To Work or Not To Work: That is the Question

The impetus for this particular post was this articlewhich talks about the middle class tax squeeze. The upper-middle class featured in this article do not sound very sympathetic. Only, I can relate to them. The Hub and I probably fall into the upper-middle class category, but living where we do, it does not feel like it, either. For starters, I checked out the property taxes in Alpharetta, Georgia on Zillow. Their property taxes on a comparable home are half of what we pay here. That is a savings of $4,000-$5,000 in property taxes alone, per year. That could buy us a pretty nice vacation. Or some extra retirement or college savings (which we could really use, by the way.) 

In a recent post, I posited that taxes ought to be calibrated based on one’s regional cost of living. I also surmised that one needs *at least* $50,000 just to “get by” in the Chicago suburbs. That got me wondering: What is the cost of living in Chicago Burbsville? How much money does a family of four truly need to earn in order to own their own home, feed their kids, and not fall into debt? And, how does being a working mother and taxes relate to all of this?

Let’s talk about what it costs to raise a family of four in today’s Chicago suburbs. (If you want more kids, you can increase all these figures.)

If you check out Zillow, you will see that if you want to live an hour or less outside of the city, you pretty much cannot find a home around here for less than $250,000, and the home you will find will be mediocre, at best. I could put examples on here, but I feel that would be insulting to the homeowners. Actually, I just ran a search of the most middle-class, middle-of-the-road suburb I could think of, and the least expensive home was $260,000. I’m going to try another….$257,000.

Okay, so to live an hour or less outside of Chicago, you can find a 1950s ranch or split level for $260,000. Oh boy, I just checked out the inside. You will NOT be getting your dream kitchen. In fact, you might be a developer tearing the place down and starting anew. Compare that with what you can get in Alpharetta, GA: This is the cheapest house I could find. But for only $39,000 more than the fixer-upper I was just telling you about, that is getting a LOT more for your money. (I really want to link and post the comparison Chicago home, but I am just too nice of a person to do that.)

Okay, back to our calculations. So, you have your little tear-down in the middle of middle-class Chicago Burbsville. That is costing you $1,033/month (I used the Zillow mortgage calculator), because you somehow had $50,000 for the 20% down payment. (I have no idea where you got that money, but we’ll give you a generous head start from your parents.) Your property taxes were just over $7,000 in 2015, so, they are probably inching closer to $8000/year now. (Note, our example fixer-upper is in Cook County, which has less expensive property taxes than Lake County, where we live. If the house was in Lake County, I’d bump them up to $9,000.)

I am going to venture to say, that to live in the cheapest tear-down house in the most middle class suburb of Chicago, your minimum monthly mortgage will be $1800/month. That’s assuming you had $50,000 to put 20% down. If you didn’t, you are paying PMI, and your mortgage is probably closer to $2000-$2200/month. Okay, so you need a minimum of $21,600/year to own your own home. Minimum. Guess what? Renting will cost you just as much, if you want to live in a house.

Now let’s make a list of essentials for a family of four:

Food – I am going to say $600/month, because I think most families could live on this budget, though you are probably not eating organic and cutting some corners.  $600/month is $7,200/year

Clothes – If you shop at the Goodwill (which I sometimes do for the kids!) and get lots of hand-me-downs and rarely buy clothes for yourself, I bet you could do a $400/year budget. This will be mostly shoes for the kids.

Utilities – I’m not quite sure what ours run per month, but I’m going to guess $200/month ($2400/year)

Medical insurance – If you are not self-employed, this is still coming out of your paycheck at about $500/month, plus a $2000 deductible. There are probably cheaper plans, but if you have allergic/asthmatic kids, you aren’t risking it. So, minimum – $8,000/year

Two cars, because you both have to drive to work – $500/month –> $6,000/year  (Even if one of you could take the train, that will cost you $200/month in train tickets)

Home and car owner insurance$600/year

Phones – We only pay for our landline. We have both our cells through work. Our landline is also our internet. We don’t have cable. – $100/month ($1,200/year)

Am I forgetting any essentials?

Oh, school fees and school supplies. $470/year 

And childcare! How could I forget?! As I said before, camp is a minimum $6,000/summer. That is for a camp that goes from 9 to 2:30. Last I checked, most jobs have longer hours than that. You have two options: You can use the camp’s before and after care (if they have it), or get a sitter. Regardless, this is going to run you between an extra $50-$200/week. I know. But we’re doing minimums. So, for 10 weeks of summer, that’s an additional $500. ($6,500/year)

You also need before and after school care (B/ASC) during the school year. (We’re letting you have elementary school aged children. If you had younger kids, I would put it at $2,000/month for daycare). Your B/ASC is going to run you about $2800/year for two kids.

Okay, those are your minimums. You have not gone out to eat or seen a movie. You don’t have cable or cell phones, unless your job gives you one. You have not gone on vacation. You have not bought any gifts for anyone or entertained. Your kids are not getting any extracurricular activities. Nor are they getting any special services, like speech therapy, occupational therapy, or tutoring. You live in a very modest fixer-upper. You do not have a cleaning lady or gym membership. You are cutting your own hair at home. Your clothes are are close to a decade old. You also have not tithed or given any charitable donations (except for maybe some of your threadbare clothing).

You need $57,170.  If you have preschool-aged children or younger, you need $14,200 more  — right when you need to cut back on your work hours, not raise the bar!

But wait! You have not paid taxes, yet! If you make $57,170 and pay taxes on this, you don’t have enough to cover your basic cost of living. So, you actually need to make 20% more than your bare-bones. You need to make: $68,604/year.  That is just to squeak by. If you want any of the “extras” listed above, you need to make a lot more – and pay tax on it. Again, if you have preschool aged children or younger, you need even more: $85,644, based on my calculations.  ($57,170 + $14,200 = $71,370. Multiplied by 1.2, because, again, you have to pay tax on all this childcare you are paying for, even though the babysitters and/or daycare centers are also paying taxes on the same income.)

Is it any wonder than women drop out of the workforce? Which makes more sense economically: To try to get by on less, so you don’t need to work longer hours in order to pay extortionary income tax on income you are paying someone else to raise your kids so you can work, or to work harder so you can pay extortionary income tax on income you are paying someone else to raise your kids so you can work? (Did you like that? How do you think I really feel about it?)

And what if you are a single parent and have no choice but to work?

(An aside: One of my best friends is a widow. A non-working mother in our community once had the gall to say to her: “I would like to work, but I don’t have the time.” This is one of my favorite quotes of all time, and I would like to see it written on cocktail napkins.)

As I said before, I really think people should not be taxed on their hard-earned labor until after they have paid for their basic minimum needs. For working parents, childcare is a basic minimum need. Especially single parents! And most of those single parents, as we know, are single moms. Single moms need a BREAK, people! The least we could do for them is let them fully deduct their childcare costs.

But wait, if this single mom is making over $85,000/year to pay for all her basic minimum needs, she is actually paying MORE in taxes! Econ-mom, you are the math whiz. What is the actual number someone needs to make so they can pay their taxes and have the minimum amount leftover to pay for all their basic needs without falling into massive amounts of debt?

Ho! Wait a minute! This hypothetical single mom making $85,644/year so she can put a roof over her head and food in her kids’ mouths has NO STUDENT LOAN DEBT! Now what is the the actual minimum figure you need to get by in Chicago Burbsville?

Is it any wonder that you need two-parent working families?

Please note the tension between the two bolded questions above. How does ANY family make the numbers work? Our family is still trying to figure that one out.

Econ-mom’s comments:

Yes, the conundrum of women both needing the income from working and also not being able to afford to work (due to childcare costs) is bizarre and confusing to me.  I have literally NO IDEA how a single parent making under $60k/year can live.  I once went to McDonald’s with my kids and there was only one other boy in the playland (because despite the fact that it was pouring rain outside no one in Seattle will deign to eat at McDonald’s).  After wondering for awhile where his parents were, I surmised that his mother was working at said McDonald’s.  This is honestly the only way I could imagine making a McDonald’s salary work when you have a child, unless you have a family member willing to watch your child for free.

I am definitely 100% in favor of the government increasing the maximum childcare tax deduction.  If you have one child you can claim up to $3,000 in childcare expenses.  What on earth?! According to this article, the average cost of daycare is $196, or approximately $200 per week.  (BTW I find that number astoundingly low, given that we were paying close to twice that amount in Seattle, but let’s go with it.) If you were lucky enough to be paying that average rate, $3,000 would get you 15 weeks of care.  Isn’t that lovely.  And what exactly are you supposed to do the other 37 weeks of the year?

Now, my desire for more childcare tax breaks (or I would also accept government subsidized childcare) may sound self-serving.  But even if you don’t care at all about gender equality issues, there is a legitimate case to be made that making this change could increase GDP.  Interruptions in work lead to fairly large decreases in lifetime earnings.  According to this article, “Each year out of work can cost a family significantly more than three times a parent’s annual salary in lifetime income.”

Another big issue that Law-mom (LM) has raised here is the prohibitively high cost of housing.  It is, to use a technical economics phrase, completely nuts.  So perhaps it may surprise you that I am actually in favor of eliminating the mortgage deduction. Of course you would need to phase it out slowly, and probably grandfather in those who already have mortgages.  But I’d be happy to see it gone, because all it does is drive the equilibrium prices of homes higher and help home owners at the expense of renters.  Instead, what I would like to see is less land-use regulations.  There is a large body of research out there (summarized nicely here) saying that land-use regulations are a big part of the problem.  I saw this firsthand in Seattle where there are several (very expensive!) neighborhoods that only allow single family housing to be built.  This is a case where I strongly believe that you want to give the “free” market more freedom to do its job.

However, I’m not 100% convinced that loosening zoning regulations would solve the whole problem.  I think a less-appreciated issue is the strong tendency for jobs to cluster in certain regions. It’s not at all clear to me what can be done about this issue, if anything, but I think it deserves a lot more thought.  Anyway, for now I think we’re just stuck in the hamster wheel, trying to get by.  I’m pretty sure that if current trends in housing prices and income inequality continue, more and more people (even families with children) will be moving in with their parents or even other families until the hallmark of being “upper-middle” class will be that you get to live in a home with only your immediate family members.  And hey, perhaps we shouldn’t try to fight this.  I for one like having other people around me, and as this hilarious tweet points out, millennials are doing it!

The Inequities of Income Tax…and Fashion

I think about income taxes a lot, because I have been self-employed for the majority of the last 10 years. (And I also just wrote a nice fat check to our friendly, efficient government.) That means of every paycheck that comes into my hands, I have to set aside a certain amount for taxes and not spend it on necessities like our mortgage, property taxes**, food, utility bills and childcare — or anything remotely fun. (Yes, I know this is obvious, but please bear with me.)

As a self-employed person, the amount I have to set aside each month is 25% after accounting for deductions and exemptions, because of self-employment tax. This is a lot harder to swallow when you have to write those checks yourself, rather than have your employer just take them out for you. (I know, because I also receive checks from an employer, and it is nice.) So, really, I have to tell myself that each paycheck is really just 75% of what I bill for. A quarter of my labor is owned by the government. (This is true for everyone; but, again, it is just a lot easier when your employer takes it out for you. Out of sight, out of mind. Kinda like how they say it is harder to spend cash than use a credit card. It is more tangible, and, therefore, feels more real.)

So, if 100% of my work is really only worth 75% of my work, how much do I have to work in order to actually make 100%? Sounds like some easy math, right?

Let’s talk about the billable hour. As any billing lawyer will tell you: You cannot bill for 100% of your time. If you do, I venture to say you are being dishonest. You cannot be 100% efficient with all your time. It is impossible, unless you are a robot. You have to eat. You have to take breaks. Your co-workers come into your office and talk your ear off. You have meetings. I would say, on a good day, you are working at least 10 hours to bill 8, which is a 25% extra effort, just to meet an 8 hour day minimum. (The bare minimum requirement of most firms.)  Also, many clients (insurance companies) use third-party vendors to cut 10% of a lawyer’s bill (another rant for another time). So now, to make 100% of your goal, you need to bill even more. You have to bill 10% more than the 125% you were already working. 125 x 1.1 = 137.5%. So, I have to work 37.5% harder than someone who can go into the office and work for 8 hours straight and go home.

Okay, now the government comes along and takes 25% of that. So, if you want to actually pocket your full 8 hours of billing, you have to work 25% harder than the 37.5% harder than you were already working. 137.5 x 1.25 = 171.985%. Just to earn 8 hours of labor. Therefore your average billing attorney, if they actually want to pocket all their labor and hard earned income, has to work 72 (rounding) percent more than an 8 hour work day. Now you know why attorneys work as long of hours as they do: 40 x 1.72 = 68.8 hours, minimum. And now you know why I have two jobs.

Someone reading this is going to be like: “Yea, but you bill like $350 to $500 an hour. So stop your sob story.”

Not, my friends, if you are a solo practitioner barely hanging on by the skin of your teeth.  As one Facebook commentator I read recently noted (and I paraphrase): “The difference between what a Big Firm lawyer earns, and Small Firm lawyer earns is STAGGERING.” (Her caps, not mine.) Yep. Staggering, peeps. Like, there are days I wish was a teacher, because then I’d at least  get my summers off and not have to pay for summer childcare. (I do not, by the way, charge nor earn $500/hour, or even $350/hour, just for the record.)

The big firms have all the big corporate clients that can afford the impressive fees. If your client cannot afford to pay $500/hour, you are not charging $500/hour. And if you do plaintiff’s work, you are not bringing in any money at all on a monthly basis. Also, if you don’t have the work, even if you are charging $500/hour, if you only bill a couple hours for that client all month, you are not faring too well. If you are a good lawyer, you might even suffer more: Getting a client’s case dismissed means no more work for you. And if you are honest, you are not over-billing, or over-working a file for no reason.

The realities of self-employment are true for any job or profession: You have to put in a lot of (free) time and labor just to get the work and keep the income coming in, as well as (free) administrative time and labor. When I was full-time self-employed, I often explained to people that I was having a good day, if I billed 6 hours. At least two hours of my day were administrative work. My husband had a short stint as a self-employed contractor, and he was putting in 60 hour weeks, minimum, to stay afloat.

Being self-employed is not for the faint of heart. You don’t have a regular income stream.  You don’t get benefits without paying for them yourself. You don’t get overtime pay.  You don’t get sick days. You don’t get paid vacation time. A day off of work is a day without making any money for oneself. The list goes on.

What is my point? The point is: Why are we taxing hard-working, honest people who work their butts off to put food on the table and keep a roof over their family’s head? Why am I paying the government for all my hard labor? Seriously? What is up with that? Why are we being taxed on our productivity?  Every time I write a check to the government, it honestly feels like robbery. I personally think people should just be taxed on passive income. Or, at least, only after $50,000. Everyone needs at least $50,000 just to live in this country. Or to live in Illinois, anyway.***

But here’s where I really feel the punch in the gut due to income taxes and what causes me to gripe and complain the most:

  1. I get taxed above The Hub’s salary. So, rather than get to pay graduated income tax on my salary, I’m hit from the get-go at 25% on every single dollar I earn. On every single minute of my time. (Some call this the “marriage penalty.”)
  2. Then there is childcare. Given our reasonably good income tax bracket (believe me, I am very grateful for what we have; I do not take it for granted), we don’t get much of a deduction on childcare. And because we live in an affluent area, childcare is even more expensive than in most states. (Everything is more expensive.) When both girls were still in daycare, I paid over $2000/month for daycare. Since starting school, camp is, at a minimum, $6000/summer. (And I have spent more in the past, in order to get the “best of the best” care for my food allergic child who couldn’t swim when she first started camp.) All told, between after care programs, etc. I have to budget at least $12,000/year in child care expenses. And on average, I get about a 10% deduction on those expenses. In other words: A drop in the bucket.
  3. I cannot work, if I have to take care of my kids. Why can’t I deduct the full amount of childcare (used for working) as a business expense? Have you ever tried to write a complex brief with kids interrupting you every five minutes? Employers can deduct for childcare provided to employees. Why can’t I just deduct for the childcare I pay for to run my business!?

One last issue about taxes and the tax code:

As a litigator, I have to dress a certain way for court.  Also, I have to walk a lot on horrible sidewalks to get to court. In my 20s, I was frivolous enough and vain enough that I could afford to replace my stilettos every three months. Now, not so much. (Remember my childcare expenses? There goes my shoe budget. And my clothing budget. And all the vacations I took in my 20s.) So, I try to find specific shoes just for work that can withstand grates and gaps in sidewalks and not hurt my feet, but still look dressy enough for work. But not too frumpy. (Okay, they are super frumpy.)

But the tax code says that my pantsuits are not tax deductible, because I can wear my work attire to weddings. (Yea, right.) And I supposedly can wear my frumpy work shoes to other events, as well. (Only if I want the “worst dressed” award.) I call balderdash on all of this. Have you ever shown up to a wedding in a pantsuit and frumpy chunky heels? In this respect, I think the tax code is sexist. I don’t love throwing the word “sexist” around liberally. But, in this case, I think it applies. Men can wear suits to court and weddings. Women can, but they don’t, because we don’t want to be cited by the fashion police. We still want to look nice, even if we have lost all our sex-appeal after baby number two.

In this respect, the tax code has a “disparate impact” (i.e., a disparate discriminatory impact) on women by making assumptions about professional work attire based on men’s, rather than women’s fashion. I should be allowed to deduct for attire I deem only explicitly suitable as work attire — i.e., courtroom attire. A woman should not wear a “little black dress” to stand before a judge or jury. (You also should not wear a black Lycra bodysuit. I’m talkin’ to you, lady I once saw at the Daley Center!) And a woman “should not” wear a frumpy pantsuit to a wedding. IMHO.

**Illinois has the second highest property taxes in the nation. And our county has the most expensive property taxes in the State. So, I am not exaggerating when I tell you we pay some of the highest property taxes in the country.

***I’m sure $50,000 goes a lot further in other parts of the country than here. So, wouldn’t it make sense to have some sort of graduated tax code structured around cost-of-living?

Econ-mom (EM) Three things – first of all, HEAR, HEAR for more childcare deductions! The amount of money we have spent on childcare over the past six years is OBSCENE.  I’m sure when we had two kids in full-time care we would have been eligible for the earned income tax credit if we had been able to deduct that entire expense.

Second, I have long been jealous of men’s fashion.  Need to dress up for work or a wedding? Wear a suit. Business casual? Khakis and a button down shirt.  As my kids would say, easy peasy.  I recently saw a man on Twitter complaining about needing to pack a jacket for business trips since he didn’t know how formal various events would be.  I almost popped a blood vessel.  I mean… gosh.  That must be SO HARD not knowing what to wear at an event!! I have NO SYMPATHY for this.  And bringing a whole jacket?  Please. Try extra shoes, skirt vs. pants, etc etc.

Finally, as an economist I of course have some opinions on taxes, but I will save most of it for another post and just say that I’m generally fine with everything Law-mom (LM) is saying here.  Economists consider income taxes to be distortionary (i.e. in theory they discourage people from working more) so there would be a lot of better ways to raise revenue while still lowering income taxes for many people in the middle class.

LMHey, EM, it could always be worse. I think we need an entire post some time dedicated to women’s fashion woes. What do you think?