Uncle Sam Doesn't Make Family Life Easy
by Sean Tuffnell
March 20, 2002
Spring is in the air. The time of year for spring cleaning and the discovery by millions of Americans that they owe most of their success to Uncle Sam.
For many, tax time is an excruciating process of pouring over receipts and attempting to decipher confusing tax forms. The process makes one wonder why anyone would have devised such as system on purpose.
When I first entered the labor market, tax time was intimidating, but not too complicated. Now that I'm married, own my own home and have a child on the way, tax time offers a lesson on how the tax law impacts every aspect of our lives. The conclusion? The tax law makes raising a family in the modern world more difficult than it should.
The problem is many of the central features of the tax law were written about sixty years ago, when the concept of a typical family was straight out of Leave it to Beaver - dads went off to work and moms stayed at home to take care of the kids. While my parents fit this mold, my wife and I definitely do not - and we're not alone. In fact, two-income families are now the norm, with 70 percent of all married women and 60 percent of mothers with children younger than six years old in the labor market.
While times have changed, the tax law has not. A recent study by Ed McCaffery for the NCPA's Women in the Economy project points out, in staggering detail, how the tax law penalizes two-income families.
The most publicized problem is the marriage penalty, the quirk in the law that taxes two-earner couples more when they are married than if they just lived together. Put simply, income tax brackets work like the rungs on a ladder. As your income increases, you enter new brackets on the margin. That is, you do not lose the benefits of the lower rates, or rungs, for the dollars you have already earned.
Since the IRS treats the family as one taxing unit, when a wife enters the labor market her first dollar earned is automatically taxed at her husband's highest income tax bracket, even if she's only earning the minimum wage. (While the tax law does not actually speak of women and men, wives are used in the example since about three quarters of secondary earners are women.) Congress could fix this problem by simply allowing couples the option of filing jointly or separately, whichever works out best for them.
Yet taxes are not the only expense that her working outside the home will generate. As my wife and I are expecting our first child, the expense of childcare is a top concern. If either one of us stayed home, we could care for our baby ourselves and pay no tax on this valuable service. But since neither one of us are willing or able to quit our jobs, we have to pay someone else to care for her while we're at work.
While many families find friends or relatives to do the caring on an unpaid basis, most families have to pay for the service, and it can be costly. In fact, according to a report from the Urban Institute, the average expense for all families that pay childcare is 10 percent of earnings. Single parents and low-earning two-parent families pay on average of 16 percent of earnings.
So not only do wives have to earn enough to pay the taxes on their salary, they also have to earn enough to pay for the childcare their working makes necessary. Yet the tax system has long denied a general deduction for childcare as a business expense, because having children is deemed to be a "personal," and hence non-deductible, matter. This logic is suspect. It's not the personal decision to have kids that triggers the need for paid child-care; it's the economic decision to work, given that one already has children.
The simplest way to provide childcare relief is a simple tax deduction along the lines of a general business expense deduction. Any taxpayer should be able to deduct up to, say, $10,000 on a showing of qualified work-related child care expenses. Such a provision would put the tax implications of childcare for the working mom on a par with the non-working one.
Quite often, it's the wife who juggles work and family demands and the wife who predominately debates staying home and quitting her job. When those women who want to work at least some of the time outside the home for pay cannot do so because of the prohibitive costs of taxes and child care combined, we all suffer. It's time to make the law more responsive and reflective of the modern family.