Working parents will be flung off the fiscal cliff?

A friend call me this morning as she pushed her four-month-old baby in a stroller. She had cut back to 4 days per week and hired a 40-hour/week nanny to cover her four 8-hour days plus commuting time. Given the cost of the nanny, the cost of commuting, and the reduction in her salary to $90,000 per year, the after-tax spending power boost she achieved by working was less than $15,000 per year. She did not like the nanny, local day care centers were all booked up, and her husband makes a good income, so she quit her job and will stay home with the baby.

I’m wondering if the tax and regulation changes for 2013 will cause more two-income families to cut back to one income. Higher tax rates will reduce the after-tax income of the second working parent. Higher tax rates for businesses and individuals will increase the cost of day care or nanny care. Increased regulations on business and increased sales and property taxes will increase the cost of running a day care center, thus increasing prices to consumers. Where my friend might have netted $15,000 per year after tax in 2012 she would face an after-tax benefit of perhaps only $10,000 per year in 2013.

It seems to me that the economic shrinkage from higher tax rates could be larger than forecast because people are not factoring in two-income households where one parent’s after-tax income is not much higher than the cost of child care. An unmarried adult who cannot navigate the welfare system has no choice but to work, but a married working parent is constantly evaluating the relative merits of staying home with the kids versus bringing home that second paycheck.

Comments from readers who are in two-income households with children under 5 would be especially appreciated.

29 thoughts on “Working parents will be flung off the fiscal cliff?

  1. The fiscal cliff (better termed an Austerity Bomb) is all part of the GOP’s long term strategy to return us to families where mom stays home and dad is the bread winner. I wonder if the traditional values folk don’t see the possibility of what you describe as a silver lining?

  2. This is always so short-sighted. Annual bottom-line thinking is a great way to make a series of bad decisions, particularly if you are a new parent, and wind up looking back after a decade and wondering what happened to your career and earning potential.

    This will be illuminated in more detail in this book:

    But you’ll have to wait until March. (That’s the real cover, which has yet to migrate to the Kindle Edition, and I’m not sure why they have no link to the dead tree edition.)

  3. Also coming into play is that the Marriage Penalty will be back in 2013 barring legislative action. So married filing jointly will see their taxes go up even if rates were to remain the same… another incentive to switch from a double to a single income family especially if the financial return is marginal already.

  4. Four years ago we faced this situation in our home. After evaluating the cost of child care (both in-home and out-of-home) we determined that my wife’s paycheck would go primarily to that cost. It didn’t make sense for her to work so that we could retain a couple hundred dollars a month – especially given the emotional, social, and moral costs to our children.

    In the end it made sense for my wife to stay home with the kids – and she loves it!

  5. Hi Phil,

    Certainly my wife and I find this to be the case here in Australia. With my wife attracting a decent but not high level of income we quickly found that any financial benefit of her working was eroded the high cost of child care here, not to mention the stress and anxiety that comes with it. Couple that with the relatively high cost of housing in our major cities.

    We’re somewhat fortunate that the dearth of power engineers in industry means I attract a good, high salary. Frankly I don’t know how others who don’t have that luxury are making ends meet. I rather suspect many are servicing interest only mortgages which I suspect will end badly.

    Long time lurker, always appreciate your perspective.


  6. We both work and have a 3 year old in daycare. We are considering having my wife stay at home but will wait until we decide to have a 2nd child. In our situation the amount of money we can stock pile will dictate when we fee comfortable having a 2nd child. This is truely sad since we want to grow our family and do not want a huge age gap between our kids. We rarely see our first child so when we do decide to have another child one of us should at least enjoy watching our children grow up. When my wife leaves the workplace our monthly savings will be slashed significantly. We are already frugal and it will be impossible to reduce our expenses unless we move even further away from the city (Chicago) then my commute will be even worse and I will see my family less. The increased tax burden in 2013 will be painful.


  7. This is not new. During the Bush Jr era we made the same decision when we figured how much it costs to send two kids to daycare. I am friends with several women with MBAs who have had hard time finding work in the last few years that would make financial sense with 2 or more kids. Mind you I am sure at least one of the dads would rather stay at home with the kids but at least short term his wage prospects are higher as a techie. At the $110K there is the SS and FICA tax max which is also a bonus if the family is on a single income.

    Haven’t done this in a while but I am sure there was a tax deduction for child care expenses so its not all one direction. Have you friend taken that into account?

    As far as increased regulations – most of the states are republican controlled and they are getting rid of many regulations.

  8. My wife and I have a four year old who was born while his mom was working on her PhD degree. For the past two years she’s been in a postdoc program making about 25k/year, after taxes. The daycare costs 18k/year and we also have some transportation expenses due to hauling the junior back and forth to the daycare center.

    Is it worth it? Barely, financially speaking, as you can easily see from these numbers. However, there are other important considerations. First of all, we have the example of a family friend who stayed home with her two children for about six years. Re-entering the workforce has been very difficult (a two year search), even though our friend had excellent work experience and education. Second, our child very much enjoys and needs to be in an environment where there are other children. And third, I believe that my wife would find it difficult to spend her entire time, day after day, on child raising activities. It becomes really boring after a while so unless you have the required personality it’s tough to do this.

  9. tekumse: Republicans will reduce regulations? I don’t think this is a partisan issue. It is easy to write a new regulation (imagine how much good it will do!) and it is very hard to get rid of an old regulation (who wants to vote for allowing daycare centers to be more lax?). So inevitably there will be more regulations every year. The new health care regulations, of course, are a supercharged version of the general principle.

  10. Even if you are breaking even or losing money by working and paying childcare, there are long-term career benefits. You continue to grow in your career, get raises, etc. When your children enter school and childcare costs decline, you will be far ahead of the parent who left the work force for several years and is now looking for a job.

    The severity depends on the discipline. It’s bad with tech jobs. Not sure about other fields like doctor, lawyer, business, etc.

    Assuming you can get by on a single income, I think the decision is less about money and more about what makes the parents happy. If you really want to be a stay-at-home-parent, then do it. However, if you would be happier juggling a career and parenting, then find a good childcare provider and make it work. Parental happiness is more important than whether a child has a stay-at-home parent.

    It can also depend on the child and family circumstances. Some kids love the social interaction of daycare and thrive there, while they would be bored spending most of their time home alone with a parent.

    For a deeper read, check the books “The Feminine Mistake” and “Opting Out”.

  11. My wife and I have raised two children, presently 16 and 14, while both maintaining full-time careers. Yes, we made extensive use of day care when the kids were little, and we had to seek out a full-time kindergarten and grade school with after-school activities/care. We also split child and household responsibilities pretty close to 50/50, so neither of us was overwhelmed.

    I disagree with Phil’s thesis that dual-income parents who have the economic flexibility to choose whether or not one spouse (usually the mother) should maintain employment will opt for single-income status because of higher tax rates. Firstly, those of us with the luxury of choice are typically career oriented. We have don’t have “jobs”, we have professions that often require extensive training and that we pursue because we are really interested in what we do. Increases in marginal tax rates are not going to change that.

    Secondly, even if it were a purely economic calculation of the monetary costs/benefits of both parents working, people have to look well beyond a given year. If, let’s say, my wife had dropped out of her career 16 years ago to stay home raising our children, the impact on our net after-tax after-daycare savings in each of the past 16 years would not have been terribly large, as Phil suggests. However, if my wife wanted to resume her career now that the kids are old enough, there is no possible way she could pick up where she left off with a 16 year hole in her professional resume. (And yes, I’d wager that most employers consider staying home to raise kids to be a hole in the resume, especially considering they will see plenty of applicants without any hole.) She’d be very lucky to find a position that pays what she was making before dropping out, and the pay would certainly be much less than the salary she now actually makes because she kept working and has advanced in her profession over the last 16 years. If my wife had stayed home, the financial penalty to our family’s lifetime integrated earnings would have been enormous, considering she’s still got 20 years to go before retirement.

  12. “And third, I believe that my wife would find it difficult to spend her entire time, day after day, on child raising activities. It becomes really boring after a while so unless you have the required personality it’s tough to do this.”

    Why would you have a child if the thought of caring for it is tedious and boring? I sincerely hope your child never happens across your poorly thought out comment.

  13. What is the effect on unemployment when the jobs that were filled by one parent are vacated? I assume there is someone else who is able to take advantage. So isn’t there a trickle down effect that will in the long term redistribute jobs and income?

  14. It’s laughable to blame Bush (or any other politician) because paying someone to raise your child costs more than not paying someone to raise your child.

    Still, two income families with MAGI > $250 will be hammered if we go over the cliff, as Obama seems to want to happen.

    It’s not just that they’ll go back to Clinton era tax rates. Many two income families, especially those with 3 or more kids, will find themselves transported into the world of the Alternative Minimum Tax, where they will treated as 1%’er’s. It’s very possible for two spouses with good incomes to find that one of their income streams is entirely consumed by taxes + child care.

    Anything you tax you get less of. Tax double income families and you get fewer double income families. The government gets less net revenue from the tax increase, not more in many cases. In all cases the revenue increases projected for tax increases are never realized because Washington doesn’t model the negative effects of higher tax rates correctly.

    This is an example of the Lafer curve in action.

  15. The economic damage to the family can be higher than just losing the second income when one spouse stays home to take care of the child. Say the spouse who decides to stay home has worked for ten years or so. All that experience/seniority is pretty much down the drain if they’re out of the workforce for 8-10 years. So rather than earning, say, $80-$100K if they’d kept their job and advanced their career, they’ll be forced to take an entry-level job at a fraction of that salary – right when huge sums of money are needed to send the kids through college.

  16. We’re a 2 income family with a 4 y.o and both earn similar salaries. We pay the equivalent of a 50-60k job in preschool and nannies (Seattle). Right now, its close to a wash. One salary pays for childcare, the other for rent, food etc. New taxes won’t help that math. We view high childcare costs as temporary until she goes to public school. One thing I’ve noticed amongst friends and family is that the decision to temporary step out of the workforce to take care of children becomes in most cases permanent… Covering all expenses for 1 adult + children on 1 paycheck long term is daunting and risky. Any job losses, illness etc becomes catastrophic.

  17. I am the breadwinner in a 50’s-style family in which I work and my wife takes care of the kids. She was previously a nurse who earned about $50,000 We are in the 28% federal income tax bracket based on my income alone, so each marginal dollar she earns will probably get us about $.55 or so after state and federal income taxes, FICA and Medicare. We would have to put our toddler in full-time daycare, and we would have to have after school daycare for our grade-schooler. The actual net gain from an hour of work would probably end up being considerably less than minimum wage, so it’s not worth it, so she stays home. The only reason we even occasionally consider having her go back to work is to diversify our income base in case something happens to me or my career.

    There’s also a day care center shortage here, so I tried to talk her into running a daycare instead of going back to nursing, but she emphatically rejected that suggestion.

  18. To provide a contrast, here in Germany every child is guaranteed a kindergarten spot, either half or full day. The fees vary depending on location from free to around 200€/month per child. Even parents who aren’t working tend to send their children there for early socialisation. Combined with the generous maternity/paternity leave (14 months to be divided between the parents at 65% normal salary) the general pattern is someone stays home for the first year and a half, then the child goes to kindergarten so the second parent can return to part time or full time work. Very few parents (and potential parents) are forced to choose between children and their career.* Yes, we pay higher taxes but I think society as a whole benefits.

    *An exception is those in “400€ jobs”, a low-doc, no-tax, minimum wage position which is common in service industries like retail. In this situation a lot rides on how much their city charges for kindergarten.

  19. It is hard to find a professional job with potential growth that takes 40hours/week. Parents need live-in babysitter + extra expenses for good private schooling. Even regular private schooling is quite expensive.
    If both parents are MDs, lawyers, traders or just independently wealthy it could make sense for both of them to work. If not it is better for one parent take care of children’s education and get better financial aid provided by top colleges based on family income – the aid is phased out above $200,000/year family income mark.

    Of course both parents could play game of chance to try become CEOs of a publicly traded company…

  20. Biggest impact when one spouse drops out of the job market: lost opportunity to save for retirement (401(k), stock plans, etc…..).

  21. I’ll never understand two of the arguments your article is based on.

    1. Day care costs. Our 2 year old is in one of the top 3 rated day cares in our major city (US top 50 population but not on either coast). Our annual cost is $7100. (One other top 3 is about $8700/yr) There is also the tax benefit of putting $5000 into a child care flex spending account so the true cost is even less. People who choose to live in NYC, Boston (where I visit frequently), etc. seem to think day care typically costs $50k or more (is everyone using a live-in nanny??). It may cost that much where you live, but that is certainly not typical throughout the country.
    It is frustrating to hear folks say, “I choose to live in an ultra-expensive city, and I can’t BELIEVE how expensive things are!” when there are plenty of other options.

    2. If Congress does raise taxes only on the rich, it affects income above a certain amount. For example, my wife and I each make about $140k/yr. If the tax rate goes up 5% for people making more than $250k, that would only affect about $30k of our family income, so we would only owe about $1500 more. This is of course a trivial amount. In other words, the tax rate does not change for the first $250k of income.

    If you combine the two factors above, changes in the tax code for the wealthy to our family are meaningless and do not influence either of our decisions to work. I can see how the equation would change with smaller incomes, but I just can’t understand your friend’s situation, especially with how close it seems to mirror my own.

  22. I’m in a two-income household with a toddler. We went through the calculations at length, but despite the cost of child care, were clearly better off with both of us continuing to work full-time (even after any likely 2013 tax increases). One big factor is that we both work in fields where it’s impractical to take a few years off and come back later to a meaningful career — so if one of us stopped work now, it would be forgoing income, or at least a large portion of it, permanently.

    Secondly, my wife (who makes the lesser amount of money) still earns enough that her take-home pay is well above her work-related expenses plus our costs for child care, substantial as the latter may be. (MB, that’s great that you can get excellent day care for $7,100 a year; here in Seattle, top-drawer day care runs about $20K a year. That’s once you get through the waiting lists, which extend 12-24 months or more. In the meantime, we pay a nanny about $40-$45K a year when you include payroll taxes and overtime.)

    But we’re fortunate that we have no state or local income tax, only nominal commuting costs, and excellent benefits from my wife’s company that make her staying employed an even better bet. She’s covered at no cost on her employer’s insurance instead of as an additional beneficiary at additional cost on mine; she gets a 401(k) with some match; she has cell phone paid for; etc.

    Somewhat higher marginal tax rates or the limiting of some deductions aren’t likely to change the fundamental math for us. I can see how they might for people where the second salary is lower or the tax burden (and other working costs like commuting) are higher, though. When I used to live in NYC, I did some freelance work on the side, and I sometimes turned down jobs simply because the 50%-plus marginal tax rate on the work made the net income not worth my time.

  23. I’m impressed by how some commenters are shocked, SHOCKED that some families think it’s worthwhile to have the mother care for the children rather than an employee (how’d that work for Marina Krim?), when the cost is having hole in her resume of [gasp] up to several years! How will the poor woman ever be fulfilled if she pisses away her prime earning years bringing up her kids rather than working some useless paper-pushing marketing/law/finance job?

  24. Mannerheim +1
    The impact on the children being raised by strangers is >> any potential monetary reward. In fact, it gets much worse when they go to school. Yes, the daycare costs drop (and here it’s not $8000 as some noted but closer to $20K for 4-5 y.o), but who will help the homework? Boy and girls club? The more they grow up, the more they need parents around. I was between the jobs for a year and it’s hard to believe how happy my 8 y.o boy was since I was there for him all the time!

  25. it is beyond crazy, beyond stupidity, it can only be described as partisan, to claim that piddly little marginal tax increases and mythical straw-men “regulations” could make what is already an untenable situation concretely worse. It is already unfeasible in any major city (sans grand-parents) to have two working parents with young children. Obama changes nothing.

    We can either offer free day-care to the future tax-payers of America (think of it like education – your taxes aren’t paying for kids’ education, they are paying for the education you already got) or we can stop the stupid fantastical economic growth train and bring housing costs down (the great free-market has brought housing costs to over 50% of the average middle-class family’s income).

  26. While it is true that two working parents offers more long term financial security than one, that security comes at a cost to the family. Juggling two jobs with childcare can be extremely stressful (as someone else pointed out, many jobs are not 9 to 5). the child care provided by nannies is frequently inferior to that provided by parents (I base this on personal observation).

    We have a 2 year old daughter that my wife quit her job to raise. Had she continued working the taxes (including AMT) and a nanny would have eaten up almost all her income. When our daughter is in full time public school, my wife will attempt to return to work.

  27. I would like to ask all the men whose wives stay home and look after the children: what the hell happens should you divorce? How on hearth anyone would even dream to saddle himself with the risk of alimony for the foreseeable duration of life on Hearth I just fail to grasp. I know it’s not my blog, and this is not the original question, but I’d like to know.

  28. Your friend should look into a nanny-share situation with a nearby family. My family is in a very similar situation to that in the original post (I don’t know how much the husband makes; let’s assume it’s somewhat higher than the wife but not more than say $200k in which case the choice is much less constrained). Say that the marginal tax rate on her earnings is 40% (federal tax is 33% on married filing jointly with joint income between $217k and $388k). It’s possible in my large city with similar demographics to Boston to get a good nanny to take care of two kids for 40-45 hrs/week for about $50k, including taxes and health insurance). Then her take-home income is .6*90k = 54k of which they spend 25k on childcare and get 30k to spend on other stuff (e.g. most of their annual mortgage payments on a 600k mortgage at 4%). Is 30k + continuing her career worth it? Depends on whether she likes and wants to continue her job; either choice seems eminently reasonable. If they have another kid then another 20k-25k of her after-tax income goes to childcare but she may still want to keep working if she likes her job. It’s hard to make the math work out to keep working if you want 3+ kids.

    To other posters: let’s not be judgmental about the choices people make, please.

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