Overtaxing the Working Family: Uncle Sam and the Childcare Squeeze

INTRODUCTIONThe 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.9Childcare expenses represent one of the highest household costs incurred by young families in the United States.10 Moreover, although middle-3. 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.16This Article argues that §§ 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 children19 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 §§ 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. …