a deduction. But he seems to have specifically chosen not to do that.
I expect that the Trump campaign will continue to dribble out clarifications on this policy proposal. I don’t expect that it will ever provide a cost estimate, and I’d be surprised if it provided enough detail to allow outside groups to produce a reliable cost estimate.
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