The Nanny Tax and the Miracle of Government Loaves

Before it descends into utter madness, Leslie Forde’s Slate article on Nanny pay opens with a good story:

“I’m sorry … but I can’t,” she told me over the phone. My heart sank. I was confident she’d take the job. Quickly, I went into negotiation mode, “But wait, can we talk about the pay? Do you need more to … ” She said no before I could finish. “I just can’t take a job (that pays) over the table. It’ll mess up my housing. I won’t be able to stay in my apartment. I’m sorry. I’ve already taken another job.” I ended the call. …my entire career was at risk because I couldn’t find a nanny—at least, one willing to be paid legally.

It’s estimated that less than 10 percent of 2 million domestic workers and the families who employ them pay employment taxes.

From that opening I was expecting the author to explain that nannies aren’t willing to work on the books because at the bottom of the income scale income is taxed twice–first by Federal and State direct taxes and second indirectly because higher income causes workers to lose benefits. As a result of this double taxation, in some states it’s possible for poor workers to face effective marginal tax rates above 100 percent. If you had to pay to work, would you work?

High marginal taxes rates on the poor are a problem. We ought to be able to agree on that, even if we disagree on proposals to address the problem such as a universal basic income or a negative income tax. But in Forde’s magical world, up is down and down is up and the problem is that taxes on the poor are too low. But not to worry because this presents a hidden opportunity!

There is, however, a hidden opportunity to provide help to our caregivers and the families who employ them. Right now, these under-the-table arrangements are creating a “tax gap”—billions of dollars in additional funding that would be available to support caregivers, if the majority of families and their caregivers paid into the system.

Did you get that? If nannies were taxed the government would have more money to provide nannies with benefits. Wait, it gets worse. According to Forde, we can make both families and nannies better off by giving them back the money the government takes and still have money left over!

The estimated “gap” from the lost tax revenue is a combination of the federal and state employment taxes typically paid by employees (Social Security, Medicare, and income taxes) and employers (in addition to Social Security and Medicare, they must pay federal and state unemployment taxes.) Imagine if just a portion of this revenue were used to reimburse families for more of their child care expenses and to provide caregivers access to better benefits than they get currently with their under-the-table jobs. (italics added, AT)

Indeed, wouldn’t it be nice to live in a world of pure imagination? One without tradeoffs. Where we could rely on the miracle of government loaves to solve all problems?

Comments

Something like 80% of working Americans pay more in payroll taxes than in income taxes. Indeed, the Reagan payroll tax increase, phased in over many years, has raised almost $3 trillion more in social security taxes than has been paid out in social security benefits. Where is the $3 trillion? It's been spent, on everything from farm subsidies to wars. Indeed, the additional payroll tax collections helped offset the income tax cuts for the wealthiest Americans, and in many cases resulted in the wealthiest Americans paying a lower tax rate than the poorest Americans. Not only that, but the higher payroll taxes turned ordinary working Americans into tax protestors, providing political support for "tax cuts" that had nothing to do with payroll taxes. For most people, "taxes" are the amounts withheld from their pay checks, and when they hear promises of "tax cuts", they don't make distinctions between payroll taxes and income taxes. Indeed, Republicans use the confusion by claiming that the wealthiest Americans bear the burden of most "taxes" and that low income Americans pay hardly any "taxes". Tabarrok isn't that cynical. Not quite, anyway.

Catch 23. Joseph Heller couldn't have imagined.

You missed several class war tax travesties. The low-to-moderate income pay disproportionately higher beer/whiskey, cigarette, gasoline, and sales, and state lottery taxes.

But payroll taxes aren't among them -- low-to-median income workers get back more in SS and Medicare benefits than they paid in payroll taxes. They are net beneficiaries.

Middle to high income workers get back even more because they live longer. Who will repay the $3 trillion "borrowed" from payroll tax collections? It won't be repaid; how could it be, since the latest round of income tax cuts has created deficits as far as the eye can see. What is more likely is another large payroll tax increase to "save" social security, generating another "surplus" of payroll tax collections over benefits paid that partly offsets the tax "deferral" passed by the Republican Congress and President. Deferral? Deficit-funded tax cuts aren't tax cuts at all, they are merely tax deferrals. And who will get stuck with the taxes deferred? Ordinary American workers who pay payroll taxes.

Excellent. That is one alternative. Who knows if it will happen?

Interestingly, some foresee massive income tax rate increases eight to ten years in future because of the need to address the massive debt. It will be that or inflation (the cruelest tax of all). Note "will" not "could."

Regarding the Social Security Trust Fund and its excessive, risk concentration in nonmarket, UST bonds: the day the SSTF needs to make benefits payments from monies recovered from its UST bonds likely will spark The Fiscal Apocalypse.

Fiscal Apocalypse is ten years away -- and always will be.

I think its opening on the road in Venezuela.

It is a problem if you are Venezuela. I can not imagine it happening here (Brazil is welcoming tens of thousands of Venezuelan refugees and President Temer has officially refused calls to closing the border -- Brazil will help Venezuela to the last Venezuelan if necessary, contrast and compare with the richest country in history) or even in the United States.

"And who will get stuck with the taxes deferred? Ordinary American workers who pay payroll taxes."

Uh, no. We'll be damn lucky if payroll taxes ever get to the point of even covering SS and Medicare outlays -- there's no way in hell they'll ever be high enough above and beyond that to pay down any of the general debt.

Study after study find that the top .01% evade roughly one-third of the taxes they owe. Evade, not avoid, evade being the Al Capone version of tax planning.

If they evade the taxes they don't owe them in the first place. So says the Supreme Court. I suspect, therefore, that the studies you refer to (but don't cite to, hint, hint) do not find what you think they find.

>state lottery taxes

Probably the most Orwellian phrase you will read today.

But not definitely.

"80% of working Americans pay more in payroll taxes than in income taxes."

This should not happen. Everyone should pay taxes, everyone should pay taxes on their income just as everyone who works should pay their payroll taxes (SS). THAT is the problem, not the other way around.

The concept of "double taxation" is understandable. But in fact when an employer hires and employee he pays his share of the payroll taxes and considers it part of the full cost of that employee. That means you, as an employee, are actually paying the employers share of the payroll taxes too just as a self employed person pays the full amount of payroll taxes.

This could be fixed. Everyone who hires an employee under the table could be discovered and fined for this illegal act and everyone who works under the table could be outed and fined for back taxes due. I could identify 90% of the employers and employees committing this crime with a simple program that correlated the Social Security data with the Internal Revenue data. If the government want me to I will write the program for free.

Those under the table payments don’t show up in the IRS

Well... yes and no. Many employers try to take labor as a tax deduction. So you kick out every employer with tax deductions for labor without corresponding payroll deductions. Additionally put serious penalties in place for employers who hire workers without paying payroll taxes.

Second, require everyone collecting any form of welfare to affirm under oath that they did not work for wages (or receive any income) that is not reported on their taxes. Penalize anyone who lies on the form by suspending their benefits for a year.

If people are being paid under the table the employers are not taking any tax deductions for them. Most welfare programs already do require recipients to report any income they receive under penalty of perjury. The problem is that it is very, very easy to hide such income.

In fact contractors who are most likely to hire temp workers under the table always take the deduction. It is called casual labor. There are limits on how much you can take for each use of casual labor so they claim multiple uses of casual labor all within that limit. That should be a red flag.

There is no specific affirmative document that welfare recipients must sign under penalty of perjury. That is what is needed so that the case would be prosecutable and safe from being overturned in an appeal.

People who employ nannies, legal or illegal, can't take deductions on their payroll. Nannies are household employees, not employees of a business, and the compensation is a consumption expense, not a business expense.

Though considering that the parents would have to make less money taking care of their own kids, and considering that government relies upon having future generations of taxpayers, perhaps child care should be at least partially deductible.

Re: There is no specific affirmative document that welfare recipients must sign under penalty of perjury.

I am currently receiving unemployment benefits; Weekly I have to report any work-related earnings. While I do not sign a physical document, I do attest on an online firm that my statements are true "under penalty of perjury".

I guarantee that Leslie Forde could have gotten any of the nannies she interviewed to work for her. How? By offering them enough money to make up for what they'd lose in benefits. And if that was too expensive, she could have done what millions of other American families do -- namely daycare, rather than a nanny. And in that scenario the good news for her is that workers in child daycare centers are W2 employees who aren't paid off the books.

I love her 'solution' too -- the tax money paid by the nannies ought to be rebated right back to the nannies and families that hire them so that, in the end, it wouldn't actually cost people like Leslie Forde any more than paying under the table. That way, she could be above board and feel good about herself, but also still get the off-the-books discount nanny price!

Calling Dean Baker.

The housing benefit complicates that. There can be wait lists that make taking a job or better paying job very risky. The wait between being eligible for a benefit and getting it can make people very conservative.

Agree entirely. Offering overtime isn't a benefit. It's the law. My guess is that Leslie wanted to walk away paying about $2K for the nanny. It's a $35,000-$45,000 a year job, depending on what your kid situation is. That's what we paid, and when we didn't want to afford it any longer, we paid her two month's severance and put our kid in daycare. Nannies are a luxury.

I wish Leslie had something to say about the shortage of affordable daycare in this country, since that's a problem that is both economically complex and affects a wide swatch of people.

Some single mothers with children collect $70,000 a year in benefits. It's hard to compete with the government. The market for nannies isn't well paying enough to get whole families off of government help.

No, people do not collect 70,000 a year off welfare. The only way you can get that much is if you have a serious healthcare event that Medicaid pays for-- but that money goes to the healthcare providers not the Medicaid patient. Otherewise the above statement is pure disinformatisiya, a myth out about by the Randian right.

I am talking about the pretax income you would have to generate to replace the lost benefits, including Medicaid for the adult and all the children - not the amount of cash and services actually received. In high-cost areas the $70,000 number is correct.

Bingo. Payroll taxes are highest for the lowest-paid workers, but those workers collect the most relative to their "contributions" to Social Security and Medicare. The proper way to fix it is to pay both the employer's and employee's side of the costs.

If you're hiring someone to be an alternate parent to your children, you should treat that person fairly. If you want to do it under the table, you're part of the problem. You encourage the perpetuation of an underclass, and you undervalue the responsibility that person assumes.

In our family, we stopped paying contractors, of any kind, under the table many years ago. We won't collect any more from Social Security for it, but we don't want to be part of the problem. And crap like this is part of the problem.

We clearly need to "invest" more in the nanny infrastructure so it can "pay for itself."

Great point. Won't someone think of the "crumbling" nannies?

A pigouvian tax on journalists would be welfare improving.

I worked in small-scale construction in NYC many years ago and everyone needed to get paid off the books because they all had some kind of government benefit that they would lose if they got paid officially.

cf all my old comments calling for wage subsidy

Working should be encouraged, not discouraged.

"Where we could rely on the miracle of government loaves to solve all problems? "

yawn. this has long been the dominant view of the American government apparatus and both major political parties.

"There oughta be a law" (government action) is the constantly trumpeted solution to all problems big & small at every level of government. They never learn.

And government enthusiasts always want more revenue to the government. Current and past taxing/debt levels are never enough -- the government must always extract more from the citizens for its miraculous good works.

The leftish mindset is truly a semi-religious mysticism, believing that "government" embodies superior wisdom & powers beyond the reach of ordinary humans.
Pick your favorite American liberal/progressive/neocon/etc public figure/pundit -- they are all delusional.

Just think of taxation as legal mugging. The Left is made up of all those that are unhappy because they want stuff that other people have. The Right is mainly made up of those who are happy enough with what they have.

This is usually expressed in terms of the poor and the rich but it isn't. After all a British person explained to me once that tax cuts for the poor were bad because the money did not stay with the right poor people. If the money was taxed, it could be redistributed to the truly deserving. That is, his friends and fellow leftists.

So ultimate it is a question of Cosmic Justice. It is unfair that uncultured buffoonish characters like Trump (or all too often the Leftist's father) have money while truly deserving people like Philosophy majors do not. Justice demands an endless quest to take money from those who created it and give it to those that deserve it.

Who would have thought?

Tax/welfare incentives are reasons multi-generational low-to-moderate income people don't become doctors, engineers, college valedictorians or Nobel Prize recipients.

Have you considered running for president? This is the reason for increased income inequality; it's plain as day; and nobody in public life will say it.

Your critique of the author’s math is spot on, as ate your comments about over taxation of the poor. But there is a legitimate tax equity issue here for families. Business owners can deduct the entire cost of an employee from their taxes. Families cannot. I employ a nanny over the table, pay all employment taxes, and comply with other workplace laws to help ensure her well being. But through current tax code, no more than $6,000 of that cost can be covered through write offs or tax advantaged funds. Why should I be treated differently than other employers in this respect?

Businesses can deduct virtually all of their expenses -- buildings, vehicles, equipment, maintenance, travel, heat and electricity...and labor. Do you think you and other families should be able deduct all those expenses, too, and pay taxes every year on the money that you don't happen to spend?

No, but they should be able to deduce in full, up to a reasonably high limit, the expenses that are there to allow them to work, since properly speaking they are not net income. It is already the case in principle, but the limits are ridiculously low. Essentially, you can deduce up to $3,000 for child care per year for one child, and $6,000 for two or more kids. Even if you are poor and not demanding, you certainly can't hire a nanny for a year and pay her or him $3,000 ! And even in the cheapest area, a full-time daycare is much more than $3,000 a year.

The limit should be something like $15,000 per child at the very minimum.

The limits probably should be higher. But nowhere near $15K per child. We do not need to provide tax breaks to cover the full cost of nannys for the wealthy. The average cost of full-time daycare in the U.S. is $9500. And keep in mind that full-time care is needed only during preschool years. It probably would be reasonable offer a higher credit for children younger than 5 but cut it back once they reach school age.

Businesses are allowed to deduct expenses necessary for them to produce a profit, I doubt your child is a requirement for your job.

'Businesses are allowed to deduct expenses necessary for them to produce a profit'

Along with the expenses that cause them to lose money,

It's not an argument I am very persuaded by, but I can see how someone would argue that nannies are a "necessary business expense" so that they are able to go to work, especially for women.

I guess the Tesla or F-150 that you use to commute to work is a “necessary business expense” then, especially for men.

Why would I care if the nanny pays income taxes? They are a contractor doing a service. I pay the fee and the nanny has to deal with the tax implications as a self employed contractor.

The way it'd be figured in tax theory, if you need to free up your time like that to work to make money, you should instead be hiring someone else (who doesn't need a nanny) to do that job. Otherwise you're paying yourself more than is justified as a biz expense, and the difference would be a gift. Of course there are plenty of businesses, mostly non-profits, where salaries & benefits are paid in great excess of their biz value.

How much is "necessary business expense" and how much is "consumption"? Getting a nanny who will teach your kids Mandarin is a consumption expense.

Honest accounting question: if a business offers daycare to their employees, how is that handled wrt taxes?

What world is this, where minimum wage workers pay 100% income tax?
Oh, as the link helpfully suggests, the world where their TANF, SNAP and Medicaid benefits are cut off when they start to work.

But yeah man, the problem is tax rates.

Yes, that's called the effective marginal tax rate. And indeed it is the problem. here

Except there isn't any problem.
Marginal means just that, the tax on that last portion.
Even paying 100% on the amount over the cliff leaves the nanny better off than she was.
She was just being illiterate for thinking otherwise.

Just possibly, she understands her situation better than you do.

But even the essay says she herself thought she would make more money by working rather than not.
She just didn't want to pay taxes, which, um, isn't really a shocking development.

There isn't really any way for someone to make less money working, even factoring in taxes, than relying on government assistance.

Chip gets it.

When we pay people good money not to work, and then wonder why they don't work, it becomes necessary to argue that when they start to earn money by working, we still have to also get them the money we would have paid them to not work.

If you are a leftist, this is the only reasonable solution to the "problem."

Or, just spitballing here, we create jobs that pay enough to make the loss of benefits irrelevant.
Or for that matter, institute a UBI.
Or if we truly value work, eliminate taxes for labor, and increase them on finance.

Or we weigh the over-under incentives on benefits. I worked years in a low-paid career but derived satisfaction from my work, which even in retrospect I believe of value. I like a lot of coffee and sometimes a lot of wine; with a UBI, it's possible (unlikely, but still) that I'd come to like a lot of meth or fentanyl.

As to finance, you and Bernie need to wake up. The industry is in decline. If you want to collect real taxes, go after Larry, Sergey, Mark, Jeff and the next 200 names on the list.

we create jobs that pay enough to make the loss of benefits irrelevant.

Sounds great sitting around an air conditioned office arguing for what other people should do.

Doesn't sound so great if your skills are only good enough at the moment to get a $11/hour job that becomes $8/hour after taxes and you would lose $6/hour in benefits and $1/hour in commuting costs.

Yeah, you are slightly better off with the money, but not working at all is the easy choice there.

You can pretend that it's the responsibility of employers "to create jobs that pay more" but they are going to hire people with more skills if they up the rate. If you require everyone to pay $30,000 for a car you don't have Corollas worth $30,000. You have Corollas unsold while people buy Cascadas instead. If you don't like seeing cheap cars on the road that's a win. If you were trying to improve the lives of the Corollas you massively failed.

If those are really the dismal choices, we should celebrate that these people have the freedom not to work.

Rationally it should be the other way around, where we concntrate on making goods & services so cheap that everyone can afford them.

You only see the dismal choices because you refuse to see the rational undismal ones.

You can insist it's great to have a bunch of people not working. That will be great until the people supporting this system decide they are sick of it. Cliché as it is, assuming that the people will never rebel against your social reconstruction because you've mathematically proven it's the best is how we got Trump or Brexit. A UBI is extremely fragile. Once someone doesn't work for several years, it's super difficult to get them back into the job market.

In the last few weeks I have read news articles that have said

1) That the American birthrate is in a long-term state of decline,
2) That Americans should have more children so as to pay for old people's Social Security and Medicare,
3) That a serious percentage of jobs -- up to 40 percent -- will be eliminated as AI and robotics replace workers, and
4) That today the country has 6.6 million unfilled jobs, enough for every unemployed individual in the country and then some.

I don't understand what is happening here.

"Before it descends into utter madness..."

Why read Slate? You can just avoid that descent into madness.

Of course, that's how extremists (religious, ideological, etc.) achieve purity of thought: don't allow contrary views. What's most impressive about Cowen is that he shares with his blog posts and links a wide variety of views.

So should Cowen also watch Fox news and read Alex Jones and share those views here as well?

I particularly like clever contrarian views that I disagree with. But what I've read of Slate is neither clever nor contrarian.

The last article I read from Slate explained how everyone who voted for the other guy is absolutely horrible and our blanket bigotry towards them is the correct approach.

Maybe reading that will help me avoid purity of thought and extremism?

This is a post by Alex Tabarrok, not Cowen, FYI.

You're right. I didn't check. I just went off the comment I was replying to.

Cowen is the contrarian, not Tabarrok; Tabarrok is as predictable as yesterday's weather. That's not a criticism of Tabarrok; as with order and stability, there are benefits to predictability. This past week I read an interesting piece on whether it's the fly or the honey that converges ideology and money. The piece argues that it's the fly; and since flies are drawn to their own kind, that makes sense.

Didn't we learn all this when Slick Willie was trying to fill the post off AG and couldn't at first find a senior Democrat woman lawyer who didn't employ illegal or untaxed nannies? Wasn't that why he eventually hired that very tall, childless woman - her name escapes me - who eventually had all those poor souls massacred at Waco?

My god in government has to tax u and kill u to signal how much I care about u.

Janet Reno. She's also the one who sent in the SWAT team to seize 5 year old Elian Gonzales and deport him back to Cuba - there is a very memorable photo.

https://iconicphotos.wordpress.com/2010/07/14/elian-gonzalez-affair/

The camera ever lies but it is indeed a stunning photo. Thank you.

In this instance was Ms Reno doing anything other than enforcing the law of the land?

IIRC there was disputed about that. The kids mom died during the Cuba to Florida trip, the maternal grandparents in Fla claimed him, the dad in Cuba claimed him. Reno sent him back.

According to all the hysterical, ignorant stuff I've seen by Americans on the recent Alfie Evans case, the father's word must under all circumstances trump all else. So back to Cuba it had to be.

If I understand it, Forde's solution is exactly the same as would occur if the government passed a law that exempted nannies and their employers from employment and income taxes. So why didn't she propose that rather than the round-about method?t

Because if the money is touch by the magic hand of government, its purchasing power doubles and it goes to all the right people.

Admittedly, there's some iffy reasoning in the piece, but I don't think you're characterizing it correctly.

The argument is that, so long as domestic workers are mostly in the informal sector, it's difficult to improve their treatment (on issues like harassment, etc.)

Bringing them into the formal sector means taxes, which is why most have stayed in the informal sector, so the point of the "imagine if just a portion..." quote you mock is intended as a rejoinder to the claim that formalization will never happen because of the tax implications. This isn't a "free lunch" or "government loaves" argument.

The argument has a sound structure:
1) Nannies pursue informal employment because of the ridiculous effective marginal tax rate on many people in that demographic (esp. benefits phase-outs)
2) Because nannies are informally employed, they're easy to exploit (perhaps as a libertarian you think that workplace protections are a bad idea in the first place, but even so, it's not clear why we should think that it's good to leave only nannies in a position without effective protections).
3) Bringing nannies into the formal sector will generate new tax revenue. If, tomorrow, this suddenly happened for no reason, then Congress would direct that money elsewhere and use the sudden windfall to, say, buy new toys for the Pentagon. This would leave the nannies *worse* off than they are now.
4) So, for those concerned about nannies, the correct step is to formalize them (bringing all of the ancillary benefits thereof) and then rebate the new tax revenue back to them directly or indirectly.

There are perfectly valid reasons to disagree with the argument, but it's certainly not ridiculous.

Yes. There’s plenty to criticize without stopping to straw man. Don’t know why you would do that.

We don't have to tax labor, at least at the low end.

We could even subsidize labor at the low end. It would still cost money, but possibly less than paying full freight on a welfare state for everyone whose labor is priced below the floor today.

If Leslie Ford gave her children the "high quality care" she says they deserve by the simple expedient of caring for them directly (instead of trying to get someone else to do it), then Leslie Ford would have no occasion to write incoherent screeds about raising taxes on caregivers so the government can rebate a fraction of the tax money to caregivers to lessen the impact of taxes on them.

Ford is not just a maroon, she is a schnorrer. If you read her article carefully, she actually wants to raise taxes on those who make less than she does to fund tax rebates to herself.

You expect a "journalist" at Slate, or for that matter many other media outlets, to understand math or logic? Journalists only understand one thing - their political agenda and they shape articles to fit that agenda no matter what.

AT gets it exactly right (again!)! Instead of complaining about people who work in the informal economy and don't pay their fair share of taxes; we should first consider the other side: maybe income taxes are too high (putting aside Nozick's irrefutable (to me) argument that income taxes are a form of slave labor).

This a phony argument as noted. The left wants to unionize nannies and have them pay dues to kick back money to the democratic party. This is what is happening in Illinois.

You can pay a nanny legally if you provide them with housing in addition to the other pay. Anyone who can afford a nanny should have at least one or two extra wings in their mansion for this purpose.

Tax discussions are as rational as those on guns and abortion...everyone brings his own *facts*.

I believe part of the problem is that low paid workers undervalue the benefit of SS contributions. When the government will provide $0.9 in income on each dollar taxed (at 12.4%), it's a benefit not a tax. Some of them may not be long term participants in the SS system of course. I don't see what the problem really is though. If the nanny wants to participate in SS, she can make both contributions herself. That's what a self-employed person should be doing.

“It’ll mess up my housing”

A Malthusian low-reported-income-level equilibrium trap, (involving other people’s kids).

I did chuckle at "pure imagination".

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