Cross-posted from AEIdeas authored by Angela Rachidi.
With so few policy specifics coming out of the Trump campaign, yesterday’s release of his childcare plan was notable. It’s worthwhile to consider some of the specific aspects of the plan.
The first question is why propose childcare relief for working families at all. A strong case can be made for it from both an economic and social perspective. As AEI colleagues have persuasively argued in the past (here, here, and here), childcare is a work expense and providing assistance to families so that they can afford it promotes economic efficiency, increases employment, and fosters economic growth. A particularly convincing case was offered by Alan Viard in a 2010 piece:
“The child care credit is not just another middle-income tax break. It plays an important role in encouraging work by providing tax relief for expenses that are closely linked to work. An improved and expanded credit can help offset the work disincentives of the income tax and boost economic growth.”
Childcare relief has social benefits as well. Research shows that childcare assistance can lead to better quality childcare, and it can relieve financial hardship for families with low earnings.
The second question is who should benefit from it. Again, a strong argument can be made for providing it to low- and middle-income families because without it, work may not be possible. One problem with the Trump childcare plan is that it seems to disproportionately benefit higher-income families. They propose “child care spending rebates” through the existing EITC for low-income families, because they have no income tax liability and wouldn’t benefit from a deduction.
But the balance of benefits seems off. A tax deduction would likely mean more assistance to the higher-income families than lower-income families would get through a spending rebate. It also does not address the improper payment problem in the EITC. Adding another layer to the EITC may make this problem worse.
Contrary to what Mr. Trump said himself, a great deal of policy work has been done on childcare assistance, and a number of options to provide it exist.
Another question is how to structure it. Contrary to what Mr. Trump said himself, a great deal of policy work has been done on childcare assistance, and a number of options to provide it exist. Trump’s plan proposes to use a tax deduction for childcare expenses, rather than the exiting childcare tax credit. It has some merit, but may be more regressive than the existing tax credit. And while it is unclear what a “spending rebate” on top of the EITC is, it seemingly would be similar to a refundable childcare tax credit, which as I have argued before, may be a better than the current direct subsidy system for low-income families.
The last question is how to pay for it, which is a major hurdle. The Trump plan claims that details will be released as part of their broader tax plan, but that “The child care plan itself can more than be offset by additional growth.” At a cost that likely would top $60 billion that seems highly unlikely. They will need a better plan for how to pay for it.
Ultimately, the plan recognizes that relief to working families to afford childcare can be worthwhile. And the particular ways to provide relief, tax deductions and refundable tax credits, have merit as a way to achieve this. The package as a whole may have some problems, but it hopefully starts a discussion about the best way to provide childcare relief to working families.
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