Would You Do Your Job For An 87% Pay Cut?

Would you do your job for an 87.3% pay cut?  That may sound like an absurd question, but it is precisely what an average married couple with a child on the way in Washington DC must decide.  Let’s use the hypothetical example of Mary and Joe, a middle-class married couple living in DC. 

Mary and Joe make the median household income in Washington, DC of $58,526.  While they live reasonably comfortably, at the beginning of each year they set out a budget.  First, they calculate their net income; how much they will have after all taxes are paid.  Since they file their tax returns jointly, take the standard deduction for both federal and DC taxes, and receive all of their income from wages, they calculated that their net on the year would be approximately $45,948.90.  Because they are cautious, they presumed the payroll tax cut would expire and factored in the entire 6.2% rate on their earnings. 

Oddly, not only do Mary and Joe make the exact median household income in DC, their essential expenses each amount to the exact average for DC residents (Shocking!).  Below is their list:

Average Rent Cost In DC:  $18,252/year
Average Gas & Electric Cost In DC: $3,120/year
Average Food Costs For Mary And Joe On A Moderate Cost Plan: $6,938.40/year
Roundtrip Public Transit On Work Days For Mary And Joe, Assuming Lowest Fare Possible: $1,950/year

All in all, the total that Mary and Joe will have to spend on these essentials comes out to  $30,260.40.  That leaves them with $15,688.50 to spend on household goods, entertainment, shopping, and other assorted items.  While they may not be able to afford the vacation they’ve always dreamed of this year, Joe and Mary are happy with the result. 

One day in May, after coming home from work, Mary tells Joe the good news:  they’re having a baby!  With the baby due in early January, Joe and Mary decide they should start early on next year’s budget.  They sit down at the table and it doesn’t take long before they realize they have two options, and neither is particularly good.

Option 1.  Mary and Joe both continue to work and put the baby in a daycare center in DC.  Since their income hasn’t changed much over the years, they start with the assumption that they will make about the same as this year: $58,526.  Again they plan on filing jointly and taking the standard deduction.  This time however, they will also take a dependent exemption in addition to their personal exemptions, bringing the federal income tax owed to $4,430.40.  Since they plan on putting the baby in a day care center, they deduct $3,000 from the taxes owed because of the Child Care Tax Credit and another $1,000 because of the Child Tax Credit.  This brings their federal income tax bill down to $430.40. In DC, they’d owe $3,008, but DC also provides them a child care tax credit of $960, bringing the amount owed to the District of Columbia down to $2,048.  After deducting Social Security and Medicare taxes, Mary and Joe calculate that their net income with a baby would be approximately $51,570.45.

From the net income, they deduct the essential expenses for themselves that they had done previously and find that they now have $21,310.05.  Then they make a list of the essential items they will need for the child. 

Average Food Costs For Baby On Moderate Cost Plan: $1,732.20/year
Average Cost Of Disposable Diapers: $800/year
Average Cost Of Baby Clothes: $720/year

This leaves Mary and Joe with $18,057.85.  They start to think about the toys they can buy for the baby, as well as the fancy crib and nice stroller.  And after all that, they’d still would have enough money to comfortably buy household goods and maybe even afford some date-nights!  But wait, Mary pointed out, in order for both of them to work, they’d need to put the baby in day care center.  And this is where Mary and Joe realized they have a problem. 

Average Cost Of Day Care In Washington, DC:  $18,200

Including the cost of day care, they would now be $142.15 in debt on just the essentials: rent, food, utilities, transportation to and from work, day care, diapers and baby clothes. They decided to create a second option where one of them would quit their job and stay at home with the baby to see if that would make more financial sense. 

Option 2:  Mary and Joe both happen to make the exact same amount of income, so if one quit it would cut their household AGI exactly in half to $29,263.  Again they plan on filing jointly and taking the standard deduction, as well as personal exemptions and a dependent exemption. This brings their federal income tax owed to $596.30.  However, they qualify for the $1,000 nonrefundable Child Tax Credit, bringing their tax liability to $0.  They also qualify for the refundable Earned Income Tax Credit of $1,890.  So they actually will receive $1,890 from the IRS after they file their income tax return.  Their DC taxes would amount to $1,014.28, but they qualify for the DC Earned Income Tax Credit of $756.  So in total, they’d owe the District of Columbia $258.28.  Factoring in all taxes combined, including Social Security and Medicare taxes, brings their total tax liability to $606.91.  This would leave Mary and Joe with a net income of $28,656.09.

Cutting the cost of transportation to work in half and eliminating the cost of day care saves Mary and Joe a total of $19,175.  Subtracting the rest of the necessities of rent, food, utilities, diapers, and baby clothes from their net income leaves them with a debt of $3,878.54.

The total difference in the two scenarios is that if both stayed in their job it would net an extra $3,736.39 than having one quit to stay at home and take care of the child.  In other words, the job that paid $29,268 now nets you just 12.8% of that, so to keep it after having a baby you’d be taking over an 87% pay cut.  

The example of Mary and Joe highlights some fundamental issues, that while exacerbated by DC’s high cost of living, are certainly going on across the country.  The first issue is that this couple, solidly in the middle class, were doomed to go in debt the minute they decided to have a child, simply by purchasing the basic essentials for themselves and the baby.  In truth we may already be at the point where only the wealthy can afford to have a child, and if we aren’t there yet, we are certainly headed in that direction. The second issue is that in Washington, the costs associated with being able to go to work if you have a child are basically equivalent to the income generated from working.  The cost of day care is so high that it is essentially driving productive people out of the workforce. The third issue is that this situation is bad for the economy as well as government tax revenues. In the case of Mary and Joe, the federal government went from receiving $430 in income tax to paying out $1,890, a federal revenue hit of $2,320.  Medicare and Social Security taxes went to $2,238.63 from $4,477.25.  The tax revenue to Washington, DC went from  $2,048 to $258.28, a difference of $1,789.72.  Excluding payroll taxes, the total revenue hit to the federal government and to DC was $4,109.72. 

One potential fix would be to increase the child care tax credit.  It seems possible that if structured well, it could not only help parents who want to stay in the workforce but could also increase government revenues if more parents continued their jobs.  However, this would only be tinkering at the edges and do little in places like DC where day care costs are sky-high. 

I think the best solution would be for states to create public day care centers, modeled after the public education system.  And hey, while were at it, make public school hours 9-5, so that parents don’t have one more obstacle to remaining in the workforce.