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.