(c) 2013, The Washington Post.
(c) 2013, The Washington Post.
Put yourself, this holiday shopping season, in the shoes of a store clerk and his family. Say you earn $11 an hour, which is a bit less than the national average for retail salespeople. And say that's not enough to feed, clothe and house your spouse and kids to your satisfaction, so your wife decides to take a job in the same store, full time. How much of her earnings do you think will actually make it to your joint bank account at the end of the month?
The answer is: about a quarter of them. Roughly $3 an hour.
The rest of that is lost to income taxes, and to the increased cost of child care, and to lost tax credits and food stamps and other government benefits.
That's not much of an incentive for her to take the job, is it?
This, two University of Maryland economists argue in a forthcoming paper, is the difficult math for the low-wage working families barely getting by in America's still-weak economic recovery: Their wages have fallen over the last decade; their anxiety over paying the bills has risen; and if they respond by sending a second spouse into the workforce, the returns to that new job are low.
"They go to work, and it's sort of like a treadmill," said Melissa Kearney, one of the Maryland economists, "which is the exact opposite of what you'd do if you were trying to design a tax system to incentivize people to go to work."
Kearney directs the Hamilton Project at the Brookings Institution. In a new paper for Hamilton, she and Lesley Turner propose changing the tax code to eliminate what they call a "secondary-earner penalty" on low-income families.
Their plan would effectively boost low-wage families' disposable incomes by 3 or 4 percent a year — or about $1,200 to $1,400 for a family with total annual income of $50,000. The lower amount would come from a revenue-neutral option that pays for that break in the federal budget by reducing other tax credits. The higher amount would come from an option that would cut federal tax revenues by about $8 billion a year.
The benefits are targeted at a group that data show are working more hours outside the home just to stay afloat. Census statistics show that both spouses worked full time in one-third of married-couple families in 2009, double the rate from 30 years earlier. (Job losses from the recession have since pushed the percentage down slightly.) A previous Hamilton Project paper showed that the typical two-parent family worked 26 percent more hours in 2009 than in 1975.
Unlike most developed countries, the United States lumps both spouses' incomes together for tax purposes. That matters because, in America, marginal rates rise with income. If a wife earns $25,000 a year and her husband takes a $25,000-a-year job, the first dollar of his salary is taxed at a higher rate than the first dollar of hers. Additionally, the couple loses eligibility for government benefits or tax breaks, such as the Earned Income Tax Credit. If they have young children, they also incur new child-care costs if both spouses work full time.
Kearney and Turner tallied those costs and found that they eat away more than 70 percent of the second earner's $25,000 salary.
To ease the pain, the economists want Congress to change the tax code for married families with children, to allow the secondary earner to deduct 20 percent of his or her earnings of up to $60,000 a year. The deduction would be phased out beginning with families who earn a total of $110,000 annually.
The economists tailored the break narrowly in hopes of winning political support for it. Kearney said she would prefer to see everyone pay taxes on individual income, not family income. But she said this proposal addresses a particular weak spot of the current economy: "We're trying to get more disposable income into hands of struggling working families."