Wives' Tale: The "marriage penalty" taxes women for working, not wedding
The Boston Globe , April 09, 2003
Every April 15 inevitably brings complaints about the "marriage penalty." From the kind of talk that surrounds the issue, especially the pronouncements of conservatives, you'd think the penalty was a plot to encourage couples to live in sin.
"For no other reason than the decision to be joined in holy matrimony, more than 21 million couples a year are penalized. They pay more than they would if they were single," says Rep. Jim Gibbons (R-Nev.) on his Web site.
"The marriage tax penalty is an immoral tax that punishes couples who choose marriage over unmarried cohabitation," declared Caleb Kershner of the National Center for Home Education last summer, when the House passed a bill that would make permanent the temporary marriage-penalty relief included in the 2001 tax law.
But the penalty isn't a plot or even a conscious policy. It's a quirk in the tax code that comes from years of tinkering aimed at achieving contradictory goals. And, contrary to the usual political rhetoric, it's not really a "marriage" penalty at all. It's a tax on married women who work, especially those with high incomes.
Though the 2001 tax cut alleviates it somewhat, the penalty hasn't disappeared. "There are over 50 items in the income tax code--and over 1,000 sprinkled throughout federal laws--that create marriage penalties or bonuses," says James Alm, an economist at the Andrew Young School of Policy Studies at Georgia State University.
The marriage penalty occurs primarily when combining their incomes pushes a couple into a higher tax bracket than either would face as a single earner. For example, if a single man and woman each have a taxable income of $30,000 a year, under current law they'll pay a total of $8,784 in federal income taxes. After the wedding, however, that total rises to $9,906--a marriage penalty of $1,122.
By contrast, if one person has a high income and the other has a low income, or none at all, chances are they'll save taxes by marrying. (To do your own estimates, use the TurboTax marriage penalty calculator at www.turbotax.com.) In the 1999 tax year, the most recent for which an estimate is available, about 48 percent of couples filing joint returns paid marriage penalties averaging $1,141. A lucky 41 percent got marriage bonuses averaging $1,274.
How did marriage and taxes form their unholy union? As public-finance economists point out, most Americans want the tax system to do three things: to be progressive, to treat households with the same incomes equally, and to treat all individuals with the same incomes equally, whether or not they're married.
The problem is, we can have any two of those things at the same time, but not all three. No matter how often politicians and various interest groups suggest otherwise, no technical fix can eliminate the marriage penalty while preserving progressive taxation and "horizontal equity."
Once upon a time, when the income tax was new, individuals were taxed as individuals. When you got married, you didn't have to tell the feds. That's still the case in much of Europe.
But in the 1920s and 1930s, savvy taxpayers in community-property states like California, where family law treats a married couple's income as belonging to both spouses equally, figured out that they could save on taxes by dividing their household income down the middle and having each spouse report half. Since in most cases, the wife earned much less than the husband, the result was to slash the amount of federal tax due from married couples. Federal courts upheld the income splitting.
By the end of World War II, other states were feeling intense pressure to adopt community-property laws to save their residents federal taxes, even though that would mean overturning long legal traditions governing marriage and divorce. To avoid that prospect, in 1948 Congress revised the tax code, allowing all couples to split their income in half for tax purposes.
The new law created the joint return-and a big tax bonus for many married couples. No one was paying a marriage penalty yet, but the tax code was no longer neutral with regards to marital status.
By the late 1960s, however, the growing number of single taxpayers started to notice that they were getting the shaft. Just because a young man had no stay-at-home wife to split his income with, why should he pay a higher tax than a married colleague making the same income?
So in 1969 Congress changed the tax law again, declaring that a single person's tax liability couldn't be more than 120 percent of that paid by a couple with the same income.
"I think there's a false impression among the population that Congress needed some revenue, so they decided to tax marriage," says Daniel Feenberg, a research associate at the National Bureau of Economic Research. "But they didn't do it deliberately." Rather, the marriage penalty emerged from the combination of progressive taxation, using families rather than individuals as the unit of taxation, and trying to still give singles a break. Over the years, it got worse because of inflation-induced "bracket creep," and social changes-more single taxpayers, more working wives making higher salaries.
Various tax bills have tinkered with the treatment of marriage since then. But the greatest change occurred as a side effect of the 1986 Tax Reform Act, which left only two tax brackets, 15 percent and 28 percent. This change demonstrated the greatest effect of the marriage penalty: Far more than men or single women, married women act like supply-siders. Cut their marginal tax rates, and they get jobs. Raise them, and they stay home.
Before the 1986 tax reform, those women in the 99th percentile of family income (the top 1 percent) paid on average about 52 cents in income taxes on the first dollar they earned, including state, federal, and Social Security taxes. Depending on where she lived, if such a wife herself earned less than $30,000 a year, she could have paid in taxes as much as 70 cents of the first dollar she earned--a discouraging prospect.
After the 1986 law flattened federal rates, the average marginal tax rate faced by such married women dropped to 38 percent, and they began going to work in dramatically higher numbers. According to a 1995 study by the economist Nada Eissa of the University of California, Berkeley, the percentage of top-income married women who worked jumped from 46 percent to 55 percent-a 19 percent increase. Those who already had jobs increased their hours by 13 percent.
Eissa then compared the behavior of women in the 75th percentile, who were subject to the same broad cultural trends but got a much smaller tax cut. Their labor force participation and hours worked also rose, but by significantly less--a 7 percent jump in those working and a 9 percent increase in hours worked.
Since 1986, the tax code has grown more progressive, most dramatically when the 1993 Clinton tax bill raised the top rate to 39 percent. At the same time, the number of working married women has continued to grow, a long-term social trend that has had as great, and in some cases greater, effect on the marriage penalty as any tax revisions.
"Rising employment rates of women affect the marriage tax cost directly by raising family income but also by altering the distribution of earnings in the family," write Eissa and fellow economist Hilary Williamson Hoynes of the University of California, Davis, in a 2000 article in National Tax Journal. The number of families in which the wife earns less than a quarter of family income has dropped, while the number in which the wife is the primary earner or earns between one-quarter and one-half the total is rising. As Eissa and Hoynes point out, the latter two groups are the most heavily taxed by the federal system.
Many labor economists have noted another striking change in family incomes over the past few decades: High-paid men no longer tend to be married to non-working or low-paid women. Instead, they're generally married to equally high-paid women. The result is rising inequality among households-and increasing marriage penalties.
In a progressive tax system like ours, taxing family income, rather than individual income, rewards spouses whose incomes vary widely and punishes couples in which each person earns roughly the same amount. By contrast, write Eissa and Hoynes, "Single-earner families receive the highest tax subsidies in the United States." From 1984 to 1997, they note, most tax-law revisions increased the benefits to these families. When Republicans rally the tax-cutting troops to reduce the marriage penalty, they always protect the bonuses for their traditionalist constituents.
But what about all the headlines declaring that the 2001 tax law eliminated the marriage penalty? Don't believe them.
The 2001 law gradually doubles the standard deduction for married couples, making it equal to twice that of single taxpayers. It also doubles the income range to which the 15-percent bracket applies, so that couples in that bracket are taxed as though they were single.
These provisions lower the marriage penalty for moderate-income families, whose taxes fall mostly in the 15-percent bracket or lower, without reducing the marriage bonus for others. The law does much less to cut the penalty for those who are hit the hardest--dual-income couples in the top bracket. Even in its reformed version, the tax code is essentially saying that if one spouse can earn enough to hit the top bracket, the other should stay home.
The politics are understandable. Truly eliminating the marriage penalty, whether by flattening rates or taxing everyone as an individual regardless of marital status, would mean big tax cuts for high-income families--red meat for the people currently denouncing the Bush tax cuts as unduly slanted toward the rich. Just as controversially, these measures would also mean eliminating the marriage bonus.
The penalty persists not only because Americans want contradictory things from the tax code but because the code's very distortions simultaneously serve two political constituencies: traditionalist conservatives who don't want married women to work, and redistributionist liberals who don't want them to earn too much money.