Overtaxing the working family: Uncle Sam and the childcare squeeze.

• Author: McCormack, Shannon Weeks
• Position: Abstract through III. Analyzing the Working Childcare Expense B. To What Extent Are Working Childcare Costs Consumptive?, p. 559-590

Today, many working parents are caught in a "childcare squeeze": while they require two incomes just to make ends meet, they end up spending a strikingly large percentage of their income on childcare so that they can work outside the home. Worse still, some parents find themselves "squeezed out" of the market entirely, unable to earn the additional income their families require because they cannot find jobs that pay enough to offset soaring childcare expenses. This Article argues that the tax laws have played an important role in aggravating these hardships. Currently, the Internal Revenue Code treats the childcare costs incurred by working parents as personal expenses, subject to various dollar limitations, percentage limits, and phaseouts. Once these limitations are applied, working parents will receive tax relief for only a small fraction of the childcare costs they actually incur. This Article shows that this is inappropriate as a matter of fundamental tax policy and results in the overtaxation of the working family. It then provides a blueprint for meaningful reform that would properly treat working childcare costs like other costs of earning income and keep the tax laws from worsening the working family's economic plight.

TABLE OF CONTENTS INTRODUCTION I. CURRENT LAW: THE LIMITED TAX RELIEF PROVIDED TO WORKING FAMILIES A. Tax Relief for Nonworking Childcare Expenses B. Tax Relief for Working Childcare Expenses C. The Reality Faced by Working Families: What Is the Effect (or Lack Thereof) of the Working Childcare Provisions? II. FUNDAMENTAL TAX POLICIES: FOR WHAT EXPENSES SHOULD TAX RELIEF BE GRANTED? A. Unnecessary Adjustments: Tax Reductions for Consumptive Expenses B. Necessary Adjustments: Tax Reductions for Nonconsumptive Expenditures C. Hybrid Expenses III. ANALYZING THE WORKING CHILDCARE EXPENSE A. Working Childcare Costs as Purely Personal Costs B. To What Extent Are Working Childcare Costs Consumptive? 1. A Framework for Analyzing Hybrid Costs 2. Analyzing the Working Childcare Cost C. Comparing Working Childcare Costs to Other Hybrid Expenses 1. Business-Related Meal and Entertainment Expenditures 2. Business-Related Moving Expenses 3. Hobby Expenses IV. PROPOSAL FOR REFORM: PREVENTING THE OVERTAXATION OF THE WORKING FAMILY A. The Method of Reform Matters B. A Blueprint for Enacting Meaningful Reform C. Potential Objections Hindering Future Reform D. Protecting Progress: How to Prevent the Reoccurrence of Past Mistakes 1. The Joint Committee on Taxations's Predominant Model 2. The Joint Committee on Taxation's Alternative Model 3. Treasury's Tax Expenditure Model 4. Academic Tax Expenditure Models CONCLUSION INTRODUCTION

The economic plight of the working family is worsening. This cry has been made in the recent campaign speeches of many political candidates, (1) by lawmakers on both sides of the aisle, (2) and by the President of the United States in more than one State of the Union Address. (3) The White House recently hosted a daylong summit devoted to the struggles today's working families face, (4) which are also chronicled in books, (5) op-ed pieces, (6) and proposals for legislative reform. (7) And current data that confirm there are good reasons to be concerned about the working family's continuing ability to "make ends meet," (8) let alone thrive. (9)

Childcare expenses represent one of the highest household costs incurred by young families in the United States. (10) Moreover, although middle-class income levels have been declining for well over a decade, (11) the costs of childcare have consistently climbed. (12) Today, most two-parent families consist of two earners and require at least two incomes to meet their needs. (13) The pressure to find work is even greater for single parents, who may bear the primary responsibilities of generating income and caring for their children alone. But parents lucky enough to find themselves employed will also find themselves in the "childcare squeeze," (14) spending a strikingly large percentage of their income on childcare to work outside the home. (15) Worse still, other parents find themselves "squeezed out" of the job market entirely, unable to earn the additional income their family requires because they cannot find jobs that pay enough to offset soaring childcare expenses. (16)

This Article argues that [section][section] 21 and 129 of the Internal Revenue Code, which provide stringently limited tax relief for the costs of childcare incurred by working parents, have played an important role in aggravating these hardships. Currently, the Code treats the childcare costs incurred by working parents as personal expenses, subject to various dollar limitations, percentage limits, and phaseouts. (17) Once these limitations are applied, working parents receive tax relief for only a small fraction of the childcare costs they incur. This Article shows that this is inappropriate as a matter of fundamental tax policy and results in the overtaxation of the working family. It then provides a blueprint for meaningful reform. Specifically, this Article urges lawmakers to resist the temptation to reform tax laws by simply relaxing current limitations, as this would leave parents vulnerable to the same legislative dysfunction that allowed tax relief for working families to become so limited in the first place. Instead, this Article asks lawmakers to allow parents to deduct working childcare costs under the same methods as other costs of earning income, which are not generally subject to stringent limitations.

This Article is not the first to notice that the tax laws are stacked against working parents. (18) But previous scholars wrote in a social context in which one parent generally had the choice to forego work in order to care for her children (19) and the salary of the secondary wage earner--almost always a woman's--was discretionary. (20) Accordingly, past scholarship has tended to focus on how the tax laws provide disincentives for married women to enter the workforce and has proposed reforms designed to create more desirable behavioral incentives. (21) These conversations, however, are increasingly off target. Today, two-parent families can rarely afford to have one parent stay home to provide childcare, a luxury that single parents are even less likely to enjoy. This Article, therefore, stands poised to be the first academic piece to critically address how a reformed tax system should tax the modern working family.

Part I of this Article describes how Internal Revenue Code [section][section]21 and 129 severely limit the ability of working parents to reduce their taxable income to reflect today's high childcare costs. Part II discusses the basic principles of tax law that govern whether a taxpayer should be able to reduce her tax liability to reflect a particular expenditure. Applying these principles, Part III argues that working childcare costs should be treated primarily, if not entirely, as nonconsumptive expenses, justifying a tax reduction for at least almost the entire cost. Because current law mistreats childcare expenses as consumptive personal costs, Part IV urges lawmakers to reform the tax laws by properly treating working childcare expenses like other nonconsumptive costs of earning income. Part V concludes that while the tax laws cannot (and should not) solve all problems facing today's working family, the reforms this Article proposes would help prevent overtaxing working families and at least ease their economic struggles.

1. CURRENT LAW: THE LIMITED TAX RELIEF PROVIDED TO WORKING FAMILIES

   There are several mechanisms by which the Internal Revenue Code allows a taxpayer to reduce her tax liability, providing some degree of tax relief. For instance, some provisions of the Code allow a taxpayer to deduct expenses she has incurred from her taxable income or credit them against her tax liability. (22) Other provisions provide exemptions by allowing taxpayers to exclude from their taxable income amounts or benefits that would otherwise be included in income and subject to taxation. (23)

   Currently, the law provides very limited tax relief for the costs of caring for one's dependents, including children (the focus of this Article) as well as the elderly and disabled. (24) The available tax relief can be separated into relief for two categories of costs: relief for childcare expenses that enable taxpayer parents to work ("working childcare costs") and relief for child-related expenses that are not associated with income production ("nonworking childcare costs"). Part II further explains the significance of this. After discussing the various tax provisions, which provide relief for these different costs, this Part shows that the Code currently allows tax relief for only a fraction of the childcare costs working parents can be expected to incur.

   1. Tax Relief for Nonworking Childcare Expenses

      Sections 151 and 24 of the Internal Revenue Code allow a parent to reduce her tax liability by set amounts that reflect a portion of the costs she can be expected to incur to care for her children. The availability of the relief these provisions offer is not tied to whether parents incur these expenses while working; nor is it tied to whether parents work at all. Instead, these provisions allow taxpayer parents to make downward adjustments to their income tax liability to reflect the inevitable costs of child rearing, which taxpayers without parental obligations do not incur. (25)

      As a default matter, [section] 151 allows a taxpayer to exclude from her taxable income a personal-dependency exemption amount, (26) which is $4,000 for the 2015 tax year. (27) A married couple filing jointly is entitled to claim two personal-dependency exemptions (one for each spouse) and an additional personal exemption for each of the couple's dependents. (28) A single parent with full custody of his two children would claim three personal exemptions on his income...