Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse cares for two children and if employed would earn $20 per hour for 40 hours per week.The total cost of child care would be $15 per hour for 40 hours per week.Assume that child care is NOT tax deductible and that child care at home is NOT imputed and taxed.Assume that the spouse is indifferent between working and staying at home except for the financial impact.What would be the marginal tax rate such that the spouse is indifferent between entering the labor force and providing child care at home?

Question

Quizplus · Accepted Answer

The spouse would earn $800 per week ($20/hour * 40 hours) and pay $600 per week for child care ($15/hour * 40 hours), resulting in a net gain of $200 per week from working. To be indifferent between working and staying home, the entire $200 gain would need to be taken away by taxes, which is 25% of the $800 earned ($200 is 25% of $800).

Suppose That the Spouse of the Primary Earner in the Household