Question

Suppose the spouse of the primary earner in the household is considering joining the labor force. The spouse currently cares for two children and, if employed, would earn $20 per hour for 40 hours per week. The cost of child care would be $10 per hour for 50 (not 40) hours per week. Assume that the marginal tax rate on work is 50%. Assume that child care is tax deductible and that child care at home is NOT imputed and taxed. What is the after-tax, after-child-care addition to family income of the spouse working each week?

Answer 1

Answer: -$100

Explanation:

Assuming that that child care is tax deductible and that child care at home is NOT imputed and taxed then we shall tax the earnings and deduct child care from it.

The couple makes $20 per week per 40 hour week.

= 20 * 40

= $800

Marginal tax rate is 50% so,

= 800 * 50%

= $400

After tax addition is $400

Childcare is $10 per hour for 50 (not 40) hours per week so,

= 10 * 50

= $500

After-Child-Care Contribution is,

= 400 - 500

= -$100

The after-tax, after-child-care addition to family income of the spouse working each week is -$100