Women and Taxes
Thursday, February 28, 2002
by Edward J. McCaffery
Table of Contents
The Dollar Costs of Work
We still aren't finished with the home economics of Sally's situation, which keep getting worse. That's because taxes are not the only expense that her working outside the home will generate. How the tax system accommodates - or fails to accommodate - additional work-related expenses is a large part of the story.
Child Care Costs. We haven't said much about Sally and Bill's kids, but now let's give them two - remember, I said that married working mothers would bear the brunt of the problems, in the first instance.
Assuming that Sally stayed home, she could care for the kids herself and pay no tax on this valuable service. But if Sally works for pay outside the home, she will likely have to pay someone else to care for the kids while she's at work. This will turn out to be doubly burdensome, because there's another relative clamoring for care: Uncle Sam. Sally will have to earn enough money both to pay taxes on her salary, which she must do first, and, second, to pay for child care.
"The tax system prohibits a general deduction for child care expenses."
It's hard to get good, accurate reporting on child-care expenses for a variety of reasons, and many families find friends or relatives to do the caring on an unpaid basis. According to data from the fall 1995 Survey of Income and Program Participation, families were paying an average of $85 a week for paid child care.13 Adjusting for inflation and rounding up, that's about $100 a week - about $5,000 a year - for child care help. There are plenty of reasons to think that this comes in on the low side, but let's be conservative. In any event, if Sally's child care options were more expensive, her economic situation would only get worse, and it's plenty bad enough as it is.
How will the tax system help with Sally's annual $5,000 worth of child care costs? Note that there is a good argument that child care expenses are work-related ones, at least as much as three-martini lunches are. Sally certainly feels as if she must pay someone to watch the kids if she is to work for pay outside the home. Yet the tax system has long denied a general deduction for child care as a business expense, because having children is deemed to be a "personal," and hence non-deductible, matter.14
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. Be that as it may, the tax system chooses to have a small child-care credit, skewed against the middle- and upper-income classes, in place of a more general deduction.15 Lately the tax law has been moving toward more and more generous per child - not child-care - credits.16 Once again, this might be all fine and good, but per child credits do nothing in particular for the working mothers of this world. They don't help to offset the costs of child care, because you get the per child credit with or without child care expenses. And they don't drive down the high marginal tax rates facing second earners like Sally.
"The child tax credit offsets only a fraction of the real cost of day care."
In any event, the Tax Code's child care credit is a limited and complicated animal.17 The bottom line is that Sally and Bill cannot possibly get more than a $960 benefit under it: 20 percent of $4,800 of verifiable out-of-pocket child-care expenses (some households may get slightly more benefit if their employers have set up a "dependent care assistance program," but few have in fact done so, and relatively few households use these complex plans in any event).18 Assuming that Sally and Bill claim the maximum child-care credit, their real out-of-pocket child care costs will amount to around $4,000 a year ($5,000 minus $960, rounded down). Again this cost is triggered by Sally's working outside the home.
Taxes and child-care combined are costing around $17,150; Sally's $30,000 job means 12,850 real dollars to spend.
But wait. We're not done yet.
Not Just Child Care. Child care costs aren't the only ones that working women must pay. Households with two outside workers pay more for many things, including dry cleaning, commuting, residential cleaning services, restaurant meals, high-priced ready-to-eat groceries and so on. Again, illustrative data are hard to come by. But it's far from unrealistic to think - in line with what actual consumer studies have shown - that these additional expenses of two-earner households will total at least $75 a week, or $3,750 over a 50-week year.19
How will the Tax Code help with these costs?
It won't. There are no provisions for deducting any of the greater non-child-care work-related expenses of two-worker, two-parent households.
"Married working mothers, on average, only get to keep one-third of what they earn."
Adding It Up. Combine $13,150 in taxes with $5,000 of child care expenses, subtract $1,000 for the child-care credit under the Tax Code and add $3,750 for non-child-care work-related expenses, and Sally's costs of work come to just about $21,000. Her $30,000 job brings home 9,000 real dollars to the household.
I haven't used smoke and mirrors or done anything fancy here. Sally's story simply captures the average situation of married working mothers in America, who get to keep one-third of what they make, as I noted above.