The debt ceiling debate continues (bringing out my inner wonk… who’s been deeply buried for a while). I’m quite intrigued and excited by the broad ideas proposed to lower marginal tax rates while reducing the use of exemptions and deductions. Higher marginal rates with lots of deductions reduce incentives to work and increase incentives for spending a lot of time figuring out how to game the system. That may not paint human nature in a positive light, but it’s true.
I’ve been thinking of this lately in light of the incentives of married mothers to work. I’ve lost track of the number of times I’ve heard people who’ve decided to leave the workforce for a while give the reason as “well, after taxes and paying for childcare, I didn’t earn anything,” or “after taxes and paying for childcare, I just earned $10,000 for working full-time.” If people would prefer not to be in the workforce while their children are young, that is one thing. If they are more mixed, then there are a few arguments counter to this — and ways lower tax rates would change some of these calculations on the margin.
I’ve never liked these arguments for a few reasons. First, why is the total cost of childcare charged against the mother? Generally, it’s because she earns slightly less than the father — a situation that is starting to change in many households, but is broadly still true. But you could just as easily charge it against both parents. Especially since households where one parent is not in the workforce often don’t have zero childcare expenses. They pay for preschool (which isn’t mandatory). They pay for occasional sitters. This isn’t as much as full-time care, of course. But it’s something. And yet those outlays are often not charged against the non-income earning parent.
Second, noting that you don’t come out ahead after paying for taxes and childcare is a short term way of looking at the problem. Because eventually your childcare expenses will fall, and if you’ve stayed in the workforce, your earnings will rise. The problem with taking time out is that it becomes very difficult to get back in at anything approaching your previous salary or level of seniority (not to mention the years of advancement you’ve foregone). Economist Sylvia Ann Hewlett’s research on this found that women who take 3 years out of the workforce only earn 67% of the wages of people who’ve stayed in. This is a big difference. Not taking it into account is like saying “oh, I shouldn’t go to college because I won’t earn anything for 4 years. I’ll actually be losing money while working really hard.” Or “I shouldn’t go to graduate school, because I could be making $60,000 a year instead of paying out $20,000.” These are long-term investments in one’s earning capacity. It’s the same with paying for childcare. Of course, some people manage to on-ramp easily and profitably. But not everyone.
So how does this all come back to tax rates? The first part of these arguments is “after paying for taxes and childcare.” Lower marginal rates change the money you’d see in a paycheck. Yes, people get some of this back in their refunds at tax time due to deductions. But these refunds aren’t built into people’s calculations of “this is what I take home every week/month and this is what I pay my nanny or daycare center.” Refunds aren’t credited only to the lower-earning parent in people’s calculations. Lower marginal rates change the paycheck and change the ongoing math.
And then there’s the second benefit for some of us. My husband and I have always paid our nannies on the books. Given that the majority of parents who employ nannies are committing tax evasion (a subject that makes me furious, but that’s for another time), the market basically works on net pay. So I always wind up calculating what people’s paychecks will look like after taxes are withheld, and then negotiate a gross salary based on that. Lower marginal rates mean that gross salary could be less for the employee to take home the same amount. Given that the gross salary is coming out of the parents’ after-tax salaries, lower marginal rates benefit professional working mothers twice.