When I read in Friday’s newspaper that a Israel’s Supreme Court had ruled that the country’s tax authorities must allow tax deductions for child care costs, my feelings were mixed. As the holder of a B.A. in public policy sciences, I winced. Wasn’t the Court inserting itself into a policy detail better left to planners in the executive branch and to the legislature? As the husband of a long-time child care provider, I was gratified. The highest court in the land had recognized the essential nature of Ilana’s work.
In today’s Ha’aretz, the newspaper’s legal commentator, Ze’ev Segal, offers a cogent explanation and defense of the Supreme Court decision. According to Segal,
The ruling admittedly overturned a well-entrenched norm that had been accepted by the tax authorities for years—namely, that such expenses should not be recognized for tax purposes. But a careful reading shows that the court was not seeking to assume the role of the “great reformer” who overturns the established order in cases where the legislator has refrained from taking action.
While the five justices who served on the expanded panel differed on some points, they were unanimous in declaring that child-care expenses, such as payments to a nanny or babysitter, are not “personal expenses,” but outlays made in order to earn money, and are thereby entitled to be deductible under the Income Tax Ordinance.
The heart of the ruling is a judicial interpretation of the law. This interpretation accords with both the law’s language and its purpose, which is to collect the tax actually due. The interpretation was based, as it should be, on the finding that there is “a direct, substantive connection between the [child-care] expenditure and earning income.”
In other words, in Segal’s view, the Court is not seeking to set policy. Instead, it is telling the tax authorities that, by the standards of the legislation they are charged with enforcing, they cannot reasonably say that a the cost of a laptop computer, for example, is a legitimate business expense while the cost of child care is not. If you are a writer or businessman or Twitter Techie and you have small children, you could no more do your work without one than without the other.
The Knesset could amend the law specifically to exclude childcare, but that would be hugely unpopular. Most likely, the tax authorities will seek to promulgate limits to the deduction that will largely empty it of meaning. For example, they could set a low ceiling on deductible outlays, or declare that they will only recognize outlays to day care centers and not to privately-run day care frameworks like the one Ilana runs in our apartment. Those limits will, of course, be challenged in court, but the tax authorities know that it will take years for the cases to be decided.
The new government would do better to embrace the ruling as part of the economic reforms it plans. What could be better for an Israel facing recession than to make it easier, and cheaper, to go to work?
In a country with a progressive income tax, like Israel, tax deductibility of child care expenses is a regressive and inefficient way for the government to fund child care. The deduction is worth much more to high-income taxpayers and deprives the government of a higher share of their taxes. It would be more efficient and equitable for the government to provide a child-care credit that would apply equally to all working parents with children in child care.
And I don’t believe that the result is compelled by the tax law. If a job requires a laptop, then presumably any person doing the job would need a laptop. But not every person doing the job would need a child care provider. If I own a house in Florida, and I need to hire a caretaker because my job is in New York, can I deduct the cost of the caretaker? Obviously, any parent will bridle at this comparison: my child is not a luxury! But as a pure legal test, and not the making of public policy, they are the same thing. I don’t think the result is compelled by the legal standard.
Here in the US, we are permitted to deduct child care expenses up to a limit, and I have benefited from the deduction myself. But I’ve always understood that it’s a wealthy person’s benefit, designed to reduce the tax burden on the upper middle class while doing very little for the working poor who need child care assistance.
I know people (“upper middle class” professionals) who would like to have bigger families but can’t afford the day care bill–so they have two kids instead of four. Versus the young woman I credit with making me a non-liberal on the issue of public assistance: she lived in public housing from age 14 onward, had one child every year, lived on welfare and AFDC, planted her kids in the free inner-city day care (0600-1800, 6 days a week) across the street from her Section 8 townhouse, and hung out on the corner with her dealer-boyfriend smoking weed all day. I know because I passed her daily for four years, coming and going through Richmond. I was saving to start a family, which was tough, because 35% of my income was going to taxes to pay for her to have kids for free…..I’m sure the little freeloader would’ve have characterized me as “rich” since that’s the word that’s flung like an insult at anyone who makes more than a living wage.
Israelis I know here say that the biggest financial issue they have is the cost of day care.
Instead of a tax deduction, maybe it should be treated like school–make it free for everyone who is employed and contributing to the tax rolls.