As I've been working on my book on bankruptcy this summer, I've been going back through the various hypotheses that have been advanced for the rise in American bankruptcy filings in the 1980s and 1990s. One hypothesis was that advanced in The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke by Professor Elizabeth Warren and Amelia Warren Tyagi.
Warren & Tyagi's argument can be easily summarized. They focus on the rise in the number of households with two parents working as an indication of economic distress. Conventional economic theory would indicate that one benefit of having a second wage-earner is that it will make the family more resilient to a financial setback or loss of job than a traditional family with only one wage-earner. Families today, unlike those a generation ago, can save the second earner's income as precautionary savings, thereby making it easier to withstand a setback.
Warren and Tyagi disagree with this conventional economic approach.
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They argue that contrary to standard economic theory, the influx of a second worker has actually made a family more susceptible to economic setback. The argument is a bit opaque, but it seems to rest on the idea that recent decades have seen an excessive “bidding war” for housing, as families compete to get their children into preferred school districts. This bidding war for housing has, in turn, driven mothers from the home into the workplace, in order to earn sufficient income to pay the mortgage on high-priced homes. In turn, this increased female workforce participation has given rise to a whole new host of expenses, such as additional cars and child care expenses. In the end, Warren and Tyagi argue, the family is no more financially stable or well-off, because now both incomes are needed to pay for the house, as well as the necessary expenses associated with maintaining a two-income family, such as an additional car to get to work and daycare. Warren and Tyagi have dubbed this phenomenon the “two-income trap,” which, at its core, is said to be driven by the rapid appreciation in housing prices. Because houses in good neighborhoods are expensive, thus in order to pay the mortgage, mom goes to work to supplement dad's income.
So although the second job brings in new income, it brings with it a whole new set of expenses, many of which are supposedly dedicated to sustaining mom's employment, such as child care expenses and another car. So the family ends up even more highly leveraged than previously and with a higher family income and two wage-earners, but counterintuitively, more vulnerable to financial setback than previously. Thus, there is sort of a prisoner's dilemma here--all families would be better off if they could commit to having only one wage-earner in the workforce, thereby keeping down the price of necessities, and especially housing, the alleged trigger for this arms'-race, and send the second worker into the workforce only in times of necessity. Yet, no family can afford to sit it out, because otherwise it will be left behind. So off they trudge, held hostage to the house and the ancillary expenses needed to maintain it.
Numerous questions could be raised about the theoretical assumptions that underlie their analysis, such as the unproven assertion that the rise in two-working-parent families is caused primarily by a housing bidding war. Scholars have provided several plausible explanations for the rise in two-working-parent families, such as smaller family size (which reduces the economies of scale in one parent specializing in child-rearing) or the philosophical and intellectula revolution of feminism, which simply empowered women who wanted to work to do so. Warren and Tyagi do not discuss these competing theories or why their theory is more accurate than these alternatives.
There is also the obvious questions of causation--having more income surely causes at least some families to increase their expenses by buying larger houses, houses in more expensive neighborhoods, or newer and more expensive cars than they might otherwise. For instance, data from the Survey of Consumer Finances suggests that households were buying more expensive cars around 2000--the time period Warren and Tyagi study--than in the past, especially more expensive SUVs and luxury cars. See Ana M. Aizcorbe et al., Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, 89 FED. RES. BULL. 1, 17 (2003). To a substantial extent, this decision to buy more expensive cars or more expensive houses was because households were wealthier than before because of massive increases in the stock market and home equity, and consumers borrowed against that wealth to increase their consumption. In addition, the rise in home ownership rates between the 1970s and today has added more highly-leveraged borrowers into the measurement pool, thereby tending to increase the measured housing obligation for the average family as well by moving them from renting to owning (also, of course, giving them an extremely valuable wealth accumulation asset). The growth in home ownership in the past decade is charted here.
But let's aside detailed discussion of the questions of theory and focus on whether the hypothesis is valid as an empirical matter.
But despite all of these caveats, we will still treat increases in mortgage and automobile expenses as exogenous and causal variables. Warren and Tiyagi's argument rests on a stylized example of the situation facing a "typical" middle class family today versus a generation ago (I apologize for the length of the excerpt, but the book itself presents the core data in a discursive manner). All figures are inflation adjusted:
We offer two examples.
We begin with Tom and Susan, representatives of the average middle-class family of a generation ago [early 1970s]. Tom works full-time, earning $38,700, the median income for a fully employed man in 1973, while Susan stays at home to care for the house and children. Tom and Susan have the typical two children, one in grade school and a three-year-old who stays home with Susan. The family buys health insurance through Tom's job, to which they contribute $1,030 a year--the average amount spent by an insured family that made at least some contribution to the cost of a private insurance policy. They own an average home in an average family neighborhood--costing them $5,310 a year in mortgage payments. Shopping is within walking distance, so the family owns just one car, on which it spends $5,140 a year for car payments, maintenance, gas, and repairs. And like all good citizens, they pay their taxes, which claim about 24 percent of Tom's income. Once all the taxes, mortgage payments, and other fixed expenses are paid, Tom and Susan are left with $17,834 in discretionary income (inflation adjusted), or about 46 percent of Tom's pretax paycheck. They aren't rich, but they have nearly $1,500 a month to cover food, clothing, utilities, and anything else they might need.
So how does our 1973 couple compare with Justin and Kimberly, the modern-day version of the traditional family? Like Tom, Justin is an average earner, bringing home $39,000 in 2000--not even 1 percent more than his counterpart of a generation ago. But there is one big difference: Thanks to Kimberly's full-time salary, the family's combined income is $67,800--a whopping 75 percent higher than the household income for Tom and Susan. A quick look at their income statement shows how the modern dual-income couple has sailed past their single-income counterpart of a generation ago.
So where did all that money go? Like Tom and Susan bought an average home, but today that three-bedroom-two-bath ranch costs a lot more. Their annual mortgage payments are nearly $9,000. The older child still goes to the public elementary school, but after school and during summer vacations he goes to day care, at an average yearly cost of $4,350. The younger child attends a full-time preschool/day care program, which costs the family $5,320 a year. With Kimberly at work, the second car is a must, so the family spends more than $8,000 a year on its two vehicles. Health insurance is another must, and even with Justin's employer picking up a big share of the cost, insurance takes $1,650 from the couple's paychecks. Taxes also take their toll. Thanks in part to Kimberly's extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family's money. So where does that leave Justin and Kimberly after these basic expenses are deducted? With $17,045--about $800 less than Tom and Susan, who were getting by on just one income.
Reading that excerpt, I thought, "Hmm, that's confusing. I wonder why they listed the actual dollar values for all of the other expenses, but the 'percentage' of income spent on taxes. That makes it difficult to compare to make an apples to apples comparison of the actual tax burdens between the two periods." Presenting it in this manner is even more confusing because the authors then go on to implicitly convert tax obligations to dollar values in order to calculate the total amount of the families' budgets dedicated to aggregate "fixed costs" versus "discretionary spending," concluding thtat the 2000s couple has less left over for discretionary spending than the prior generation. Yet, although they report the actual dollar values for everything else, in an apparent oversight, they never actually report the actual dollar figures for the tax expenditures in the two periods.
So I got out my handy calculator and calculated what the indicated percentage of taxes translates into in terms of actual dollars paid in taxes. In turns out that for the 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income (a higher rate presumably because of progressivity hitting the second wage-earners income) in taxes works out to be $22,374.
Thus, taxes increase in the example by $13,086. By contrast, annual mortgage obligations increased by only $3690 and automobile obligations by $2860 and health insurance $620. Those increases are not trivial, but they are swamped by the increase in tax obligations. Too put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage (the supposed driver of the "two income trap") and about double the increase in the combined obligations of mortgage and automobile payments. This also leaves aside the peculiarity that the 2000s family is paying $9670 in new child care and $2860 in new automobile expenses supposedly to meet a $3690 increase in mortgage expenses, the supposed driver of the model.
Indeed, because of this huge increase in the tax bite, the percentage of family income dedicated to payments for health insurance, mortgage, and automobiles actually fell between the two periods. Consider the following charts taken from my article "An Economic Analysis of the Consumer Bankruptcy Crisis" (I used the actual dollars to calculate this, which because of rounding errors lead to the percentages being a bit off):
First, consider the "average family" of the 1970s:
As can be seen, for the 1970s family, health insurance is 3% of income, mortgage payments 14%, and automobile expenses 13% of income.
Compare the "average family" of the 2000s:
As can readily be seen, expenses for health insurance, mortgage, and automobile, have actually declined as a percentage of the household budget. Child care is a new expense. But even this new expenditure is about a quarter less than the increase in taxes. Moreover, unlike new taxes and the child care expenses incurred to pay them, increases in the cost of housing and automobiles are offset by increases in the value of real and personal property as household assets that are acquired in exchange.
Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined. And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined. And note, this is using the data taken directly from Warren and Tiyagi's book.
It is not clear what to make of all of this, except that it is hard to see how this confirms the central hypothesis of "The Two-Income Trap" that "necessary" expenses such as mortgage, car payments, and health insurance are the primary draing on the modern family's budget. And again, this unrealistically assumes that all increased spending on houses and cars is exogenously determined, ignoring the possibility that an increase in income leads to an endogenous decision by some households to increase their expenditures on items such as houses and cars.
Instead, Warren and Tiyagi's data, point to the conclusion that the obvious problem for this "typical" American family appears to be an extremely high tax burden caused primarily by the progressive nature of the income tax that hits families with two working adults by kicking them into higher marginal tax rates.
This conclusion is obscured by the confusing way in which the data is presented in "The Two-Income Trap." Whereas the book presents all of the other figures in terms of dollar values, expenditures on taxes is presented in terms of percentages. This stylistic decision unfortunately makes it difficult ot recognize that this increase in taxes is the primary factor causing the drop in "discretionary income" between the two time periods. It is not obvious why exactly the authors presented only this one particular entry in terms of percentages rather than actual dollars, which obscures what is going on by making it more difficult to understand exactly how much of the family budget was allocated to paying taxes versus these other expenditures. And even though the actual dollar value for taxes is later used to calculate the fixed and discretionary portions of the family budget, that figure is not reported anywhere in the book itself. Converting percentages to dollars, however, it is evident that the percentage of income dedicated to tax payments is by far the biggest difference between the "typical" family of the 1970s versus that of the 2000s. In the end, this confusing presentation seems to have led to overall confusion about the lessons of the book.
Finally, this confusion about the underlying dynamic also leads to confusion about policy recommendations. In particular, although Warren and Tyagi do not make this argument, it would seem to follow that one logical policy implication of this analysis would be to support a lower and flatter marginal tax rate. This would reduce the household tax burden and increase available discretionary income.
Related Posts (on one page):
- Robert Frank Falls For the Two-Income Trap:
- An Even More Confusing Presentation of the Two-Income Trap and Taxes:
- The Two-Income Tax Trap:
- Evaluating The Two-Income Trap Hypothesis:
LizardBreath--I agree. I figured the post was excessively long already, but that is another policy conclusion that presumably would follow from the findings.
In the end, though, an increase in income tax is definitely not what drove Kimberly into the workforce. Personally, I believe ("believe" = "I have no facts to back this up, so I'm making it up as I go along") that the bigger house/nicer car(s) are merely part of the larger phenomenon of "buy more and costlier stuff" we've experienced over the past 30 years.
Not so, of course. For their extra expenses in housing, they get to live in a better house. Try remodeling sometime and see what the new codes require.
When I was a kid, my family moved into the starter house that the WW II vets were going into by the millions. Three bedrooms, one bath, finish the basement yourself, crawlspace above, small lot. Everybody thought it was terrific. Considering what the adults knew of how young families had had it in the Thirties, which is to say the Depression.
Later, after building up equity rapidly in the standard fifteen-year mortgage, we and everybody else moved to the got-it-made house, which by today's standards wasn't all that much.
Problem is, if you were born after about 1950, as a boomer, your standard was the got it made house. You have no idea that we never felt oppressed or poor. We were having a ball in the early subdivisions.
Succeeding generations insist on higher standards of living, which cost more money. There is a price.
But the accidental support for Dr. Laura is a hoot.
If mom stays home, she can home-school and so the quality of the neighborhood school doesn't matter.
Your hypothesis that taxes might be behind some of this seems right to me. But distinguish two things - higher taxes can't explain why women are working, but it can explain why, given that women (really: secondary earners, who are mostly women) wish to work, how even a second income doesn't net much income at all. One of the best sources on this is Ed McCaffery's "Taxing Women". The problem he discusses is *not* the "marriage penalty" but the "secondary earner bias."
If a wife goes to work, all of her income is taxed at the marginal rate, which is higher, of course, than the average rate the husband (really: primary earner) is taxed at. After that, her work implies a variety of expenditures, which you have noted in your post, none of which are fully deductible as business expenses. McCaffery argues that two changes to tax law would lower the "costs" of having a secondary earner:
1. Allow married couples to treat their individual income separately and tax it at the rate applicable to unmarrieds, avoiding the higher marginal rate for the secondary earner. (Of course a flax tax would solve this problem too.)
2. Allow secondary earners to treat the expenses associated with working to be fully deductible against their income, especially child care.
Finally, the most compelling reasons for increased female labor force participation have to do with the higher levels of human capital that women have achieved combined with the decreasing amount of labor required for household production. The opportunity cost of entering the labor force has declined dramatically. There's no evidence that reduced male incomes explain it. In fact, the wives of higher-earning men are more likely to be working than those of lower-earning men, although that's mostly assortative mating.
That is, of course, total bunk, because there's not a fixed-size lump of labor sitting around.
I'd buy that there was a bidding war going on for "Ivy League college education." Because the number of seats open at Elite Colleges is pretty much constant. (Your definition of an "elite college" will vary, but that's fine -- however you define it, there are only slightly more slots open in today's admission class of those colleges than there were 20 years ago.)
But what evidence do we have that there is only a certain fixed-size lump of "good places" to live? Schools are the primary key, but there are new and highly-regarded public school systems that barely existed, if at all, 20 years ago. So the supply of them is surely increasing.
You also have to consider the effect of a household having its entire life savings invested into its mcmansion, which is considerable. Among other things, it becomes politically impossible to fix housing shortages by allowing higher density, because the apartments and condos have to go next to someone's house and nobody wants to take the hit (real or imagined) to their property value.
I think that couples where the wife, out of choice, stays home to raise the kids are more likely to be conservative financially. They have made a choice to live on a lower income in exchange for the other tangible benefits that they perceive from that life style.
I don't think we have to go into the whole bidding war scenario to explain the statistics. I didn't enjoy Liz Warren's bankruptcy class at UT.
All those things that Warren &Tyagi dismiss as "basic expenses" seem to be reasons that people work. What was W&T hoping we would spend the money on, cable TV?
Clearly the improvement in income is overstated due to taxation.
Tmac -- how's that black eye coming along, anyway?
Inflation adjusted to what year? It would appear to current or near current dollars. I made nowhere near $30,000 in 1973, just out of college.
Are the incomes used in the example median or something else? Income figures for the example should be weighted to reflect families just starting out, rather than a median for example, as that's when the initial decision is made as to whether the wife should work.
From the young 'uns I work with, I have to wonder if there is really any economic analysis in the decision. It seems they make the presumption of the wife working and don't analyze the economics.
But what I really wonder, is how many people in the 1970s lived within walking distance of shopping? I didn't, and neither did my single-wage earning parents in the 1950s (we lived, two parents and three children, in a two bedroom-one bath house of about 900 sq. feet). I remember going "downtown" with my mother on a bus -- try that today.
The fact is we live incredibly better in a material sense than we did at mid-twentieth century(or even 35 years ago). You can argue that we could live cheaper without multiple bathrooms, DSL or dishwashers (the mechanical kind), but there seems no desire on the part of anyone to give up these "basics" of modern life.
For the reasons stated in the post. In the good old days that nobody remembers with anything resembling accuracy, the single-earner family typically had one car, which the husband used to commute to work except on days when the wife needed it to do the shopping, in which case she had to drop him off at work and pick him up later. The arrangement worked for most people because both work and shopping were located downtown.
In your typical two-earner family today, work and shopping are probably nowhere near each other and there isn't enough time in the morning to get the kids out the door and drop one parent off at work. They need two cars. When the kids get old enough to drive, it becomes compelling to buy a third car because, again, there just isn't time to drive the kids everywhere they need to go (and they can't get there on the bus or on their bikes)
From the author's point of view, that's probably a feature, not a bug.
I'll go on a ledge, but these kinds of theses (middle-class families are squeezed) tend to presented as evidence for *more* tax progressivity. It kind of defeats the purpose to then state that the biggest squeezer is the federal government, doesn't it?
Or (as with my parents) he would carpool, and she would have the car half of the time. But that didn't matter for grocery shopping, because the grocery store delivered.
A progressive tax (or regressive tax, for that matter) is created by having more than one tax rate at different levels of income. So take the "income tax". You have deductions, and so the first rate is zero. Then the next rate is 15%, then 25%, then 28%, etc. The marginal tax rate is increasing, therefore the tax is progressive. Then take the "social security tax" which is called the "self-employment tax" for a lot of people. It's 12% for the first $90-some-thousand in income (indexed for inflation) and then zero after that. The marginal rate is decreasing, so the tax is regressive. The "unemployment tax" is another regressive tax. Then take the medicare tax -- it's the only real flat tax out there, where every dollar earned from the first to the billionth and beyond is taxed at the same rate.
Because of the fact that people's taxes are the sum of progressive taxes, regressive taxes and flat taxes, whose functional shapes differ, and because of the byzantine nature of the "income tax" part of the tax code, individual families all face different regimes of deductions, etc., and so face marginal tax rates which bounce up and down all over the place -- sometime progressive, sometimes regressive, and subject to change as the tax code changes and their family circumstances change over time.
Every single proposal that I have seen called a "flat tax" keeps social security &unemployment taxes as regressive taxes while having at least two tax rates creating a progressive "income tax". Having a big deduction (which all the "flat" proposals have) means that there are two rates -- zero and whatever the rate is on income above the deduction. Two or more rates means that the tax cannot be flat -- that's simply the definition of flat.
For the purposes of this discussion, the only way that a "flat tax" would be family-status neutral is if only wage-earners got deductions. If the deductions flow to the family according to family size, then the second wage earner pays the flat tax + regressive tax, while the first earner pays the progressive tax + regressive tax.
If anything, the discussion points to the fact that for the stereotypical "middle income" family, the wife is the prototypical flat-taxpayer. Take my family... For most of my married life I was self-employed. We would get all of the deductions whether or not I worked, and my husband's income put me into the 28% bracket for all of my income, and I never made enough to get past the maximum for social security. Add 15% for social security &medicare, and then state income tax. Round numbers, my flat tax was 50%. Whenever I was considering a deductible business purchase, I always assumed a 50% tax rate.
After my son was born, my wife and I sat down to crunch the numbers. She doesn't have a college-education, so she is limited in the types of jobs and salaries she can get.
She was working for the State in a decent position.
If she worked, her salary was going to pay for two things, 1. day-care, 2. the car payment on her car.
We sold the car and she stayed home with my son. Our budget was definately a lot tighter after the child was born than before the child, but it was going to be tighter anyway.
We chose to live in a small 2 bedroom home with a 1 car garage. We cut up all our credit cards. We paid off all of our personal debt. We make a new budget every month and hold ourselves accountable to it.
That was 10 years ago. We have a lot more money in the bank and our IRA/401Ks than our friends do. We go on nice vacations. We paid cash for our last used car. When our friends and family complain about how terrible the economy is, we smile and make sympathetic noises, but inside we are giggling.
Our situation is not unique. I know lots of 2 income families where the wife has a low paying job that doesn't even cover her daycare expenses and the family feels that they can't possible afford to have her not work because "daycare is so expensive". It baffles me.
Out of curiosity, taking into account fees at average boarding schools (which I don't know), how much could sending children away to boarding school compensate for the hit from living in expensive, high-quality school districts? I don't know what any of the numbers involved are (I did not attend a boarding school, do not have children, and do not own a house in an expensive, high-quality school district), but I'm a bit curious whether that's something we can expect to see in the coming years. If, that is, their analysis has some truth to it (Zywicki's critique notwithstanding).
While the second worker may not bring in as many $s as the first, and having a second worker may occasion substantial expenses that could otherwise be avoided, e.g., daycare and transportation, the second worker may add much value through employment benefits, especially health insurance. Not hard to imagine a lawyer, doctor, accountant, etc. who earns a good income but who would have to pay a good deal for not such good health insurance if spouse, who brought home less money and occasioned those substantial expenses that could otherwise be avoided, did not get good insurance benefits from their employer.
In addition to the possible health insurance benefit, might there not be another valuable, though hard to quantify "insurance" benefit, namely assurance of future employability of the secondary worker? It is generally easier to get a job if one already has a job than if one doesn't. And it is almost always easier to get a job, especially a well-paying, satisfying one, if one hasn't been out of the workforce for an excessively long time. So when the second person, usually the wife, works, they have both the current employment and future, hard to value, possibilities that might not be there should the need or desire to work come years later. If that need or desire to work never comes, then it can be looked at in retrospect the same way one can look at a property insurance policy they never collected under.
Imagine (unfortunately, I don't have to imagine it) a family member who has always been, and no doubt always will be, profligate, wins the lottery and gets a stream of annual payments for 20 years. They now see themselves as well-off and go about incurring credit card debt that puts them deeper and deeper underwater, as the relatively generous annual payments to them remain fixed, while their spending doesn't. (The details of how they go about are too painful to recount, even though they are not a first-degree relative or otherwise all that close.) With a negative "current" net worth, that is liabilities well in excess of "current" assets (not including lottery winnings for a few more years and prospect of a small inheritance), is personal BK an option for them to investigate? Would the prospect of more annual payments to them be reduced to present value, or factored into a repayment schedule? After the changes to BK law so as to keep people from walking away from recklessly incurred credit card debt, is personal BK out of the question as a possible solution here? (BTW, no need to consider a second wage-earner in this "hpothetical," since after winning the lottery, the couple figured neither needed to work thereafter, and subsequently divorced?!)
[Professor Zywicki, if you need any BK "parables" for your book, I could give you more details. Not too different from Aesop's fable about the ant and the grasshopper, though.]
Has destigmatization of BK been considered as one cause of increased numbers of filings?
I do agree with the author's claim that many two-income households are at risk of financial ruin than their one-income predecessors, at least for a specific subset of them. Those who live paycheck to paycheck (many people I know have a marginal propensity to consume of 100%) are quite obviously at higher risk of disaster, because their household is about twice as likely to experience a job-loss as a single-earner.
According to the US Census (2005), only 27% of the US population has a 4 yr college degree or higher. For the vast majority of Americans, that 2nd job is going to be a lower wage job.
For a family where both spouses are college educated, your arguments make sense. But those are going to be a minority of the families.
Honestly for most people, it is an emotion driven argument rather than an economic one. The average couple doesn't even consider making a budget and examining how their career choices are impacting the family. All their friends work, so they want to work too. It is more of a peer pressure-social expectation type decision.
I have been looking this morning and can't find it, but the result the person was trying to demonstrate was that pay scales have been going up slower as the number of two-income families increased.
The paper claimed there was two reasons for this.
1. Because more women stay in the work force there are more people chasing fewer jobs. Employers don't have to offer as much money to find a satisfactory number of applicants.
2. The primary money-earner in single-income families tends to be more aggressive in asking for and pursuing raises. They feel more pressure to raise their families standard of living when they are solely responsible for it.
I remember my microeconomics professor ripping on the methodology of the paper and the results. She had to admit that the numbers seemed to support the first conclusion, but the second one was pure conjecture.
But the consequences of job loss for the single-earner living paycheck to paycheck is likely more than twice as catastrophic.
Among post-boomer couples in that demographic, the wives earn more money in many (sometimes I think most) of the families I know. But somehow nobody ever thinks that the choice their husbands make to work is strictly economic, and that their husbands should stay home if day care and commuting costs are too high. Something else is in play there.
They are? In terms of the risk of personal bankruptcy?
I've posited :
1) savings = $0, and
2) monthly expenses = monthly income (i.e. paycheck to paycheck)
Granted, the high-spending two-income household could probably cut expenses more than the one-income household. But they'd better be able to cut expenses by 50% immediately, which is unlikely. When cash flow is negative and net worth is zero, insolvency comes quickly. I'm shocked by how many 40-something, dual-income, upper-middle-class households would be insolvant withing a month or two if one person lost a job. In fact, I think that the one-income household may be able to weather unemployment more easily in many cases. In effect, they have excess earning capacity. While the stay-at-home spouse may have limited earning potential, s/he can often find some sort of work in a pinch.
this book is shocking"
Are these two authors even economists? Their arguments don't seem like the kind serious economists would make.
1. Most bankruptcy filers in my area are high school graduates that got in financial trouble using credit cards and buying vehicles and consumer goods beyond their means.
2. Their stop-gap method of dealing with financial problems was to stop paying their vehicle/home loans, insurance premiums and federal taxes. This worked in the short term but it ultimately caught up to them with repossession or foreclosure proceedings, IRS garnishments or an uninsured event that affected their health care, vehicle, or home.
3. They filed bankruptcy based on the recommendation of a family member, friend, or coworker who had previously filed. They typically use the same attorney as their family member, friend or coworker. A surprising number are repeat filers (within the past 10+ years), often with the same attorney.
4. Some bankruptcy filers encountered an unusual event - e.g., a medical event that disabled the sole wage-earner in families where only one spouse works outside the home - that resulted in bankruptcy. Under the old law, these filers were more likely to file a Chapter 13 bankruptcy even though their ability to repay was questionable. In general, their desire to repay their debts seemed greater than the average filer. It's too soon to see any pattern under the new bankruptcy laws.
5. Some bankruptcy filers' financial problems are related to the cost of addictions to drugs, alcohol, tobacco, and/or gambling - costs that aren't shown in the bankruptcy documents but become apparent in questioning at the 341 meeting. A few arise from job loss due to incarceration of one spouse, and many more are brought on by one or both spouses' inability to pay delinquent child support payments.
6. The type of debt listed in the bankruptcy Schedules does not tell the whole story of why a debtor filed bankruptcy. The overall problem may have been caused by overspending on new vehicles, consumer goods and/or credit cards. However, the unpaid debts are often secured debts like car payments, home loans, and federal taxes because, unlike consumer creditors, secured &priority creditors have not historically been aggressive regarding missed payments. Many debtors basically rob Peter to pay Paul and thereby get behind on taxes or car/home loan payments to finance expensive consumer credit agreements, only to ultimately file bankruptcy when they can't catch up on their delinquent secured &priority debts.
Agree with NeuroDoc. Adding to it: the expenses of day care are temporary. Both parents will see an increase in their salaries as they gain experience. It's not just the insurance of a second income: it's the fact that the second income will be substantially larger than it would have been if the woman stayed at home for 15 years. Expenses associated with that income (car, childcare, etc) will either remain constant (i.e. car) or decrease (high schoolers don't need daycare) - either way, they will represent a smaller portion of the second income as the couple ages.
Did the authors account for the fact that more women than men go to college these days? Did they account for the high divorce rate?
We cannot afford vacations. We barely eat out and I always pack my lunch. We do curb shopping and are amazed at what people throw away that could be fixed with less than $5 and very little time.
Today's families, by law, must have auto insurance. Was that true in the 1970s?
The dollar has been devalued and does not buy as much as the 1970s family.
Everything seems geared to force families into a double-income, small family arrangement. I wonder if we can sustain the 1 paycheck for much longer.
Richard Maybury's Whatever Happened to Penny Candy is a good primer into economics.
The two income household which loses half its income could cut all the expenses identified by Prof. Warren. (Child care, second car, etc. And of course the extra taxes disappear when the income does.) The single income household doesn't have that slack to cut.Why wouldn't the same consideration apply in a two-income family in which one of the spouses was laid off?
Your argument is based upon the notion that dropping from $60 -> $30 is more painful than going from $30 -> $0, which seems hard to credit. (In any case, even if that is true, you're arguing that an irresponsible two income family is worse off, not that an average two income family is.)
And speaking of that bit of sleight of hand, there's another bit of slipperiness in the Warren theory:Warren posits an increase in health insurance costs. That may or may not be, but it has nothing to do with the "two income" issue.
The long post is excellent and I think the impact of taxes on the "middle class" needs more formal academic exploration. Ironic that our ever-growing gov't funds the very social ills that makes middle class life difficult while at the same time draining the life out of the middle class. And these very same middle class citizens then go to polls to vote for....more gov't. Very sad. Vote Ron Paul.
Real estate prices exploded a few years back because of lower interest rates; too much money chasing too few goods. There was a similar jump in prices in areas with good schools previously, probably because of competition cited here.
What bugs me, however, is that college-educated couples are often paying beaucoup bucks to buy a house that a factory worker used to live in two generations back. Sure, it's outfitted better. But still ... anyone ever feel like our society's sort of running in place, you know, like the end of Gatsby?
I don't know what would/wouldn't happen it your hypothetical cutpoints, but taxes on X would probably be <50% of those on 2X, and certain means-based benefits (welfare, Medicaid) that weren't available at 2X might kick in at X. So not a straight linear equation with no discontinuities.
Actually, it does: but it may be less expensive to have two people working when both get health insurance through an employer. They can then choose the least expensive plan, or put the kids on the one that is least expensive. Furthermore, if/when one spouse is laid off, the other can simply add the rest of the family to her policy, rather than paying something like $300 per month per person for COBRA.
If the two income hypothesis is correct, then I think you would see regional disparities in bankruptcy filings depending on the real estate market.
Presumably, as well, you would see a higher bankruptcy rate among middle-class homeowners.
Now of course there is nothing wrong with any of these wonderful things- but somehow they have gotten catagorized into 'necessities' for a middle class family (heck, what percentage of households below the poverty line have 3rd generation video consoles?). Its not just that every family is 'entitled' to a nice school district, they also must have all the trappings of middle classdom that keep their kids from feeling left behind (god forbid their self esteem might suffer).
Somehow when i see both parents driving off to work in the morning in nice cars (there are buses in the suburbs, believe me), swinging by Starbucks for a 5 dollar cup of coffie, I dont shake my head sadly at how the quest of educating their kids has forced both parents out of the home.
With moderate local college degrees, and low-end white collar jobs, our respective fathers were able to save a bit. With an Ivy education and a professional job we had no savings and when I was out of work for 13 months (what shortage of programmers?) we petitioned for Chapter 7 bankruptcy, because we had credit card debt we otherwise wouldn't have got out from under.
Her car cost about $600/year in insurance and a little more in repairs -- even though she wasn't working, she pretty much needed it to get the kids to simple things. (No soccer, no daycare, no pre-school.) Her medical bills were a little higher than typical, but rarely more than $10,000/year and that was tax deductible.
We bought our house for twice what it had cost maybe 5 years earlier, but half what it would have sold for 5 years after that; our mortgage payment was comparable to rent on a smaller place.
We did have basic cable, and of course I'm now using a computer that would have cost millions of dollars in the past. Otherwise I'm not sure how I'm living any more profligately than our parents, but I know I'm not saving like they were.
It sounds like medical expenses are a big part of what drove you into bankruptcy (along with unemployment). This is not uncommon. Good luck.
Houses where I sit in a generic middle-class SF Bay Area suburb are now worth roughly 25X what they were in 1973. Same lot, same house, just more digits. It's the rare income that's gone up 25X in that time.
The property tax payment alone would be greater than the mortgage payment factored into the authors' example.
This isn't necessarily true. Two-income couples with similar incomes pay a penalty. Two-income couples where one couple makes substantially more than the other get a marriage bonus from the tax system.
Warren and Tiyagi wrote: Thanks in part to Kimberly's extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family's money.
Todd Zywicki wrote: And for the 2000s family, paying 33% of its income (a higher rate presumably because of progressivity hitting the second wage-earners income) in taxes works out to be $22,374.
This is false, at least when it comes to federal taxes. A family with a $67K income, a $9K mortgage, and two child deductions would be in the 15% marginal bracket.
Add in the cultural factors like many households breaking apart, with the costs often falling on the state, young people renting apartments instead of living at home, etc. and it's obvious why no one has any savings. It doesn't matter what tax system you have, we need an across the board 30% cut in government spending.
Then parents who home schooled could buy homes in poor school districts (which, it turns out, are all of them) and make out like bandits.
Maybe it is false, and maybe it isn't. Total tax load includes federal, state, and local income taxes and property taxes...and sales taxes.
$1030 a year is about $85 a month. Maybe that was realistic in 1973
$1650 a year is about $138 a month, and I don't believe that is realistic for a family of four these days.
Fair enough, but the original authors were still wrong when they wrote: "Thanks in part to Kimberly's extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family's money."
Justin's $39K single income puts him in the 25% tax singles bracket and the 15% married-filing-jointly category. Their $67K income still puts them in the 15% bracket when you factor in their kids and their mortgage.
So, marriage decreased Justin's single marginal tax rate and had no effect on his married marginal tax rate. I don't have time to do the math to see if their overall taxes went up or down.
Again, the "marriage penalty" is really a "marriage bonus" for many couples.
I also question whether many two-income families really need two cars. If they work office jobs in the downtown of a major metropolitan area, a lot of them can take public transportation or find some other way to get to work. They choose to buy two cars because of the status and the convenience. But it's very expensive status and convenience.
The automobile can be an extremely useful tool. It can also be a trap. You buy a car because you "need" it for work. You work because you "need" to make the car payments. Anyone in a two-car family who is financially strained should take a long hard look at the expenses related to that second car to see if they are really worth it.
As to real estate taxes, in my area, homes are worth a lot more in areas with high school property tax rates than in places with low property tax rates. People want good schools, and they pay a premium for it. It goes against the libertarian model, but here, high property taxes increase property values.
Families who can afford to move to high tax/high service communities. Families who can't afford the high tax/high service communities live in low tax/low service communities. (I realize that the calculation is different for empty nesters and the elderly.)
I'd love to see how people got to the 33% or 34% total figure for a family with kids.
Caluclation:
$67,000 income
$10,300 standard deduction
$13,200 in exemptions
Taxable income: $43,500
Tax $5,766
$2,000 in child tax credits
Again, this is a quick calculation, and I wouldn't sign that tax return under penalty of perjury without checking it again, but I have to get to work.