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«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»

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The question, therefore, is whether working childcare costs are purely consumptive expenses that should not be deducted because, in paying a caregiver to tend to one’s children, a working parent has simply transformed her wealth from cash to childcare services. Unlike the case in which parents pay caregivers to tend to personal matters, such as babysitting costs that facilitate date nights, there are compelling reasons to think that net wealth decreases when parents incur childcare costs to work.

Imagine Spouse and Partner (S&P), a married couple filing jointly, have two children. Suppose that Spouse, the primary wage earner, earns $150,000 this year and that S&P have decided their family requires $50,000 additional disposable income to meet its needs.141 Luckily, Partner has a job offer which will enable her to earn $70,000 annually. To do so, however, S&P must incur childcare expenses so that their children are cared for during working hours.

After a vigorous search, S&P determine that the only option that meets their needs will cost $20,000. Spouse and Partner think the services are probably worth about half this cost and would never choose to pay the $20,000 if they had full, free choices. But they do not. Assuming this is their best or only choice in childcare, S&P will still pay $20,000 because doing so will enable them to earn the additional income they require.

Importantly, this hypothetical is not simply a play with numbers. As discussed in Part I, there are various reasons why options for full-time care are limited. For instance, day-care centers have notoriously long wait-lists and are often unwilling (or uncertified) to care for young infants.142 Furthermore, a couple may feel the need to hire an expensive, individual caregiver

138. G.A. Res. 217 (III) A, art. 16, Universal Declaration of Human Rights (Dec. 10, 1948), http://www.un.org/en/documents/udhr/index.shtml#a16 [http://perma.cc/XAN5JWWR].

139. See supra Section I.A.

140. I.R.C. § 262 (2012).

141. The hypothetical assumes, for simplicity, that all income is ordinary income and that the earned amounts are in post-tax dollars.

142. See supra Section I.A.

Uncle Sam and the Childcare Squeeze 585 February 2016] to ensure childcare coverage even when children are sick.143 There is, therefore, strong cause to doubt the driving assumption that childcare costs are purely consumptive expenses. One cannot so easily assume that parents incurring working childcare costs (as opposed to nonworking costs) have paid caregivers at least as much as the perceived value of those services. This creates a convincing argument that at least some tax relief for working childcare costs is needed.

Moreover, even if parents valued the working childcare services purchased at cost, the purchase is still involuntary, driven by the need to find care for one’s children while working. The forced nature of this transaction further suggests that costs for working childcare are not consumptive in the traditional sense. And not allowing a deduction for these somewhat involuntary expenses creates issues of horizontal equity—that is, it compromises the notion that similarly situated taxpayers should be taxed the same. In a seminal article, Professor Andrews raises similar arguments to defend the tax law’s allowing a deduction for some of a taxpayer’s medical expenses.144 While the ill taxpayer may value at cost the medical services needed to make him well again, these services simply put him back in the same position as the taxpayer that was fortunate enough to enjoy good health.145 A deduction, Andrews argued, seems to preserve horizontal equity so that similarly situated taxpayers are taxed the same.146 Similarly, it makes sense to compare the situations of a family with a “stay-at-home” parent who provides childcare with those of dual-earner and single parent families that, while each earning the same income as the first family, must incur the significant additional costs of childcare. The working childcare expenses incurred by these latter families simply restore them to the position of the first, single-earner couple, and a deduction for at least a portion of these expenses, like the medical expense deduction, seems justified on these grounds.

Similar reasoning might (and should) be applied to criticize other tax laws, which disallow tax relief for other significantly nonconsumptive costs.

For instance, the tax laws do not allow taxpayers to reduce their taxable income to reflect commuting costs147 or the costs of many graduate schools, such as law school, that enable the taxpayer to enter a new profession.148 Like working childcare costs, the fact that these expenses are not deductible “is

143. See supra Section I.A.

144. Andrews, supra note 112, at 331–43.

145. Id. at 314 (“As between two people with otherwise similar patterns of personal consumption and accumulation, a greater utilization of medical services by one is likely not to reflect any greater material well-being or taxable capacity, but rather only greater medical need.”).

146. Id. at 331–43.

147. IRS, Publication 463, Travel, Entertainment, Gift and Car Expenses 14 (2014), http://www.irs.gov/pub/irs-pdf/p463.pdf [http://perma.cc/UV6A-GMAW] (“Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses.”).





148. IRS, Publication 970, Tax Benefits for Education 67 (2014), http://www.irs.gov/ pub/irs-pdf/p970.pdf [http://perma.cc/MCB6-WNRS] (“Education to maintain or improve 586 Michigan Law Review [Vol. 114:559 probably not caused by any doubt that these expenses are business related, but by the belief that they are based on underlying personal decisions which give rise to personal satisfaction.”149 As shown in this Part, this argument is theoretically incomplete and does not justify disallowing a deduction for these costs. This Article, however, focuses only on the working childcare cost, and a companion paper will address more broadly the tax law’s failure to allow individual taxpayers to deduct various nonconsumptive costs.

Having dismantled the argument that working childcare costs are purely consumptive expenses, this Article turns to what seems the more persuasive argument—that working childcare costs are, at least in part, nonconsumptive expenditures. As discussed, to the extent that expenses are nonconsumptive, tax relief must be granted to accurately measure income.150 Ideally then, one would situate working childcare costs along the “expense spectrum” described in Section II, the ends of which consist of purely nonconsumptive costs (for which a full deduction is warranted) and purely consumptive costs (for which no deduction is warranted) and provide a tax reduction representing only the nonconsumptive portion of the expense.

As the next Section shows, for most taxpayers, working childcare costs fall far toward the nonconsumptive end of the expense spectrum, suggesting that the stringently limited relief §§ 21 and 129 provide is inadequate as a matter of fundamental tax policy.

B. To What Extent Are Working Childcare Costs Consumptive?

–  –  –

This Section attempts to situate working childcare costs, along with several other hybrid costs, on the expense spectrum described in Part II. To do so, one must tease out the consumptive and nonconsumptive elements of these costs. Of course, this cannot be done with exact precision because each taxpayer derives a different mix of benefits from various costs. But a meaningful approximation of where a particular cost would fall on the expense spectrum, and hence how much tax relief is warranted, can be made by estimating the size of three subsets of taxpayers:151 i.) The Full Consumption Subset: The subset of taxpayers that would incur a particular cost regardless of work. In the case of working childcare costs, a parent will fall within this subset if the consumptive benefits of working childcare are so great that she would have purchased that care even if it did not enable her to earn any income.

skills needed in your present work is not [deductible] qualifying education if it will also qualify you for a new trade or business.”).

149. Halperin, supra note 129, at 865.

150. See supra Section II.B.

151. These subsets utilize the concepts developed by Professor Daniel Halperin in analyzing the problem of business-related meals and entertainment expenses. See Halperin, supra note 129, at 866.

Uncle Sam and the Childcare Squeeze 587 February 2016] ii.) The Substantial Benefit Subset: A taxpayer in this subset will enjoy substantial consumptive benefits from the goods or services purchased, but will not enjoy benefits substantial enough to put the taxpayer in the Full Consumption Subset. In the case of working childcare costs, a parent would fall in this subset if she would not incur these costs if the purchased childcare did not enable her to earn income, but the income required to make the childcare costs worthwhile is quite a bit less than the total cost of care.

iii.) Insubstantial Benefit Subset: The subset of taxpayers that will derive only insubstantial consumptive benefits from a specific cost. In the case of working childcare costs, other than the ability to earn income, parents in this subset will enjoy only slight benefits from the childcare purchased and would, therefore, incur few childcare costs if they were not working outside the home.

By considering census and other collected data, the next Section shows that most parents who incur working childcare costs fall within this last subset, suggesting that working childcare costs are largely nonconsumptive expenditures for which substantial tax relief is required.

2. Analyzing the Working Childcare Cost

In 1972, two commentators wrote:

The working wife who hires a babysitter, or sends her children to a day care center, can be viewed as spending money to enable herself to work, or, just as easily, as working so that she can afford the luxury of... child care help.152 This characterization leads one to believe that in 1972 some significant percentage of secondary wage earners (at this time, almost certainly mothers) could be expected to fall within the Full Consumption Subset. If this portrayal is true, there may have once been good reasons to limit the tax relief provided for working childcare costs. Regardless of the veracity of this caricature, however, the picture one finds today is quite different. Today, the income of the secondary wage earner is generally not “discretionary”153 and families increasingly report that they need two incomes just to meet daily needs.154 Furthermore, the 1972 caricature places the mother in a somewhat enjoyable, part-time job. But whatever one thinks about her children, few parents work a full-time schedule in order to avoid them. Perhaps there exists working parents who despise spending time with their children and gleefully

152. Schaffer & Berman, supra note 133, at 536.

153. See supra note 20 and accompanying text.

154. See supra note 12 and accompanying text.

588 Michigan Law Review [Vol. 114:559 dispose of them each weekday for nine hours. But the more common feelings of working women and men seem to be ambivalence and guilt.155 Furthermore, as discussed in Part I, in today’s economic environment, childcare costs represent a strikingly large percentage of a family’s combined salary, and a family with two young children may easily find itself spending over $35,000 per year on childcare.156 Few parents can be expected to incur these high costs unless that care enables them to work.

Of course, it is common for stay-at-home parents to hire help to care for their children. Parents sometimes hire mother’s helpers and nurses when children are young,157 and they sometimes send their toddlers to preschool and pre-kindergarten programs.158 But recent census data suggest that an extremely large majority of families with stay-at-home parents do not use any of these arrangements and therefore incur none of the childcare costs incurred by dual-earner and single-parent families. In 2011, approximately 88 percent of families with working mothers used “regular childcare”—that is, a childcare arrangement used at least once per week—for children under five years of age.159 By contrast, only 28.2 percent of single-earner families with preschool-aged children used any form of childcare on even a weekly basis.160 In other words, in an extremely large majority of cases, parents tend to care for their young children themselves, unless work prohibits it.

These data not only suggest that, in the case of working childcare costs, the Full Consumption Subset will be sparsely populated, but also that the Substantial Benefit Subset—parents who only require a small amount of additional income to make childcare costs worthwhile—will be small. One might initially expect a sizable percentage of parents to fall within this subset. After all, many working parents likely believe that their selected caregiving facility or caregiver provides their children valuable opportunities for socialization and education.161 But this does not mean that these parents would incur the costs associated with this care in the absence of work. While working parents may be pleased that their child is benefiting from working childcare, these parents may have provided the same (if not, at least in their opinions, superior) benefits to their children at free or lesser cost if they

155. See Margie Warrell, Letter to Working Mothers: Stop Feeling So Guilty, Forbes (June 25, 2013, 6:08 AM), http://www.forbes.com/sites/margiewarrell/2013/06/25/dear-workingmother-stop-feeling-so-guilty/ [http://perma.cc/R4BN-BJK7]; see also Kim Parker & Wendy Wang, Modern Parenthood: Roles of Moms and Dads Converge as They Balance Work and Family, Pew Res. Ctr. (Mar. 14, 2013), http://www.pewsocialtrends.org/2013/03/14/modernparenthood-roles-of-moms-and-dads-converge-as-they-balance-work-and-family/ [http://per ma.cc/D8HS-GK9J] (“[A] nearly equal share of mothers and fathers say they wish they could be at home raising their children rather than working....”).

156. See supra Section I.C.

157. Laughlin, supra note 68, at 3–4, 10–11.

158. Id. at 3–4.

159. Id. at 5.

160. Id.



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