The House and Senate tax-writing committees will
try again this year to develop legislation to reform the marriage
penalty in the tax code. The challenge is to craft a measure that
Congress can pass and the President can sign. Last year, President
Bill Clinton vetoed the Taxpayer Refund and Relief Act, which
contained $117 billion in marriage penalty relief over the next 10
years. The veto forced about 25 million working families to pay
more in income taxes because of the marriage penalty, and it
perpetuated the troubling second-earner bias forcing lower earning
spouses to see their pay frequently taxed at higher rates than the
income of their higher earning spouses.
This
Report contains new estimates of the number of couples in
each congressional district and state who pay some form of the
marriage penalty in 2000. (See table.) These
estimates are based on data from the 1999 March Current Population
Survey and cover all combinations of the three most frequent
reasons that marriage penalties arise:
-
Married taxpayers who qualify for the
Earned Income Tax Credit (EITC) see that credit phase out more
quickly than if they had applied for it as single taxpayers.
-
Married taxpayers who do not itemize claim
a standard deduction that is less than twice the standard deduction
for single taxpayers.
- The taxable income threshold for the 28
percent tax rate (and all rates above 28 percent) is less than
twice that of single taxpayers, which means that the income of the
lower earning married worker frequently is taxed at a marginal rate
that is higher than that of the higher earning spouse.
WHAT IS THE
MARRIAGE PENALTY?
The
marriage penalty stems from the federal government's effort to do
three things: 1) tax equal-earning couples at the same rate, 2) tax
them at progressive marginal tax rates, and 3) recognize the
economic benefits of marriage by requiring married couples to file
their taxes on a schedule of tax rates that treats them less
favorably than it does single taxpayers. As the Congressional
Budget Office notes, "The incompatibility of those three
goals...results in continuing tension within the tax code." This
tension in the tax code harms the pocketbooks of American families
and the institution of marriage, and has significant implications
for the economic and cultural health of the nation.
The
marriage penalty is arguably the most significant of the biases
affecting the secondary earner (the spouse with the lower income).
As two prominent tax economists have observed, "the basic source of
the marriage tax is the fact that key elements of the tax law
depend on an individual's family situation, including the rate
schedule, the standard deduction, and the earned income tax credit.
Hence, the act of getting married per se affects individuals' tax
liabilities, even if their work and saving decisions stay the
same."
In
most cases, federal income tax laws require that married couples
file joint tax returns based on the combined income of husband and
wife. When a husband and wife both work, the secondary earner is,
in effect, taxed at the top rate of the primary earner. As a
consequence, a married couple may pay more taxes than they would if
each spouse were taxed as a single wage earner.
According to the Congressional Budget
Office, an estimated 42 percent of married couples incurred a
marriage penalty in 1996: "more than 21 million married couples
paid an average of nearly $1400 in additional taxes in 1996 because
they must file jointly." Most severely affected by
the marriage penalty were couples with a more equal division of
income between husband and wife and those who receive EITC
benefits. Essentially, Americans with the lowest incomes and
families dependent on two wage earners shoulder the largest
marriage penalty burdens under the current tax policy.
Consider what happens to two
$30,000-a-year wage earners who decide to marry. As a single
individual, a $30,000-a-year wage earner would pay $3,000 in taxes.
The principle of marriage neutrality would mean that when a
$30,000-a-year wage earner marries another $30,000-a-year wage
earner, the couple's tax liability should be $6,000. Under the
current joint filing schedule, however, this married couple--that
now earns a total of $60,000--owes $8,400 in tax per year, a $2,400
penalty for marrying each other.
According to the ideal of marriage
neutrality, tax burdens should not be altered when two people
decide to marry. However, the goal of progressive taxation is
violated under such circumstances.
Progressivity states that a person (or, under today's joint filing
requirement, a combination thereof) who has twice the income of
another would pay more than twice in taxes. The current tax system
sides with the ideal of progressive taxation and punishes
hardworking Americans.
THE EFFECT ON
THE NATION
The
marriage penalty can have significantly negative economic
implications for the country as a whole. Not only does this feature
of the tax system stand as a likely obstacle to marriage, it can
actually discourage a spouse from entering the workforce. Edward
McCaffery, a law professor at the University of Southern California
has said that: "By adding together husband and wife under the rate
schedule, tax laws both encourage families to identify a primary
and secondary worker and then place an extra burden on the
secondary worker because her wages come on top of the primary
earner's. The secondary earner is on the margin."
As
the American family realizes lower income levels, the nation
realizes lower economic output. From a strictly economic
standpoint, the fact that potential workers would avoid the labor
force as a result of peculiarities in the tax code is a clear sign
of a failure to maximize eligible resources. As a result, the
nation as a whole fails to reach its economic potential, which is
demonstrated by decreased earnings, output, and international
competitiveness.
METHODOLOGY
This
analysis estimates the number of married taxpayers who are affected
by marriage penalties in the tax code that stem from the standard
deduction, taxable income thresholds for marginal tax rates, and
the phase-out structure of the Earned Income Tax Credit (EITC). The
vast majority of couples that we estimate to be affected by a
marriage penalty are two-earner families in which the secondary
earner's wages are a significant portion of a family's income and
taxed at a higher marginal rate. Readers should note that these
incidence estimates cannot be directly employed to estimate the
dollar amount of penalty per family due to differences in the
marginal rate structure and the EITC.
We
employed the March 1999 Current Population Survey, which contains
1998 income and demographic data, to determine the number and type
of families that suffer the marriage penalty in each state. We then
used the most recent IRS Public Use File to determine the
percentage of families in each tax bracket that typically use the
standard deduction instead of itemizing their taxes.
We
assumed that married taxpayers will incur a marriage penalty if
they had two earners in a tax bracket that is higher than 15
percent or if they were likely to use the standard deduction in the
15 percent bracket. We also assumed that married families receiving
the EITC suffer a penalty due to the steeper phase-out of the
credit for married taxpayers than for single taxpayers. Eligibility
for the EITC is determined on the qualifying income of the
taxpayers. The phase-out range for married taxpayers is less than
twice that of two single taxpayers. Readers should note that the
number of families who do not currently receive the EITC but would
if they were both single was not used in this analysis.
The
estimated percentage of families suffering a penalty at the
congressional district level was derived from the 1990 Census
updated to the 104th Congress. The percentage of families likely to
suffer a penalty was held constant for families in 1998. The
overall number of families affected in 1998 is based on U.S.
Treasury estimates of 25 million.
William W.
Beach is Director of the Center for Data Analysis at The
Heritage Foundation, and Rea S.
Hederman, Jr. is a Policy Analyst in the Center.