1/27/2015

President Obama targets "second-earners" with new proposed tax credit

With his state of the union address completed, President Obama has proposed another set of taxes that will surely rile up a lot of people (http://www.npr.org/2015/01/20/378680818/transcript-president-obamas-state-of-the-union-address). Besides the ever-popular attacks on investments and rich people, the president also mentioned a new tax credit aimed at “second-earners” in a family. I think this may constitute an attack on families where one partner decides to drop out of the workforce or work part time for some reason, say to care for children or an aging parent. Take two families making $60,000 a year: in one family a mother works full-time for an employer and in the other she does not. Under Obama’s plan, the first couple receives a large child-care credit and a new second-earner credit. The second couple does not — and so pays higher taxes than the first one. This in fact encourages families to abandon their hope of staying home with their children and penalizes them if they do decide to stay home.

On the other side of the equation are employers. Hiring managers may be excited about the prospect of this “second-earner” credit because it gives these people an incentive to actively join the job recruiting pool. Much like the Work Opportunity Tax Credit (http://www.doleta.gov/business/incentives/opptax/) encourages employers to hire individuals from certain target groups; hiring managers could use the “second-earner” credit to their advantage to recruit more qualified individuals into their companies.

What do you think? Does the second-earner credit punish those who wish not to actively seek work for whatever reason? Could employers use this to their advantage to lure hesitant workers into the recruiting pool? What other perverse incentives could arise from using this tax credit to influence a person’s decision to stay home? 

12 comments:

Dave Tufte said...

Andy Dufresne: 100/100

Note: after Block 1, I'll take off for people who don't format their hyperlinks in the conventional way. In the meantime, posters are encouraged to go back and fix those.

I think the economics in this post is spot on (although the explanation has some rough spots).

Imagine two markets with side by side supply and demand diagrams. In one we have paid employment, and in the other we have unpaid "homecare" (prices still work in this market, they're just denominated in things other than money).

What Obama is proposing to favor supply in the paid market over supply in the homecare market. So supply will shift right in the former and left in the latter. So paid employment will go up, but pay itself will drop (thus the tax credit is more useful than a casual reader might have recognized). In the homecare market, there will be lower quantity and a higher price: less will get done and it will be higher to get it done.

What's interesting about that latter point, is that it will increase employment in a third market: that for paid providers of homecare (aids, assistants, maids, nannies, personal shoppers, and so on).

Jerry said...

The main purpose of this tax credit, I believe, is not to provide incentives for those to "abandon families", it is to provide some extra support to those who are forced to have a second-earner in the family. I believe people (who do not have a full time job) concerned about staying home will value that with their children much more than being awarded a tax credit. Families that have both parents working full-time are likely paying for home care services, thus possibly counterbalancing the tax credit. So, in my eyes, the tax credit doesn't punish those staying at home. One thought that crossed my mind is incorporating the above blog post on increasing minimum wage. With this tax incentive, more people are thought to join the work force as a second-earner. This results in families having to pay for the third market homecare. I would assume that most people working in homecare are not being paid much more than minimum wage. So if the minimum wage did rise, the cost of hiring nannies, maids, assistants would rise as well. Rising pay increases the costs to the company, thus decreasing the amount of homecare available, resulting in an increased price of the service. This could be a deterrent to picking up a second job even with the available tax credits.

Dave Tufte said...

Joey: 47/50 ("will value that with their children" doesn't make sense).

On this one, I think I'll state flatly that Joey is wrong in his big statement. One thing that economics teaches us (repeatedly) is that we can't isolate the effects of policy choices. We especially can't do this by the way we label them. In this case, the tax credit is labeled as helping two-earner households. But quite early on in micro we teach that taxes are often incident on people other than their targets. This is a blog, not a text, so I won't go into a proof of this ... but applying the principal here we should conclude that the incidence of a credit that is labeled to favor one group will in fact impose some costs on the other group. We don't know the scale, but this is absolutely a tax on people who could choose to be the second earner but instead choose to not work.

Other than that, Joey makes a lot of other points that seem sound and interesting.

Now, this is more of a personal opinion, but I do think we're too quick to label having two earners a matter of need. I think this is about want most of the time, rather than need. As an economist, I don't have a good reason why our wants are so strong, but I do think we're rationalizing about them a bit. (And before you jump all over me on that one, please note that I'm in one of those two-earner households, and the personal part of me absolutely sees that as a need, but the rational part can't explain why that would be so).

Susie said...

This proposed tax credit has more to it than just a credit for second-earners. According to CBS New http://www.cbsnews.com/news/obama-to-propose-higher-capital-gains-taxes-new-fee-on-big-banks/, it includes a provision that would “triple the child care tax credit”, provide a $2,500 credit for degree seeking college students and consolidate federal education tax benefits, and “allow part-time workers to apply for and eventually receive retirement benefits”. How does he plan to pay for these proposed credits? Through increased taxes on capital gains, closing the “trust fund loophole”, and a new tax on banks. While I agree that it’s unfair to the middle class that the wealthy don’t pay their fair share of the tax burden, I don’t think that increasing taxes on capital gains is the answer. This would punish those who have been frugal and invested in their future; they will now be charged a higher tax on their life savings when they retire. I am a member of a single earner household who choose to live on a single income in order to be home with my children. I do not regret this decision. However, I don’t feel that this new tax credit will entice families who believe that one parents place is in the home to abandon their beliefs and return to the work place.

Dave Tufte said...

Oops. It's Joey that got the 50/50, not Jerry.

Dave Tufte said...

Susie: 47/50 (you need an apostrophe on parents).

Susie: You can't go back and fix comments. In the future, I'd like your links to be formatted better.

I'm going to tighten up Susie's conclusion a bit. She doesn't think that the credit will entice anyone to change. That's a conclusion about the net effects after the change. That's not unimportant, but it's not a statement about the pressures that people will face. Those are that the policy tilts the playing field towards 2 earner families. That will put pressure on all single earner families. Perhaps no one will succumb to the pressure, but coming to that conclusion would mean measuring how great that pressure is (rather than a blanket statement that no one will change).

Economists regard it as an urban myth that "the wealthy don't pay their fair share". The reason is that 1) the wealthy already pay most of the taxes, and 2) if you ask people who aren't wealthy how much they think the wealthy should pay ... it's often less than they already do.

Joey said...

I find this post very interesting. I am the bread winner for my family for a few reasons. First, I married the person I want to help me raise my kids and I don’t think I could hire someone that could do it better. Second, there is no amount of money or change in lifestyle that could be worth failing in my home.
That said, I think this tax credit is backwards. I believe we should reward families who provide for, and raise their own children. In my opinion more parenting could help decrease crime, drug and alcohol abuse, and many other issues that plague society. I understand that having a parent stay home is not always possible, but too often people abandon home and family so they can buy the toys they want and have more material possessions. I do not think we should make it any easier for them.

Dave Tufte said...

Joey: 50/50

Here's a radical idea. How about we back off picking winners and losers with the tax code?

I know that the thread is a response to Obama's proposal, so I'm not knocking any of your individual positions.

But, having said that, the presumption of the Obama administration is that the tax code is their creature, for which they can elevate any priority they like. It seems self-evident to me that the primary goal of taxes is to raise funding for spending programs, and that it's a secondary goal to influence other behaviors.

But that's not what we're seeing here at all ... and not one of you has raised this objection so far.

Lyn said...

While a tax credit for dual house incomes does add benefits to having both parents work, it does not sway me away from my goal of eventually staying home with my daughter. For me, the economic benefits of staying home are greater than the economic benefits associated with having two incomes. The intrinsic value of staying home and raising a responsible child that adds value to society has greater value than working outside the home. While this proposed tax credit will add incentive for individuals to enter the workforce, it will not be the only reason. These decisions will be based on lifestyle preferences and the net effect of those preferences. Those who will be motivated to return to work because of the potential tax credit will be those individuals who were already contemplating a job outside the home for reasons such as increasing disposable income, healthcare benefits, or retirement benefits. A question to consider is whether the quality of the labor pool will increase with qualified, skilled workers or decrease with under-qualified, unskilled workers. If the potential tax credit leads to an unskilled labor force, does it cause greater costs than benefits?

Dave Tufte said...

Lyn: 47/50 (I think you mean "... will add an incentive ...").

Let's take Lyn's evaluation of benefits and costs at face value. The thing I wonder is not whether Obama's proposal is good or bad, but rather whether we should be OK with a government that thinks it's OK to put its thumb on Lyn's scale? Why do they view it as OK to even interfere with the scales? We take that for granted, but it's pretty weird if you step back and think about it.

ty said...

There are always unintended consequences to laws. The purpose of the credits being offered may not be to punish stay at home moms, but it might encourage households to increase their labor output. This law just like any other is likely to have unintended consequences. One such consequence is the possibility that the quality of education suffers if more parents decide to work.

It would be interesting to see what it costs in added complexity for the IRS to deal with the mountain of tax incentives. On top of those costs there is also the cost to taxpayers to stay tax compliant while minimizing their tax exposure. Between unexpected results and added accounting costs I doubt that most tax incentive programs are worth it.

Dave Tufte said...

Ty: 50/50

It's pretty easy to go on the internet and find estimates of costs of tax/IRS compliance. I'm always a bit leery of these ... they never seem to be motivated from a good place.

I have no doubt that the costs are rather large, but I'd like to see them bracketed by groups on both sides of fiscal debates. It seems we only hear about cost estimates from the anti-government folks.

I also think there's a "compared to what" problem that's rarely addressed with tax compliance costs: we really don't know what a tax system in a developed country should cost, so what do we compare ours to?

In any event, I think the primary goal of taxation is to raise needed funds, and that any incentives are secondary goals. Except that we seem to be pretty lousy at the primary goal. Whether you like or dislike government, there don't seem to be any places in the developed world where tax revenue is collected with an eye towards actually covering the bills. Yet it also seems that everywhere elected officials are willing to use the secondary goal of taxation. Missing the primary goal makes me think most elected officials suck at their jobs, while the emphasis on the secondary goal makes me think that most of them have control issues that are insufficiently checked.