Incentives and the cost of childcare

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.

8 thoughts on “Incentives and the cost of childcare

  1. “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.”

    This is a good, solid argument… more along the lines of why I started reading you in the first place .. Tax policy should support marriage since marriage is shown to make women wealthier…Women should support marriage and talk about policy that supports it and children AND paid work outside the home for women.. We get a little confused here as women… and no the fact that women have AIDS in Africa does not mean that America women shouldn’t be talking about more better for us here in AMerica… And tax policy should support work and specifically women’s work..t he childcare deduction is a bottom line deduction and not really a good deduction.. I can deduct what I pay my assistant as a business expense but what I pay my nanny (I don’t have a nanny but if I did) that is “my choice” and let’s be honest that is BS since quality childcare is a work expense and deduction.. without it the mother cannot work.. You should interview some folks about this and ask around b/c I hear about this magical childcare credit all the time — complete bs .. The itemized deduction for childcare is a magic wand to make women think they are getting things when they are getting nothing and being held back from work.. and this story is more of the kind of stuff we need as (working for pay) women — Is the 67% figure for men and women or just women..
    Also birth control should be part of health insurance reform since it is the woman who is tied to her body during pregnancy and lactation… Can’t we all agree as women who work and pay taxes and ARE MARRIED that birth control for married moms is part of empowering women — I an tell you that most small business insurance does not cover birth control – and again that is complete bs… anyone who says we have it so easy in America should take a good hard look at the real reality of AMerican women.. IF you believe in entrepreneurship for women — and particularly as a path for working moms to achieve not just work BUT WEALTH and intellectual engagement in the working world — how can you support health care reform that says we are supposed to use the rhythm method for birth contorl? as married women.. come on !

  2. I love this argument, because I was a professional and tax law to support working parents benefits me. However, to have quality childcare, we must have people (male or female) who are willing to provide it and someone must pay enough to draw quality people into the field. I don’t think lower marginal rates are the best proposal- I think deducting actual childcare expenses from taxable income, up to the lower earning spouse’s salary, is a better proposal.

    The other tough question is how to handle sick kids- unless a family has a nanny, one parent must take time off with a sick child and, at least at my former employer, I couldn’t even take UNPAID leave for a sick child. (I didn’t think this was legal under my interpretation of state law but given that they were laying off 40% of my division, it was irrelevant. 🙂 When employers are cutting back, families with two working parents and young children will be disproportionately hit because taking time off to care for sick children is viewed so negatively by employers of professional parents, the ones who could otherwise afford childcare.

  3. Do you have any knowledge of which women increase their salaries by remaining in the workforce? I imagine that women in law, business and marketing do but those in medicine (physicians, nurses, therapists) don’t. I suspect that the same factors are at work that cause professional women to have higher divorce rates- women in stable marriages with higher earning husbands are less likely to make the personal/family sacrifices to remain employed in a demanding role than women who suspect their marriages are not stable or who have low-earning husbands.

  4. You make more money if you stay working totally agree with that and shoot for it but the current child care situation in america does make it very difficult to justify it.. — but here’s another interesting tidbit.. When women earn more than their husbands, their husbands do less around the house and they probably
    All my friends who are stay at home moms get more help from their husbands than all my friends who make more than their husbands… We are still fundamentally conflicted about women and power — and our subtle conflicts are harder to fight b/c we get drugged up going to costco with the hubby adn thinking everything is great and fair when it is not… yet… but could be better. Yes, men should step it up at home.. but the reality is women have to take care of women and talk about these issues as they exist in America today …. and they are still women’s issues… I commend Laura for bringing it up I just think sometimes her tone is a little too life is great and I think that comes off as swallowing the Kool Aide… There are a lot of people — even good loving men – who benefit from keeping women down (poorer working less hours etc) and the woman’s movement of the 60s and 70s — has not allowed women to work as it should… It is unfinished…. and childcare and taxes and access to family planning and respect for parenting and motherhood are all part of why .. very complicated

    1. As usual, I think it’s a supply and demand issue. The supply of professional men who are willing to equally share household/childcare duties is small. Most would rather choose a wife who is willing to scale back so he has more time to succeed in his career.

      I think there’s an interaction between professional women’s goals to marry a successful man, rather than a supportive one, and men’s lack of desire to play a supportive role. With the right couple, this works well, but percentages are low.

      A few professional women are single mothers via donor (no legal father) but this is still relatively rare and has challenges of its own.

      I’m the only married woman with children of several women from the high school classes around mine. The rest are single childless professionals. As long as you don’t want children, I think women finally have equal opportunities to succeed.

      Unfair? Yes, but reality. My sister, a successful professional, would almost certainly be married if she were male. But at 34, it’s unlikely to happen and she can’t just marry someone several years younger and have children as a man can.

  5. But if you really think about it telling a woman she can have it all as long as she doesn’t have children — how is that reform or any kind of women’s movement… Laura has written about how most women have children — and in my personal experience most women want to have children (don’t have stats on this but sure you could find some) … just as most women would prefer to be married (we are after all a social species, monkeys are social most people are not preferring to be alone with no social ties)
    I don’t have the stats on this but very very very few women would agree to a career at the cost of a family…. the idea that this is the “solution” we got from Betty Friedan says a lot about where we are as women in America and how little we really ask of our society, our government, our spouses, our world… and how this has to change… The biggest lie of the 60s and 70s womens movement was this all or nothing move from stay-at-home and bake and clean to work but have no family… or quality affordable childcare… During WW II remember there was affordable 24-hour-around the clock childcare … what about child care shares..s houldn’t we motivate work by encouraging women to do these sort of like we have a carpool lane.. I’ll try to think of some more specific examples but I do think the birth control example for small business owners is a great example about how clearly health policy and small business and entrepreneurship policy in the US is written by and controlled by MEN… until that changes we won’t see the reforms we need..

    1. I guess I don’t think the situation is reformable or that a women’s movement will have much affect. Nature has made women different from men and much of the current problem with equality reflects that difference. Equality might be improved by different laws, as in Scandinavia, but I’m not aware of any society where men seek women or women seek men by standards of equality. We see this difference reflected even in the scandals of powerful politicians. Albright, Hillary Clinton, Kagan, Sotomayor, Ginsberg and Pelosi are untainted by scandals including inappropriate sexual conduct. Spitzer, Weiner, Schwarzenegger, Bill Clinton, Sanford, Gary Condit, Henry Hyde and Strauss-Kahn are, well, tainted. I’m unconvinced that legislation will cause men to prefer women who are powerful and competent. Powerful, competent women (see list above) seem to better live out their professed vision of society.

  6. Laura, I’m quite curious about the strong political bent in some of your more recent posts. Could you further explain your thoughts on why low taxes and no exemptions (which I am assuming you mean in reference to the current political debates) such as food stamps, Pell Grants, WIC, federal funding for supplemental schooling programs such as Head Start or special education, universal access to medicine and so on would generate a stronger nation?

    I admire your work, deeply appreciate the structure your book 168 Hours has provided to my life and appreciate your insight and clever time-saving strategies posted on your blog – but some of your posts have me a bit confused of late. I consider you an intelligent woman in a position of some influence and would appreciate understanding how you have come to these positions. Is it purely from an economic point of view?

    I ask as the daughter of two disabled parents – both disabled after they had worked hard for many years, one from an accident and the other from severe illness – who would have starved as a child, had no health care as a teen, and been unable to attend college as an adult and better my life and my family’s lives without these types of aid. In this case – and the case of a tragic number of people I now help through my position in the medical field – working harder was simply not an option.

    Now that the country becomes polarized on these issues and food stamps, the Pell Grants, and dozens of other programs whose names were spoken with grace and reverence in my household growing up (as they fed us, clothed us, and gave my parents the medicine they needed to escape their pain long for at least an hour a day, so we could visit) are on the block to be cut… I am baffled at how cutting the small trickle of support that families such as my own received will help the country and its people.

    I understand how in your position – a well-off, upper-class white woman in a heterosexual relationship with healthy children and health of mind and body – it may be very difficult to understand where I am coming from, but I am still curious. Are you truly that jaded in humanity that you see those of us like myself and my family simply out to game the system? Once, society skimmed off the edges through taxes and managed to support my family – now I am proud to say I support society back working as a nurse while getting my Masters.

    But without that help, my life would be very different – bitter, painful, uneducated, a childhood illness not caught that could have killed me… I don’t understand how helping the country’s people is by taking away the support that we had. It wasn’t a matter of working harder because my parents were physically incapable of walking most days… so what should have happened to us? Was there really a way to make it better, without the aid we received? I’d love to know if there is, because with so many of these programs being shut down, I’d love any insight into how to help the many young teenagers I see at the centers where I volunteer who are in the same position I was. I want to give them hope, but if it must only come from them and minimum wage jobs instead of from aid from their community and country, what exactly is that hope?

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