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Childcare and Taxes - Elizabeth Unexplained
Lots of data but no answers
greyautumnrain
greyautumnrain
Childcare and Taxes
A few people have asked me recently about Jomkwan, so I figured I should give an update on her. She chose to extend her stay with us for 12 months, and we are very happy to have her for a second year. She continues to be great with Margaret, and is actually as excited about the new baby as we are. Back in August she went with us to visit my parents and take in the Long Island Scottish Games. I’m assuming that explaining the finer points of the caber toss fits the ‘cultural exchange’ bill nicely.

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Au pairs typically come to the US for a year, and they then have the option of extending their stay for 6, 9 or 12 months. They can stay with the same family or find a different host family. We are really glad Jomkwan chose to stay with us, and hopefully her choice means she’s pretty happy with the situation too. Next September she will have to go back to Thailand and we will miss her.

Since I posted yesterday about economics, I thought I should also mention how much child care costs. In our area, cheap daycare for infants starts at around $13k a year. For that you’d get one of those out-of-the-provider’s-home type operations, and no guarantee that they comply with regulations concerning the maximum number of children, etc. Some of the day care centers I looked at cost upwards of $25k a year, and I’m told they can even get more expensive than that. The au pair program costs us about $20k a year, plus the room. (We weren’t using the room anyway; pretend I made a separate long rant about the woes of being a landlord in these parts.) Given these numbers, the au pair program is a reasonable deal for us right now, we get quality one-on-one care for our baby at something close to the median price for daycare, plus I don’t have the hassle of having to deal with drop-off and pick-up. Once the little guy arrives the au pair program rapidly becomes the most cost-effective program for us, since day care charges you by the kid, but the cost of the au pair does not change when you add extra kids.

Now the tax policy portion… I work. I like to work. I went to college, got a bunch of skills, and enjoy using them in a constructive way. I also love my little girl like crazy. Right now I am happy being a working mom. Much as I love Margaret to pieces it’s nice to have some time away too, plus it gives me a bit more money to spend on her so I can buy her super-cute clothes. Working is not free, though. I have to get to work, so that’s money for gas and wear and tear on the car, more expensive food options at work, and of course there is the child care. The way the current tax system is set up, if the taxes on us as a couple get raised very much more, my net income after taxes may no longer cover those expenses associated with me working. I like my job, but I don’t like it so very much that I’ll keep the job if it turns into a net loss for us. If the result of me working is that I have both less money to spend on my girl and less time with her I’m going to quit my job. Any sensible person would. I also doubt that I am the only professional woman in this position, in fact I expect there are a fair few women potentially in the same position, women who are better at math than our politicians seem to be. Now, the president said during his campaign that he would not raise taxes on families making less than $250k a year. Let’s say that he can’t quite stick to that number (politicians having a reputation for making promises they later don't keep), and they wind up raising taxes on families making $150k a year and more. I’m thinking that some of my liberal, childless friends would think this is a good thing given the responses to yesterday's post; they can afford it and it’s more money for those unfortunate poor people. Well, not so fast. Those of us with kids then do the calculation, realize we’d be better off if someone (probably the Mom) didn’t bother and stayed home. The government would then end up getting far less money from us in taxes, we’d spend less ourselves, our au pair would be out of a job, and all the money she is spending at Abercrombie would also go away. The net result is less tax revenue than you were counting on and decreased consumer spending. Oops. And I bet that as soon as the guy who said he wouldn’t raise taxes on families making less that $250k a year got elected there were a bunch of doctor/lawyer couples who heard the implication, did the math, and decided that one of them was either going to quit or reduce to part-time.

I suppose I should try to tie this all together now having rambled at length, so in closing I will say that I really, really like having Jomkwan, and I like my job, and I sure hope the folks in Washington don’t screw it up for me. I hope this explains to those of you who differ with me on the whole tax thing that I don’t think that my position is one of greed but rather one of practicality.
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Comments
mathhobbit From: mathhobbit Date: October 3rd, 2009 01:46 pm (UTC) (Link)
In my role as the naive liberal, I ask "would raising the child care deduction help?"

(By the way, it's not just high income couples doing this calculation. On the other end of the scale there are people who lose insurance or other benefits if their wages rise over a certain amount. Stupidity all the way 'round!)
psychohist From: psychohist Date: October 3rd, 2009 04:28 pm (UTC) (Link)
Having a child care deduction which covered typical day care expenses of up to $20,000 per kid would help tremendously, absolutely. As it is, it phases out long before our combined income, so it doesn't help us at all. It's also a tax credit, not a deduction. Basically it's set up to cover families who are in the 15% marginal tax bracket, which ends at $33k individually or $66k for a couple, or who only need part time coverage, as the maximum credit is $3000 per child. I guess people who make or work more than that aren't supposed to have kids.

You are right about how screwed up the lower end of the tax range is, too. Basically there are a wide variety of strong incentives to keep people on welfare rather than working.

The fact that you're even willing to ask about these things probably puts you half way to conservative, by Massachusetts standards. Of course, by the standards of much of the U.S., Elizabeth and I are left wing.
arcanology From: arcanology Date: October 3rd, 2009 06:32 pm (UTC) (Link)
So to ask the logical followon question, society should subsidize childbearing by thousands of dollars more per child per year, but only for those families where both parents choose to work? Or alternately, having both parents work is important enough to subsidize in this way?

Actually talking about a child care deduction at all probably puts you in the left wing next to mao by the standards of the only party that claims to be conservative. I'm not going to go so far as to say they're actually conservative though, because they really aren't. But it isn't genuinely conservative either - since it adds a new entitlement and complication to the tax system that we've never had before.
psychohist From: psychohist Date: October 4th, 2009 04:44 am (UTC) (Link)
See Chenoameg's response to the original post for a succinct answer. It's hardly a subsidy when it results in more tax money paid to the government.


Edited at 2009-10-04 04:48 am (UTC)
arcanology From: arcanology Date: October 4th, 2009 11:40 pm (UTC) (Link)
I'm not buying that. Any time the government gives someone money they spend it and then it's taxed. So by your rules there are no subsidies.

It's a subsidy. In this scenario the government is preferentially supporting some lifestyles vs. others. If they were just handing out a tax deduction to everyone, then you'd be right.
psychohist From: psychohist Date: October 4th, 2009 11:45 pm (UTC) (Link)
Any time the government gives someone money they spend it and then it's taxed.

Where do you get that we're talking about money given to people by the government and then taxed? I'm talking about money people earn on their own in the private sector, no government involved, and then it's taxed by the government.


Edited at 2009-10-04 11:47 pm (UTC)
arcanology From: arcanology Date: October 5th, 2009 12:09 am (UTC) (Link)
The government gives me $2000, or fails to tax it from me, same thing as far as the next step goes. I spend the tax money on goods and services (sales tax) and this money is used to pay workers (income tax) and so on. That's all I meant by that.

I'm not sure why a special targeted tax break (raising the child care deduction) would not be considered a subsidy. Maybe there's some official word for money given in the form of a tax break instead of in the form of cash, and then it's that. But it works out the same way in the end.
psychohist From: psychohist Date: October 5th, 2009 01:32 am (UTC) (Link)
I still don't see how this fits into your previous statement. Let's take something that we'd both agree is a subsidy - say, the tax break for home energy efficiency improvements this year. You said "Any time the government gives someone money they spend it and then it's taxed." I can see how this tax credit can be considered to be "given by the government" and then people "spend it", but how is it "taxed" after that?

As for why a child care deduction wouldn't be a subsidy, it's because it's really a "necessary cost of business" as the tax code puts it. It's like an automobile company deducting the cost of the steel that goes into an automobile - Ford can't make an auto without buying the steel, and Elizabeth can't work without paying for child care.

As far as I can tell, by your definition, the personal exemption is a "subsidy" for buying groceries and clothes needed to live. It seems to me that would require an assumption that the default state is that the government taxes the populace into starvation. I'd prefer to believe that's not how governments are normally supposed to work.
arcanology From: arcanology Date: October 5th, 2009 12:51 pm (UTC) (Link)
The government is saying with this subsidy that it would prefer that Elizabeth works rather than that job being filled by someone else. It's saying that a two income family with children is worth supporting over a two income family without children or a one income family with children.

I actually kinda believe it probably is. Actually the biggest benefit of this subsidy is not you guys, it's the one parent family, and it's much more important for those families. But it is a position that the government is taking by subsidizing one form of living over another.

The personal exemption is not a subsidy because it applies to every single taxpayer. This deduction does not.
psychohist From: psychohist Date: October 5th, 2009 06:12 pm (UTC) (Link)
Ah, the "there are a limited number of jobs and competition to fill them" theory.

Believe it or not, that theory is wrong. The U.S. did not start out with 140,000,000 jobs in 1776 and just now, 233 years later, finally fill them all. Except in the very short term, the number of jobs is a function of the number of people who are willing to work, and not vice versa.


Edited at 2009-10-05 06:13 pm (UTC)
greyautumnrain From: greyautumnrain Date: October 5th, 2009 12:23 am (UTC) (Link)
Ideally I'd prefer that no one got a subsidy. Right now the feds are subsidizing poor people to have kids at my expense, and I think that's wrong.
arcanology From: arcanology Date: October 5th, 2009 12:36 am (UTC) (Link)
Is it? Or is it subsidizing children who were not fortunate enough to be born to rich parents?
psychohist From: psychohist Date: October 5th, 2009 01:34 am (UTC) (Link)
I think she's talking about when people have kids in order for the parents to continue to qualify for welfare, which is common in some states, notably California. That's a subsidy to the parents. It's not a subsidy to children, because if the subsidy did not exist, there would be no children to subsidize.
arcanology From: arcanology Date: October 5th, 2009 12:55 pm (UTC) (Link)
So how many people have children to stay on welfare? That's such a strong assertion! While I could believe a few people would be single minded enough to do it, I don't actually believe that a significant number of people plan to have children just as money making opportunities without some serious evidence.
greyautumnrain From: greyautumnrain Date: October 5th, 2009 01:27 pm (UTC) (Link)
Having kids is a choice. I don't want anyone to get the subsidy because I think people who can't afford to raise kids should not have them in the first place. The subsidy encourages, or at the very least enables folks who can't really afford to have kids to have them, and makes the rest of us help pay for the bad decision. Sure, the kids themselves didn't ask to be born and are blameless, but the only effective alternatives I can see besides not subsidizing people who can't afford to be parents is to take the kids away, or use forced long-term birth control on folks who can't afford kids.
chenoameg From: chenoameg Date: October 4th, 2009 12:48 am (UTC) (Link)
For how many years are child care costs that high? Isn't preschool much less expensive than 40 hour week child care?
psychohist From: psychohist Date: October 4th, 2009 04:50 am (UTC) (Link)
Based on some googling, it appears that average preschool costs are in the range of $10,000 per year in Massachusetts.
enugent From: enugent Date: October 6th, 2009 10:47 pm (UTC) (Link)
Having a child care deduction which covered typical day care expenses of up to $20,000 per kid would help tremendously, absolutely. As it is, it phases out long before our combined income, so it doesn't help us at all. It's also a tax credit, not a deduction. Basically it's set up to cover families who are in the 15% marginal tax bracket, which ends at $33k individually or $66k for a couple, or who only need part time coverage, as the maximum credit is $3000 per child. I guess people who make or work more than that aren't supposed to have kids.

For what it's worth, you can pay for $5000 of childcare (regardless of number of children) with pretax income if you can get your employer to set up a flexible spending account for it, and it doesn't phase out with income. Employers with a significant number of highly paid employees really should do it, as it provides a significant benefit to the employees at minimal cost to the employer. I have no idea why the incentives are set up to prefer that this be mediated by employers (it makes even less sense than health insurance), but there it is - might as well try to take advantage of it.
psychohist From: psychohist Date: October 6th, 2009 11:01 pm (UTC) (Link)
Elizabeth is looking into this at her employer. I believe employers can actually just provide the day care as well, and at one point Mattel had a policy of doing so, when they had a female CEO.

Self employed people don't have that option due to case law; some sole proprietor tried to pay for his wife's child care but not for the child care of other employees, and that was ruled not a necessary expense for the wife since it wasn't necessary enough to provide for the other employees. Fair enough, but that precedent has been interpreted as applying even for sole proprietorships that would like to provide it for all employees, despite not applying that way for C corporations. Sigh.
sorceror From: sorceror Date: October 3rd, 2009 06:35 pm (UTC) (Link)

Is it possible for you to find a job that lets you work from home? Many people at my current company work from home at least once or twice a week, and some do it almost exclusively, only coming in to the office once a week -- or in some cases, only for very specific company meetings or events.
psychohist From: psychohist Date: October 4th, 2009 04:42 am (UTC) (Link)
Very few jobs will permit the worker to have full time care for a child at the same time. This is because if you try to do it, you end up doing a poor job both at the job and at the child care.
greyautumnrain From: greyautumnrain Date: October 5th, 2009 12:25 am (UTC) (Link)
Um, if I work from home I still need someone to watch Margaret if I am going to get any work done at all. I can't even answer my personal email when she is awake and not in the care of someone else.
chenoameg From: chenoameg Date: October 4th, 2009 12:47 am (UTC) (Link)
Yes, the current tax structure penalizes the lesser earning spouse in a two-income married couple while benefiting one income married couples.

(On the upside I hear your job is getting more annoying, so maybe working will be less appealing to you! Wait, that's not actually an upside.)
baronet From: baronet Date: October 6th, 2009 07:32 pm (UTC) (Link)

Incremental Taxes

I believe that taxes are like any other differential equation where one variable is inversely related to the other. The highest product of the two occurs somewhere in the middle. If there was a 100% tax rate, then no one would work, and the government would collect no taxes. If there was a 0% tax rate, then no matter how many people worked, the government would get no taxes.

I hypothesize that the graph of total tax income as a function of tax rate looks something like the graph of the product of two numbers that sum to a constant. Near the zeros, the graph goes up sharply, then levels off near the maximum in the center.

If the total tax income works like that, then the question is "are we on the right (correct) side of the point of inflection?"

Or in your specific situation, given that increasing the tax rate will push some people to stop working, is the extra tax revenue from the remaining people enough to increase the total, or do we lose more than we gain? Do we end up below the inflection point (I'm trying to avoid "to the left" because I don't want to get confused with leftist or rightist politics) or above it?

This analysis is purely about the question "does it increase the total tax revenue?", and not about the fairness of the tax distribution or value of time at work vs time at home or any other way to look at the situation.

I don't have an answer, but I like the way of looking at it, and I think that it suggests empirical questions that could be asked and answered. I dislike the position "lowing taxes increases total revenue and raising taxes decrease revenue", because it is suggests that we'd have the maximum revenue possible if we had a 0% tax rate, which is clearly false. 0% taxes might be desirable for other reasons, but it wouldn't result in the maximum revenue.
psychohist From: psychohist Date: October 6th, 2009 08:35 pm (UTC) (Link)

Re: Incremental Taxes

Congratulations, you just reinvented the Laffer curve:

http://en.wikipedia.org/wiki/Laffer_curve

I would note that maximizing tax revenue is probably not the correct strategy. For example, the size of the economy - and thus average income - is maximized at a lower tax rate than that which maximizes tax revenue.
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