matt | March 15, 2014
Or: Why the government is discouraging workforce participation for new parents.
I’d like to thank a good friend for helping me frame this argument. I’m not going to out him, but he knows who he is, and has my thanks.
So, you’re a couple, and you have your baby. Both parents take some time out of work to welcome the new arrival and get adjusted. Perhaps one parent stays home more than the other while the child is very young, but eventually the child becomes of infant day care age, and the family needs to decide whether both parents should work or one should stay home for an extended period of time.
For the case where the potential stay at home parent’s income won’t exceed the costs of working (which now include day care expenses), the calculation is simple – if you would lose money, don’t work.
Similarly, for the case where you can’t afford to live on one parent’s income, you have no choice – both need to work.
But, what if you have an option? What if, say, you are both professionals and have arranged your life that you can live on one income quite comfortably, and the other salary is spent on capital improvements (addition to the house, new cars), trips, and investments in the future (IRA, etc.)?
Let’s examine that case, and see what the numbers say.
For our base salaries, we can assume that our two hypothetical people make $100,000 per year. They’ve been out of school for 10 years, are successful, and the field in which they’re in pays well.
So, before their child, they both work, make $200k per year. Of this, the federal government takes $43466, and we’ll assume that the state government takes another 10% of that amount (that’s about right for NY), so $4347. They may or may not have a mortgage to deduct, but that doesn’t matter because it will be the same now and in the future, so we’ll ignore it here. So, they get to keep $152187 before kids.
Then they have a kid. Let’s look at those two scenarios.
Oh, we’ll also ignore the child deduction, because you always get to claim that, so it’s the same for both scenarios.
If one parent works, they make $100k, of which the federal government takes $16858 and the state takes $1686, so they get to keep $81456. There is also a child tax credit of $1000, so they’re at $82456 with one parent working.
If the second parent works, they start at the same $152187. They no longer get the child tax credit, because that phases out and is gone by $130k. Anyway, the difference is $69731.. or is it?
The second parent working will incur child care expenses. A nanny is in the $25k ballpark. A friend tells me that a Montessori school is in the $12k realm. You can deduct up to $3k of these expenses which, at the 28% tax bracket that income is in, will get back $840. So, let’s assume the cheaper route and do the $12k + $840 back in taxes, and that gets us down to $58571.
So, now this begs the question – is an additional $58k worth the second parent working? In order to calculate this, you need to look at what the parent staying home gives you, beyond child care. The most obvious thing to me is that, if one of Liz or I were to stay home, we would do much of the cooking and cleaning and other chores which often found their way in to the weekends. Instead of doing chores on weekends now, Liz and I are spending time with the boys. How much is that worth?
The granola eating hippie inside of me says “priceless, man”, but we can do better than that.
At $100k a year, we’ve basically already said that our hypothetical parents’ time is in the ballpark of $50/hour. After all, that’s what they’re selling it for. If our weekends are now free, that’s approximately 832 hours, which gives us $41600 in value that is being lost if you’re not spending your weekends with your kids (As an aside, in economic circles, this is referred to as opportunity cost). However, both parents get their weekends off, so that’s actually $83200 in opportunity cost.
Is losing $83200 in value worth $58571 in income? Seems like that’s a $24629 shortfall to me – and that doesn’t even include all the squidgy stuff like the enjoyment of spending time with your children.
Now, if you value your time as less than what you’re paid for it at work, then both parents working makes sense (for the curious, the break even point in the above example is $35/hour, so, if you feel your time is worth less than that, then you make out on the deal).
Anyway, how can we solve this hypothetical situation? Well, we’ve just calculated our opportunity cost as $83200, which is really close to the $81456 that the single parent makes. In order to do this, we would have to:
- Tax the second parent’s income at the rate of the first parents’.
- Allow the child tax credit to be taken regardless of income level.
- Allow the full cost of child care expenses to be deducted (at least at this income level. It could be done like the mortgage interest deduction – it can be taken up to a really high amount, which most folks won’t hit.) Now, in the end, this still wouldn’t get us to the $83200 (because of the child care expenses), but it does get us slightly better than they were before they had their child ($153832 vs. $152187), so then having a child is not a penalty.
Another option is to do the last two things of the above, which would leave us with $144547, which means the full taxes are collected on your non-child-care expenses, so you’re essentially splitting the difference.
Now, you may ask, why does a simple discussion about whether or not one parent should stay home descend into a discussion of tax policy?
Well, our government is in the habit of trying to promote things it thinks are useful, hence why there is a mortgage interest deduction, ostensibly to promote home ownership. So, why isn’t the government promoting high income individuals having kids? Further, why isn’t the government promoting workforce participation when they do? I keep hearing how we’re facing a labor shortage in high tech industries – doesn’t people dropping out of the workforce to have kids exacerbate the problem?