By: Jennifer Bird-Pollan
This week Republican presidential nominee Donald Trump released a series of proposals aimed, presumably, at improving his approval ratings among women. Much of the focus in reporting on this plan has been on the proposed six weeks of maternity leave that employers will have to make available to all of their female employees. Another element of the proposal is focused on mothers who do not work outside of the home. Trump’s plan offers a tax deduction for childcare expenses to all parents (including adoptive parents and foster parents) with children under the age of 13 living at home. In a unique twist, rather than having a uniform cap for the amount of childcare expenses taxpayers can deduct, the plan caps the amount of the deduction at the average cost of childcare in the state of residence. In another radical departure from current law, Trump’s childcare deduction would be available to stay-at-home parents who provide care for their own children in their own homes. In the explanation of this proposal Trump claims that allowing the deduction to be claimed by stay at home parents means the government would be allowing families to decide for themselves”what’s in a family’s best interest.” Further, the proposal claims that giving a deduction to stay home parents is “a belated recognition by the federal government of the economic value of the work provided by stay-at-home parents.”
This proposal might have significant political appeal, especially to stay at home parents who feel socially undervalued, but it demonstrates some basic misunderstandings of tax law and related theories of income. Most basic income tax law courses cover the subject of “imputed income”. Imputed income includes all the things one does for oneself, that don’t come in the form of cash, but that provide advantages to oneself. The classic example is the imputed rental income from owning one’s own home. If you own your own home, you do not have to pay rent to a third party. This makes you economically better off than another taxpayer who does have to pay rent. In order to reflect that economic advantage with regard to your tax situation, we could require you to report as income the economic value of the rent you would have to pay to rent your house from someone else. This would be treating you as though you were renting your home from yourself, and paying yourself rent. With your landlord hat on, you’d have to include in your income the rent you paid when you put your tenant hat on.
Another example of imputed income is uncompensated labor performed (usually by women) in the home. One of the most common (and most valuable) forms of this labor is child care. Assume that a person runs an in-home childcare center with room for three children, and that in exchange for caring for one child, the provider receives payment of $10,000 per year. If the provider takes in the full three children that would put the center at capacity, the provider will have $30,000 of gross income for the year. However, if the provider decides to use one of the spots to care for his own child, then he will take in only $20,000 in payment from others. As a result, he has $10,000 in imputed income, for the care of his own child. We could have a tax system that tried to tax imputed income, by treating the caretaker as though he paid himself $10,000 to care for his own child. Without such a system in place, caring for his own child in the childcare center gives the taxpayer the economic advantage of receiving childcare, while allowing him to report income of only $20,000. In this way, our taxpayer pays less income tax than he would if he took in three children to the center, earned $30,000 in income, and paid someone else to care for his child. While this example might clarify the point neatly, imputed income from childcare does not only arise if you run a childcare center from your home – any time a person cares for his own children he gives rise to imputed income.
The U.S. tax system does not tax imputed income. Work performed for oneself produces an economic benefit that goes untaxed. If Trump’s proposed system really wanted to recognize the economic value of work performed by stay at home parents, then that value should be included in the income of the parents performing the work. At that point, offering a tax deduction for the value would be appropriate. However, because the imputed income goes untaxed, offering a tax deduction for the work of a stay at home parent results in a windfall to the family, and further incentivizes second earners (usually women) to stay home to care for their children rather than work outside of the home.
One of the ways that second income earners (and in the 21st Century United States, those second earners are typically women) are disincentivized from working has to do with this lack of a tax on imputed income. Assume a woman is married to someone whose annual salary places him in the highest marginal tax bracket, currently 39.6%. Any income she earns will be taxed at that highest marginal rate, if they are married and file jointly. Let’s assume she is considering taking a position that would pay her a salary of $30,000 per year. Assuming no other deductions, she’d take home $18,120 after tax. Let’s assume our potential taxpayer also has two children, ages 2 and 4, both of whom will have to be cared for by someone outside of the family while their mother works. If our family lives in any major metropolitan area in the U.S., they will certainly have to pay more than $18,120 for a year of childcare for two children. Even here in Lexington, Kentucky, a year of full time daycare for one child costs about $10,000. So if our example mother’s decision is purely economic, she will choose not to go to work, but will instead stay home and care for her children. A tax deduction for the cost of childcare, however, especially if it fully offset the amount the family has to pay for the two children, might change this outcome. If she can take an above the line deduction for the costs of childcare, reducing her taxable income by the amount she pays to have someone care for her children while she goes to work, then there is an economic benefit to her choosing to work. Under Trump’s plan, even if our example mother chooses to forgo earning the taxable salary, and to stay home and care for her children, she will be entitled to a tax deduction. In this way, the economic benefits of staying at home with her children will be multiplied by the tax rate on her income earning spouse’s highest taxed dollar of income.
The difference between the mother who works outside of the home and earns taxable income, and the mother who cares for her child in the home, producing non-taxable imputed income, already results in a tax-motivated disincentive for working mothers. The mother working outside of the home must incur the costs of childcare in order to produce the taxable income she earns. The mother who works in the home caring for her child incurs no comparable expense, and has no comparable income subject to tax. Allowing the stay-at-home mother a deduction for a childcare expense she did not actually incur gives her an actual deduction for an imputed expense, while continuing to allow her to avoid taxation on the imputed income her labor produces. There is no theoretically consistent justification for allowing this deduction, while still failing to tax this income.
The problem of the tax code’s disincentive effects on working mothers is real, and proposals to address the problem should be applauded. While Trump’s latest plan claims to be offering a solution, a deduction for stay-at-home mothers will exacerbate the problem, creating additional economic incentives for women with young children to stay out of the workforce.