This was supposed to be the week both major party candidates concentrated on their visions and proposals for growing the American economy.    On Monday, Donald Trump focused on reduced tax rates, deregulation and repeal/renegotiation of trade agreements. We have yet to hear from Hillary Clinton (scheduled for Thursday) but we know she will likely include proposals to hold or lessen the tax burden on low and middle income families while raising rates or eliminating loopholes which primarily benefit the wealthy.  Although other events have dominated the election news, economic growth and equity still deserve our attention.

My question is, “Are tax rates the best or only way to address inequities in the tax code?”  This question was inspired by Donald Trump’s proposal to convert the current child care credit to a deduction and increasing the dollar limit on eligible day care costs above the current $3,000 for one child and $6,000 for two or more children.  Who would benefit most from these changes?

• Today, a family of four living on the cusp of the poverty line ($23,550) which spends the maximum ($6,000) on child care gets a tax credit of 30 percent or  $1,800.  However, it is highly unlikely a family at the poverty level could spend over 25 percent of their total earned income on child care.
• In contrast a family with the median family income of $53,637  who spends the maximum $6,000 on child care  (11.2 percent of their annual income) would get a 20 percent credit worth $1,200.
• However, if a family on the poverty threshold spends the same percentage of income (11.2 percent) on day care, their credit is only worth $790 (30 percent of $2,635 in day care expenses).

So even though the tax credit is progressive based on earned income, the absolute benefit is higher for a wealthier family.

We do not have the details of the Trump proposal,  but he talked about a tax deduction versus a credit and raising the maximum dollar amount.  Just for argument sake, let’s say he raises the dollar limit to $10,000.  Here’s what happens to those two families.

• The family on the poverty line will have a taxable income of $0 (income of $23,550 less $12,600 standard deduction and four exemptions at $4,000/person).  Therefore, they will receive no day-care subsidy.
• The family at the median family income will have a taxable income of $25,037 ($53,637 minus $28,600 with exemptions and the standard deduction).  They are in the 15 percent tax bracket.  If they spend the maximum $10,000 for day care, they will receive a $1,500 subsidy.
• And a family in the proposed highest rate of 25 percent will receive a $2,500 day care subsidy.

This is just the tip of the iceberg.  Think about the major tax deductions such as mortgage interest, state/local taxes and charitable giving.  In 2013 (last year for which there are IRS statistics), total mortgage interest claimed was $317 billion.  Total charitable giving claimed was $194 billion.  And state/local tax deductions claimed equaled $506 billion.  The overwhelming majority of these claims are made by upper income taxpayers who are currently subsidized at rates of 25 to 35 percent for these personal expenditures.

Want to make the individual income tax more equitable?  Here is my proposal.

1. Raise the exemption to $5,000/person.  Therefore, a hypothetical family of four would have its first $20,000 exempt from federal income taxes.
2. Abolish the standard deduction.
3. Convert all current tax deductions to flat rate credits.  For example, instead of subsidizing home ownership based on income (zero to 35 percent), paid mortgage interest would entitle all taxpayers to a flat rate refundable credit.  I am not sure how much the exact percentage would be, but it would easy to calculate.  What is the total tax expenditure for the mortgage interest deduction?  The Tax Policy Center estimates the total mortgage interest subsidy in 2016 will be $75.3 billion dollars.  My preliminary estimate suggests a refundable tax credit somewhere in the range of 15-18 percent would be revenue neutral.
4. Develop revenue neutral deduction to credit conversions for all major Schedule A line items.
5. All future tax incentives would be in the form of flat rate refundable credits available to all taxpayers regardless of filing status or income.

This proposal is presented only as a first step to make the individual income tax code more equitable.  During my research for this post, I found there are other organizations such as the Center for Budget and Policy Priorities which have previously raised similar issues.  After watching the current presidential campaign, my next question is, “Is the American body politic capable of organizing a movement behind solutions instead of anger and dissatisfaction?”

For what its worth.
Dr. ESP