WSJ Article

The Two-Income Tax Trap
By TODD J. ZYWICKI
August 14, 2007; Page A17

Non-business bankruptcy filings in the United States quintupled during the 1980s and 1990s, to over 1.5 million annually by 2004 from 300,000 in 1980. To address the problem of soaring bankruptcy filings during this period of unprecedented prosperity, two years ago Congress enacted comprehensive, bipartisan bankruptcy reform legislation.
[Two-Income Tax Trap]

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 tightened bankruptcy laws to weed out chronic problems of fraud and abuse -- and to restore public confidence in the integrity of the bankruptcy system. Since that time, bankruptcy filings have plummeted to about half of their prior levels, and reports indicate that the law is having few unintended consequences of interfering with the needs of legitimate, good-faith filers.

The reasons for the rapid rise in filings, as well as for BAPCPA's effectiveness, remain unclear. The most plausible explanation for the rise seems to be a change in legal rules, social norms and the economics of consumer credit that increased the advantages of filing for bankruptcy. At least some of these factors were reversed by BAPCPA.

Scholars on the left, however, have argued the recent drop is temporary and that rising bankruptcies will result from new stresses on American households, such as those posed by rising health-care costs and higher mortgage payments for increasingly expensive homes. These new expenses strain the family budget, leaving less discretionary income available to save and to meet other household expenses, and forcing mothers into the workforce. Despite the apparent prosperity of American families over the past several decades and the presence of two regular incomes, American households, on this view, are in a more precarious situation than ever before.

The argument is developed in the book, "The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke," by Harvard Law School Professor Elizabeth Warren and her daughter Amelia Tyagi. In fact, using their own numbers, it is evident that they have overlooked the most important contributor to the purported household budget crunch -- taxes.

Ms. Warren and Ms. Tyagi compare two middle-class families: an average family in the 1970s versus the 2000s (all dollar values are inflation-adjusted). The typical 1970s family is headed by a working father and a stay-at-home mother with two children. The father's income is $38,700, out of which came $5,310 in mortgage payments, $5,140 a year on car expenses, $1,030 on health insurance, and income taxes "which claim 24% of [the father's] income," leaving $17,834, or about $1,500 per month in "discretionary income" for all other expenses, such as food, clothing, utilities and savings.

The typical 2000s family has two working parents and a higher income of $67,800, an increase of 75% over the 1970s family. But their expenses have also risen: The mortgage payment increases to $9,000, the additional car raises the family obligation to $8,000, and more expensive health insurance premiums cost $1,650. A new expense of full-time daycare so the mother can work is estimated at $9,670. Mother's income bumps the family into a higher tax bracket, so that "the government takes 33% of the family's money." In the end, despite the dramatic increase in family income, the family is left with $17,045 in "discretionary income," less than the earlier generation.

The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars. Nor do they ever present the actual dollar value for taxes anywhere in the book. So to conduct an "apples to apples" comparison of all expenses, I converted the tax obligations in the example from percentages to actual dollars.

In fact, for the typical 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 is $22,374.

Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086 -- a whopping 140% increase. The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods.

During this period, the figures used by Ms. Warren and Ms. Tyagi indicate that annual mortgage obligations increased by $3,690, automobile obligations by $2,860 and health insurance payments by $620 (a total increase of $7,170). Those increases are not trivial -- but they are swamped by the increase in tax obligations. To put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage payments and almost double the increase in the mortgage and automobile payments combined. Even the new expenditure on child care is about a quarter less than the increase in taxes.

Overall, the typical family in the 2000s pays substantially more in taxes than the combined expenses of their mortgage, automobile and health insurance. And the change in the tax obligation between the two periods is substantially greater than the change in mortgage, automobile expenses and health-insurance costs combined.

This suggests that the most important change in the balance sheets of middle-class households over the past three decades is a dramatically higher tax burden caused by the progressive nature of the American tax system. In turn it follows that the most effective way of alleviating the household budget crunch would be to adopt lower and flatter tax rates that would reduce the government's take. Another possibility, advocated by Prof. Edward J. McCaffery of the University of Southern California Law School, would eliminate the "secondary earner bias" in the tax system, which causes all of the wife's income to effectively be taxed at a much higher marginal tax rate than the husband's. Any of these reforms seem sensible.

Lower and flatter marginal tax rates generally are not advocated by those who dominate the American legal academy today. But for those who want to consider serious strategies for preventing bankruptcies, less money in Uncle Sam's pockets may mean more money in ours.

Mr. Zywicki is a professor of law at George Mason University and author of a book on consumer bankruptcy and consumer lending, forthcoming from Yale University Press.

For a long time, I have thought that the rise in both partents needing to work was caused by taxes, not inflation.  

I also notice that they do not address other taxes that are now in effect, that weren't back in the 70's.  Back in the 70s, sales taxes were low to non-existent.  Now, they are approaching 10%.  Also "sin" taxes were low too.  

Essentially that is what is being stated in this article.

The 1970's single income family actually had more discretionary income than the dual income family of 2000.  

The mortgage, auto expense and health care combined are less (%-wise) in 2000 than they were in 1970.

The point of this article is that the dual income family is required because of the increase of taxation from 1970 to 2000.

No surprise

The liberals want your wife or "life partner" to work.

This way, they can spend more time with your kids to properly "educate" them.

So where is all this money going exactly?

Quoted: So where is all this money going exactly?

More and more wonderful government.  Think of the wonderful programs that have been created in the last 30 years.  They never just go away.  They always get bigger

EPA enlarged
Osha enlarged
DOE created
DOEducation created

The list goes on.  

Quoted: No surprise The liberals want your wife or "life partner" to work. This way, they can spend more time with your kids to properly "educate" them.

  Gosh you make it sound like the govt wants marxism.  

Quoted: So where is all this money going exactly?

According to the breakdowns that I've seen... 50% (approx.) of all local, state and federal taxes collected, go to transfer payments of some type or another.

In other words... welfare.

When, as another poster stated, you figure in the constantly rising expense of .gov bureaucracy...?

No wonder it's getting tougher to make ends meet.

I make more than my parents did... and yet, even with a live-in girlfriend who works and pays half the bills, I have a harder time making it from paycheck to paycheck than they did.

EVERYONE I work with, that has a wife and kids, works AT LEAST 2 jobs. God forbid, they get hurt at work (a very real possibility in our profession-firefighter), and can't work on the side...

some very good men could be facing the very real possibility of losing their homes.



As a wise man once said...

Something's gotta give...

In fact, for the typical 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 is $22,374

This is the part I don't buy. Those may be the average "marginal" tax rates, but average couples don't pay 33% of their income in taxes, at least not federal taxes. They only pay 33% of additional dollars earned. This doesn't take into account deductions, and lower tax rates on the initial thousands of their earnings.

Top marginal tax rates and overall family tax burdens were slashed by Reagan and to a lesser extent by Bush. I would never want a return of the 1970 (Carter) tax rates.