Daycare used to be downright quaint: When I was a kid, my “daycare center” was Mr. and Mrs. Cummings’ front yard across the street from my house. I walked there after school and under their careful watch I played every dangerous game that existed until my parents got home from work. The cost of this service? My mom did their laundry.
Today, most daycare centers have been replaced by after school on-campus programs, or for-profit daycare centers. And the costs have skyrocketed: Nationally, five day per week childcare averages about $200 per week. It can be significantly pricier in metropolitan areas, or a bit cheaper in smaller towns or if you can find an in-home provider in your neighborhood. But on average, it’s about $800 per month.
With this high expense for childcare—think about $15,000 to $20,000 a year for two children— it’s no wonder that childcare has surfaced in the current presidential election. Hillary Clinton originally broached the subject during the Democratic primary but at that time in didn’t gain much traction. Now in the general election she has refined her proposal by advocating a childcare tax credit.
The Clinton plan for a tax credit isn’t new, exactly. It just modifies what is already part of the IRS code. Currently, taxpayers can take a childcare credit against taxes owed in an amount that varies from $600 to $2,100 depending on family size and household income. The only twist with the Clinton plan is to increase this credit so that, “no family has to spend more than 10 percent of their income on child care.” This new angle certainly benefits low and middle income families, but it has significant downsides that will affect millions of families if it becomes reality.
The average family of four in the United States has a median household income of about $56,500 per year according to the Census Bureau. Using the Clinton plan this average family would therefore receive a tax credit of about $10,000 to $15,000 assuming they had a few kids in child care and paid roughly the national average. Assuming they took just the standard deduction and exemptions, this would entirely eliminate their tax bill of about $4,500 and additionally pay them another $5,000 to $10,000.
And remember, this analysis is just on the median family—the middle of the pack. A family with income below this amount—say a couple both working full-time and earning minimum wage—would not only eliminate their $1,000 income tax bill but get a check from the IRS for about $16,000. That’s effectively a 50 percent pay raise in their household income.
More egregious, affluent families would also get a huge check from the public. Consider a family with an income of $100,000—the lower end of the top 25 percent of all Americans. This household would have an average childcare expense again of about $20,000, but with the Clinton credit, it would receive about $10,000 as an offset against income taxes. Assuming they also only took the standard deduction and exemptions, it would entirely eliminate the family’s tax bill. To put this another way, 75 percent of all American households with children and child care expenses would pay no income taxes at all—and most would get an additional check from the government.
Effectively, the outcome of Clinton’s plan is to pay almost every family in America roughly $10,000 per year for every child they have, regardless of whether they make a high income. Suddenly, giving birth becomes a profitable enterprise.
And with all of this extra childcare money floating around expect costs to skyrocket. Just like with housing a few years ago and college costs now, overpriced childcare will become another government-created bubble. If you think childcare is expensive now, just watch what happens if this credit becomes reality.
Kevin Cochrane teaches business and economics at Colorado Mesa University. He is also a Permanent Visiting Professor of Economics at The University of International Relations in Beijing.
