I was perusing through Trump’s proposed child care benefits and happened upon a familiar foe:
A new tax-preferred dependent care savings account (DCSA). Families could contribute up to $2,000 per year per child to the new accounts, with no limits on the income of eligible families. Contributions would be tax deductible and the accounts would grow tax-free indefinitely, provided families eventually spend the funds on child care, after-school enrichment programs, private school tuition, or higher education. It appears that withdrawals would also be tax-free (National Women’s Law Center 2017). This extremely favorable tax treatment — akin to combining an IRA with a Roth IRA — only exists in one other place in the tax code, for Health Savings Accounts. DCSAs would provide little benefit to the substantial share of families who owe no federal income tax because their income is too low. For low-income families, the president’s proposal would match 50 percent of their first $1,000 in contributions, similar to the effect of a 50 percent tax credit. But, as discussed below, DCSA adoption among such families is likely to be low, partly because they tend to be cash-strapped. Moreover, low-income families would be more likely to spend DCSA funds quickly and thus not benefit from tax savings on their earnings. At the same time, DCSAs would provide high-income people a new tax sheltering opportunity
The proposal here is to have the government match 50 cents for every dollar low-income people contribute to a savings account, up to a point. What’s the problem with this particular idea? I’ll let the Tax Policy Center explain:
In practice, low- and moderate-income families are likely to benefit far less because they cannot afford to contribute to such accounts. The majority of American families have less than one month of income in liquid savings (Pew Charitable Trusts, 2015). Low- and middle-income families participate in tax-preferred savings programs much less often, and when they do participate, they do not contribute nearly as much as wealthier families. For example, in a study where low-income households were offered a 50 percent match for saving in an IRA and were even given assistance opening an account, only 14 percent elected to participate (Duflo et al. 2007)
Ah. That’s right. The thing about being poor is that you don’t really have money to put into savings accounts in the first place, making this kind of benefit program largely pointless. That makes sense.
So who the hell would come up with such an idea, then? Surely this is a conservative idea for how to seem like you are looking out for poor people without actually doing anything meaningful, right? Wrong: this comes straight from prominent liberal think tanks.
Here is a 2012 proposal from the Center for American Progress that is identical to Trump’s with the only difference being that the CAP proposal is for a retirement savings account while the Trump proposal is for a child care savings account:
Our proposal goes one step further. We propose a refundable credit of 50 percent for up to $500 in contributions per individual for all households earning less than $55,000 and for individuals earning less than $27,750, respectively. Clearly this would expand the maximum value of the credit to more low- and moderate-income households.
Here is CFED, a liberal think tank that is supposed to be the leader in developing ideas for building wealth among the poor, with the same basic proposal:
We support strengthening the Saver’s Credit to enable millions of Americans to receive an additional incentive to build their savings and enhance their financial security. We support expanding and improving the Saver’s Credit by providing a flat 50% match on deposits into qualified savings accounts up to $500/$1,000 per year for a single/joint filer; automatically depositing this match directly into a designated account through IRS Form 8888; and, extending this benefit to households earning less than $65,000.
Trump’s plan is no more comically inept at building the savings of low income people as the plans offered by CAP or CFED. In all cases, the plans will fail because few low-income people will ever be able to access the 50% matching funds because they can’t really save. So why do liberal policy organs waste their time writing white papers in support of this kind of junk?