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Two-Income "Trap", aka the Government Trap

Todd Zywicki has a nice post on the The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke by Professor Elizabeth Warren and Amelia Warren Tyagi. 

In his writings on the tactics for engineering the communist state, Karl Marx talked a lot about the need to "proletarianize the middle class."  This has been a very popular tactic among leftish writers and politicians today, attempting to convince the middle class that they never had it so bad.

I won't repeat Zywicki's whole post, but the books author's argument revolve around examples which purport to show that as families go from one to two earners, their costs (health care, child care, cars, mortgage, etc.) go up by more than the additional income, making them poorer on a discretionary spending basis.

Zywicki first points out the same thing I immediately thought of when I read a summary of the 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.

While the assumption seems crazy, it makes sense in the context of leftish ideology, which holds that the middle class have only limited free will and tend to have their decision making corrupted by advertising and other corporate pressures.

But Zywicki goes further, and actually digs into the author's numbers.  He finds that the authors are surprisingly coy about addressing changes in taxation in their numbers.   Zywicki then uses the authors' own numbers, this time with taxes factored in using the authors' own assumptions, and gets these two charts:
Toddtwo_income_3 Toddtwo_income_4

As Zywicki summarizes:

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.

Posted on April 28, 2008 at 11:17 AM | Permalink

Comments

I have a sort of hard time believing that a married couple with a mortgage and kids are managing to lose 34% of their income to taxes. I'm married, the only wage-earner, with a mortgage and one kid, and last year my liability came up to something like 11% of my gross income. I did spend about 8% of my gross on charitable giving, and I know there are other things like property tax and such, but I don't see how I could ever get to 34%.

Posted by: Matthew | Apr 28, 2008 12:05:27 PM

Actually, I'm surprised it isn't higher. Matthew, have you considered FICA, Medicare, Property Tax, Personal Property Tax, Sales Taxes, all the assorted garbage taxes and fees tacked on to utility and phone bills, etc.,? Income tax is not the major hit until you get into higher income brackets.

The others just nibble away, bit by bit, consuming ever increasing amounts of the economy.

Posted by: Bill | Apr 28, 2008 12:54:56 PM

My guess would have been that it was around 50% but I still think 34% is too high. I like it when the socialists talk about the "tragedy" of having to have 2 people working to make ends meet. Their solution is always to take more taxes just to give them back as "services". My suggestion is that leaving the people with more of their own money by reducing taxes gives them the option to spend money on only services they want. Usually I get the silent look with the occasional eye blink. It makes me wonder why they would ever start such an easy argument to foil.

For the record, I have a friend that jumped from industry to industry just long enough to get bushwacked when the industry tanked, (think internet, Mortgages, company sales, downsizing, etc...)it happend about every 18 months that he found himself without a job. It really started to take a bite out of his savings and I suggested that he drop the cell phone, cable tv, & start bringing his lunch to work. He told me flat out that these were not things he could part with. One has got to wonder when factoring in the "sadness" that society should have about the state of "disposable" income when people, when faced with choices, refuse to make them correctly. He could easily have cut back, maybe bought a used car instead of a new one, and never taken a hit to his savings but something was getting in the way of that. As for me, except for the tax bite, I don't put too much weight behind the, "look how much better things were in the 1970's" (or earlier) crowd. People make their choices and live their lives and what they do is their business alone.

Posted by: tim | Apr 28, 2008 3:17:36 PM

One of his commenters remarked
"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." In Britain the Conservatives got rid of that trap back in the 80s. The present Labour government has started edging it back in through a system of "tax credits". I conclude that your US right-wing party isn't right-wing enough.

Posted by: dearieme | Apr 28, 2008 3:41:51 PM

"If a wife goes to work, all of her income is taxed at the marginal rate..."

That would only be true if the man were getting paid weekly/biweekly/monthly and the wife was getting all of her remuneration at the end of the year. Otherwise, the respective earnings contribute equally to the aggregate income as the tax year progresses. I've seen that argument propounded by feminist idiots many times, but like most of their pablum, it isn't true.

Posted by: skh.pcola | Apr 29, 2008 8:29:05 AM

skh, tax rates are computed based on the year end total income rather than week-to-week. If you compare the taxes for an income of $N versus an income of $N + $M (with $M smaller than $N), the change will be exactly as if the tax rate for the $M started at the highest rate of the taxes on the $N. You can quibble all you want about how to "assign" which taxes come out of $N and which $M, but the net effect is going to be exactly the same.

(Of course, the assumption that it is the wife who wouldn't work if the family had only one income is sexist, as is the assumption that the wife wouldn't make enough to push the joint income into a new tax bracket... making this seem like an odd argument for a feminist to take up!)


Posted by: Sol | Apr 30, 2008 2:21:18 AM

Sol, the vast majority of workers in the US have taxes taken out of their paychecks every pay period. The final tax liability may be dependent upon total yearly income, but the income taxes paid are spread over the year by each spouse. If both are working the full year and receiving paychecks on a regular basis, both arrive at the higheer marginal threshold at the same time. To use your argument that *any* income by the second spouse is completely taxed at the higher (or -est) rate is akin to saying that working 5 extra hours a week for the month of January pushes your entire year of taxable income into a higher marginal bracket...which it doesn't. The last half-week worked in December would do that. That might be a weak example. But still, the gains accrued to a working couple are greater than the costs incurred and even married couples are legally able to file separate tax forms, if that route would be more beneficial. Needless to say, it isn't.

Posted by: skh.pcola | Apr 30, 2008 2:52:44 PM

Consider this link to tax freedom day (which just happened)http://www.taxfoundation.org/news/show/52.html
They have a chart similar to the one here but expressed in days rather than dollars. . It's based on data from the Bureau of Economic Analysis

Posted by: Robert Durtschi | May 14, 2008 9:39:53 AM

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