Donald Trump released his child care proposal yesterday, complete with an expansion of government mandate, convoluted tax rebates and fantastically magic funding sources. But he let Ivanka unveil it, so we all wanted to look anyway. Pure Trump.
Buried in the garbage, however, is one little tidbit that begins to scratch at a hugely important, potentially earth-shaking idea that could fundamentally remake the Republic in dramatic ways. Think I am exaggerating? Well, maybe I am…but read on anyway.
What’s the big idea? I’ll let the Washington Post describe it:
“The GOP contender, who announced his plan this week, wants to let parents deduct from their income taxes child-care expenses for up to four kids. The total deduction would be capped at the average cost of care in their state, which ranges from roughly $5,500 annually for infants in Alabama to nearly $22,000 in Washington, D.C. Parents who make more than $250,000 individually or $500,000 together would not be eligible for the break.”
The big idea isn’t a tax deduction; the big idea is in tying the deductibility of child care costs to actual costs in the place you live. And the bigger idea, still, is normalizing the tax code to account for cost of living differences. And that, my friends, is a game changer.
The tax code currently treats a dollar as equivalent regardless of where it is earned. Everyone in America, though, knows that such a thing is not true. This lovely three bedroom unit is within a stone’s throw of the Arkansas State Capitol in Little Rock. It’s new, comes with a two car garage, roof deck and over 2,600 square feet of living space. It can be yours for about a quarter of a million dollars. This similar place, within spitting distance of the Massachusetts State Capitol in Boston, is a shade bigger at 2,800 square feet, and has a valet instead of just a garage, but you don’t get the roof deck and it will set you back at roughly $5.5 million.
Is the cost of living in Boston a full twenty times higher in Boston than Little Rock? No, of course not, but it’s certainly an awful lot higher (about 50 percent higher, per the Economic Policy Institute). People who live in big, expensive, coastal cities – New York, San Francisco, Washington, Boston – pay more for everything they do than people in cities of all sizes in other parts of the country. The cost of living in Houston, for example, is barely half of the cost of living in Washington, DC. People in those cities tend to earn more, as well, although the real premium of earnings is much smaller than the nominal premium.
But to the IRS, the family that earns $150,000 in Manhattan is just as rich as the family with the same earnings in Des Moines, despite the fact that the same income goes nearly twice as far in Iowa. Our income tax brackets, asset tests and income limits on all sorts of credits and deductions are uniform across the country, which benefits states with lower incomes and lower costs of living at the expense of the states with higher incomes and higher cost of living.
What Trump has proposed begins to chip away at that, and that is a huge…nay, a YUGE…idea. It acknowledges that stuff costs less in Alabama than it does in Connecticut and the higher earnings of someone in Connecticut doesn’t actually mean that person has a higher standard of living, or more disposable income or whatever measure you choose to use to measure wealth. It lets a normal taxpayer in Connecticut with two kids claim a deduction of up to $40,000 of child care expenses while only allowing the Alabaman $11,000, which is magnified because the woman in Connecticut is already in a higher marginal bracket than her equivalent in Alabama because she earns more.
Taken to its potential extreme, this fundamentally changes everything about the way we fund our government. Or, the portion we choose to fund instead of borrow, at least. If we started (and just to be clear – no one has proposed this) normalizing income tax brackets by state, or city or county or whatever, and readjusted the tax burden so that everyone paid a tax based on their cost-of-living-adjusted earnings and not their nominal earnings, the tax burden would shift in pretty remarkable fashion. A whole lot of people would have a whole lot more money, and a whole lot of other people would realize exactly how much they have been subsidized for 75 years.
And it is not very hard to figure out what that shift would look like.
Whose taxes go down? People in dense, wealthy coastal cities with high costs of living. Whose go up? People in lower-cost flyover country, especially the southern part of it. As a proud denizen of the state with the fourth highest cost of living in the lower 48, I am not really all that broken up about this. But I wonder how Trump’s staunch support in places like Mississippi, Tennessee, Idaho, Indiana or Oklahoma (the five cheapest) would react..?
12/5/2016 12:04:19 pm
I would like to say that this blog really convinced me to do it! Thanks, very good post.
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