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President Trump, perhaps spurred on by his daughter Ivanka, wants to use the tax code to provide new government assistance to families with children. During the presidential campaign, he proposed a child care tax deduction. And he has shown interest in such a plan since the election, including a short description in the Administration’s April outline on tax reform.
But Trump’s proposed deduction has some flaws: It would deliver the most benefits to high-income families and deliver very little help to the low-income households that need it the most. But there is a better way: Congress could expand the existing child tax credit (CTC), an idea that has the support of Senator Marco Rubio (R-FL) and other members of Congress.
The Tax Policy Center (TPC) has estimated that Trump’s campaign proposal for child care tax benefits would cost about $115 billion over 10 years with roughly 70 percent of benefits going to families with incomes of $100,000 or more. The lowest income families, who likely struggle most to care for children, would get almost no help.
The child care deduction, as envisioned by the Trump campaign, would allow parents of children under 13 to deduct child care expenses, up to the average cost of child care for a same-age child in their state. The deduction would be available even to married couples who don’t pay for child care, effectively making it an additional per child deduction on top of the existing personal exemption for dependents.
The rub: The deduction would be available only to those who pay federal income tax. Since most low-income families do not owe federal income tax, reducing their taxable income with additional deductions would provide no benefit. The Trump campaign also proposed a small tax credit for low-income families. But it would go only to those who pay out-of-pocket for child care, something many low-income families simply cannot afford—even with such a credit.
A few weeks ago, a Washington Post article floated the idea of making the existing child and dependent care tax credit (CDCTC) refundable. That would provide more benefits to low-income families, but the extra support would not help families without paid child care costs, nor would it help married couples with only one worker and a stay-at-home spouse.
There is a better option: Expand the CTC. With recent reports of Ivanka Trump meeting with Senator Rubio (Florida), this might be what‘s on the table, given Senator Rubio’s long time support of a CTC expansion (though to be clear, his previous proposal to expand the child tax credit was ill-targeted, flowing mostly to higher income families with children).
Why expand the CTC rather than the dependent care credit? For starters, the CTC reaches many more families. TPC estimates that 12 percent of all families with children benefit from the CDCTC, a number that would increase a bit if the credit were made refundable. But the CTC already reaches 67 percent of all families. Expanding benefits off that much broader base would likely help many more families than enhancing the relatively narrow CDCTC.
Congress also could consider other CTC reforms that could help low- and moderate-income families with children. It could target additional benefits to families with young children or phase in the CTC starting with the first dollar of earnings rather than limiting it to earnings in excess of $3,000. The latter reform would provide substantial new benefits to the lowest income families.
The President’s interest in helping families with children is commendable, but the deduction he proposed during the campaign would be poorly targeted and do little or nothing for families that need help the most. The good news is that he could easily correct the problem by reforming the existing child tax credit – providing larger benefits to families with young children or providing more benefits to low-income families.
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