A taxing situation

By S.M. | NEW YORK

“WOMEN—no less than other humans, it turns out—can be rational economic actors.” So says Lilian Faulhaber, an associate professor of law at Boston University, in a New York Times op-ed. In light of the high cost of child care, Ms Faulhaber explains, it often makes little economic sense for a middle-class woman to re-enter the job market once she becomes a mother:

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.

Ms Faulhaber admits that her proposals for tweaking the tax code to remove these disincentives are unlikely to “pass in the face of sequestration”. And she is right: expanding the tax credit for child care, permitting parents to claim these costs as a business deduction or offering direct government subsidies for day care are not in the cards in the climate of austerity that has descended on Washington, DC.

Which leads to two questions. What is the rational choice for middle-class women under the present tax structure? And what else might be done to address the inequities mothers face when contemplating a return to their careers?

Parents may choose to take time off to care for a young child regardless of the economic consequences, though this is not a realistic option for many. The calculus facing most middle-class parents today is daunting: it seems pointless to outsource your child’s care in order to take a job with a paycheck that barely covers your day-care provider’s fees. That said, taking a wider view of women’s earning potential shows the myopia of a month-by-month assessment of income versus expenditures. The rational actor’s cost-benefit analysis should consider the impact of opting out of work over a longer time horizon. And as it turns out, the price of exiting the workforce for even a short time is huge.

While many women assume that their skills and professional degrees will be their ticket back into the workforce when they are ready to return, the facts insist otherwise. As Joan Williams, the director of the Center of WorkLife Law at the University of California, Hastings College of Law, points out, deciding to delay re-entry until the kids are old enough to fend for themselves entails bigger trade-offs than you might think:

One study found that women who took just one year out of the workforce sacrificed 20% of their lifetime earnings. Women who took two or three years earned 30% less. Another study found that leaving the workforce has a significant negative effect on women’s wages even twenty years after a career interruption. These statistics dramatise the grim fact that women who take a career break are penalised out of proportion to any objective deterioration of their skills.

So if women consult the statistics and really crunch the numbers, they will be more wary of opting out of the workforce when their babies arrive. When mothers attempt to get jobs years later, they have a harder time finding work—Ms Williams cites a study showing that only 74% succeed—and they wind up making less money: only 38% of men’s wages over their prime earning years.

But even if the IRS were friendlier to families with two working parents, mothers would still face considerable hurdles in restarting their careers. It isn’t just tax policy that pushes women out. As Ms Williams notes, the “discriminating and inflexible workplaces” of the American economy are another significant factor:

Of all the triggers of stereotyping in today’s workplace, motherhood triggers the strongest bias... [W]hen researchers gave subjects identical resumes that differed in only one respect—one, but not the other, mentioned membership in the PTA [Parent Teacher Association]—the mothers were 79% less likely to be hired and 100% less likely to be promoted. They were also held to higher performance and punctuality standards if they were hired.

This is the so-called “maternal wall” that makes leaning in such a challenge for working mothers. Overt discrimination by gender may be prohibited by the Civil Rights Act of 1964, and victims of differential pay may have an easier time proving discrimination in court under the Lilly Ledbetter Pay Act of 2009, but workplaces often remain unwelcoming to mothers, and women continue to earn 23% less than men in comparable positions.

Here are two ideas, on Equal Pay Day (today, symbolically, women’s 2012 salaries catch up with those of men), for improving the status of women in the workforce. First, Congress should pass the Paycheck Fairness Act, a bill that would prohibit employers from penalising workers who divulge their salaries to colleagues. Free discourse about pay imbalance is a necessary step to exposing—and correcting—it. More quixotically, America needs mandatory paid parental leave. America is one of the few countries to have no legislative provision for fathers or mothers to take paid time off after the arrival of a baby. Some employers would grumble about bearing the cost, but if paid leave became the norm, the family-unfriendly culture in the American workplace may begin to change.

(Photo credit: AFP)