Last year at tax time, I asked whether my wife and I should stay married. As I noted then, the tax code says ‘no’ – being married cost us lots of money in additional taxes.
This year’s question is whether or not my wife should keep working.
The numbers in this analysis are heavily rounded for simplicity and anonymity. Taxes are (by far) our largest expense, but next year (with two young children), childcare will be next.
We made a lot of money last year. We’re not quite in the top 1%, but we’re close, with income of roughly $325k. My wife made the larger share of that amount (57%).
For 2011, we’ll pay a lot of taxes (Federal and DC) – rough $115k. Our average tax rate is about 35%.
If my wife wasn’t working, I’d pay a total of about $25k in taxes, making my average tax rate about 18%. Put differently, my wife working raises our tax bill by about $90k.
Having two kids with a nanny or in daycare would cost us roughly $50k after taxes (a nanny is a bit more expensive and day care is a bit less). At an average tax rate of 35%, we have to earn something close to $80k (pre-tax) to pay for childcare.
Adding up the additional taxes (90k) and childcare costs (80k) you get $170k of income that goes away.
My wife would make more than that next year, but she has to work a lot to make that money. At a certain point, her hourly wage becomes ridiculous. Therefore, it looks like the answer to the question of whether or not she should work is ‘no’. Obviously, this is a subjective decision. We’d make more money (and save more for retirement) if she keeps working. The returns on her working are just very low, given the amount of time she has to spend working. It looks like, for us, the returns are not worth the time and energy. This is too bad for the government, the nanny that we won’t hire, and the guy who we’ve kept half-employed doing work on our house.