LOST in the debate between Anne-Marie Slaughter’s chronicle of the obstacles confronting career-oriented mothers and Sheryl Sandberg’s call to “lean in” is a crucial reality: taxes. Women — no less than other humans, it turns out — can be rational economic actors.
The tax code starts with a bias in favor of couples in which one partner works and one stays home. Couples with very different incomes (think banker husband, novelist wife) owe less in taxes when they marry, while couples with similar incomes often owe more when they marry.
This bias, however, does not directly discourage one partner from working. What does is the tax code’s treatment of child care.
Most working mothers who pay for child care do so out of their after-tax income. This is not an issue for very well-paid women. Nor is it that relevant for women in poor households, since they most likely don’t pay federal income taxes anyway and are eligible for the earned-income tax credit, the government’s most effective antipoverty program.
It’s women in the middle class who are hit hardest by this treatment of child care. For these couples, increases in the earnings of the better-paid spouse — usually, still, the husband — directly discourage work by the lower-paid spouse. There are several reasons for this: the federal child and dependent-care credit, which is supposed to help with these expenses, decreases as household income increases; the lower-paid spouse’s earnings are taxed at a higher marginal rate because of the other spouse’s earnings; and child care is paid out of after-tax income.
Imagine two women on either end of this middle group, each deciding whether to return to work after having their first child. The first woman’s husband makes $25,000, and the job she is considering pays $25,000. The second woman’s husband makes $90,000, and the job she is considering pays $45,000.
If the first woman enters the work force, she and her husband will lose their entire earned-income tax credit of more than $2,500. Because of her husband’s earnings, a portion of her salary will be taxed at 15 percent. After she pays payroll and state taxes, her after-tax income will be close to $17,000. Say she lives in New York State, where the average cost of day care for an infant is just over $14,000 — almost every after-tax dollar she brings home will go to her child care provider.
Now consider the second woman. If she were single and without children, her after-tax take-home income would have been around $36,000. But because of her husband’s earnings, almost all of her income will now be taxed at a higher rate, 25 percent. After paying for child care, she will take home only around $16,000. This is not even factoring in the fact that many higher-paying jobs, just the type Ms. Sandberg wants women to lean in to, require longer hours — and the more expensive child care that entails.
Many women in these scenarios, where the costs of working outweigh the benefits, would rationally decide not to re-enter the work force.
That decision has a long-term impact. Every year out of the office will affect these women’s retirement savings and Social Security contributions, their chances for promotion, and the likelihood that they will eventually be able to re-enter the work force at the same level and salary. This quite likely contributes to the relatively higher rates of female poverty, especially in old age.
The child and dependent care credit, created in 1976, was meant to address these skewed incentives. But the credit severely underestimates the cost of child care, and is phased out too quickly for higher-earning couples.
The most working parents can receive through the credit is $1,050 (or $2,100 for two or more children), but this amount decreases to $600 (or $1,200 for two or more children) as income increases. Even a couple making $50,000 could use it to reduce their taxes by only $600. Congress was right to prioritize the lowest-income parents, but it shouldn’t ignore the impact policies have on other groups.
What can be done? We could decrease tax rates over all, but that wouldn’t target the obstacles facing second-earners. There are three better possibilities.
We could directly address the high cost of child care by providing or subsidizing such care, as France and Sweden do. (Congress does allow employers to, in effect, subsidize their employees’ child care expenses by letting them exclude a portion from their income. But many companies, particularly smaller ones, do not offer this option, and those that do can exclude only up to $5,000.)
A different approach would be to focus on the tax treatment of child care. We could increase the child and dependent care credit to include the full cost (or at least a higher portion of the cost) of child care, which would increase parents’ after-tax income. Or we could treat child care as a business deduction. This would let parents pay for it out of their pretax income, and would have the added symbolic benefit of acknowledging that child care costs are ordinary and necessary business expenses.
It is unlikely that any of these proposals would pass in the face of sequestration. Nonetheless, we need to acknowledge that women (and other second-earners) are not opting out of the workplace without encouragement. If we truly want them to lean in to the work force, we need to have a tax system that does not push them out.
Lilian V. Faulhaber is an associate professor of law at Boston University.