Each year, more and more married couples have to
pay a "marriage penalty"--extra federal income taxes that they
would not pay as single adults--and each year the calls for
marriage penalty relief grow in strength and popularity, both in
Congress and across the nation. Last year, Congress
took action to end this pernicious and unfair part of the tax code
by passing the Marriage Penalty Tax Relief Act of 2000 (H.R. 6) by
a vote of 269-159 in the House and 61-38 in the Senate. Though
President Bill Clinton vetoed the measure, the 270-158 vote in the
House to override his veto showed strong bipartisan support for
eliminating the marriage penalty.
HOW THE MARRIAGE PENALTY WORKS
A
marriage penalty occurs when the total tax paid by a married couple
exceeds the sum that they would pay if each filed as a single
taxpayer. In other words, two unmarried working taxpayers who live
together would have a lower total tax bite than they would if they
married and filed a joint return. Couples are more likely to be
affected by the marriage penalty when they both work and the second
earner contributes at least 30 percent of the total income.
Each
year, more couples are affected by the marriage penalty because of
the steady growth in the number of dual-earner families. In 1995,
the Congressional Budget Office estimated that 42 percent of all
couples suffered the penalty. This year, the
estimate is over 43 percent.
The
demographics of couples who suffer a marriage penalty have changed
as well. In 1998, for the first time since the Census Bureau began
recording such information, the majority of married couples with
children were dual earners. Because they have
children, these couples face additional marriage penalties in the
form of lower tax credits and exemptions such as the child tax
credit or the EITC. Thus, they not only pay a penalty for being
married, but also have this penalty compounded by having
children.
The
majority of marriage penalties are caused by the fact that the tax
code treats married couples differently from two single adults in
four distinct areas: (1) rate brackets, (2) amount of standard
deduction, (3) phase-out levels, and (4) EITC eligibility. While
there are other areas in the tax code that treat married couples
unfairly, these four areas have the largest effect on their
taxes.
WAYS TO END THE MARRIAGE PENALTY
President George W. Bush campaigned on the
need to enact a comprehensive tax cut to give back to Americans
part of the overtax they now pay, and reducing the marriage penalty
was a prominent part of his proposal. On February 9, 2001, the
President sent Congress a plan to cut taxes by $1.6 trillion over
10 years, which included marriage penalty relief in the form of a
dual-earner deduction. All married couples who report taxable
income on separate W-2 forms--in other words, who have two wage or
salaried jobs--could claim this deduction. The deduction would
equal 10 percent of the lesser-earning spouse's salary, up to a
maximum of $3,000. The Joint Committee on Taxation estimates that
the savings for married working households from this deduction
would be $88 billion over 10 years.
Though implementing such a change in
current tax law would be a step in the right direction, however, it
would do nothing to remedy the marriage penalties inherent in the
tax code. It would merely bandage over differences in brackets,
standard deductions, phase-outs, and so forth by providing married
taxpayers with an offsetting deduction.
Congress's effort last year to end the
marriage penalty is a better approach. The reasons: The
congressional plan would attempt to fix some of the basic
second-earner inequities in the tax code, and the President's
proposal would add to the code's complexity.
H.R.
6, the Marriage Penalty and Family Tax Relief Act of 2001, was
introduced in the 107th Congress on March 15, 2001, by
Representative Jerry Weller (R-IL). It also would take a strong
step toward fundamental tax reform by addressing the penalty in the
standard deduction and reducing the penalty that emerges from
differences in marginal rates, but it could be improved so that it
addresses all aspects of the marriage penalty.
The Standard Deduction
For
tax year 2000, the standard deduction is $7,350 for joint filers
and $4,400 for single filers. If two single taxpayers who use the
standard deduction on their individual returns were to marry and
use the joint filer standard deduction, they would have to pay
taxes on the difference between these standard deductions.
In
other words, the standard deduction for two single working adults
is $8,800, while married taxpayers (or joint filers) can claim a
standard deduction of only $7,350. This leaves a taxable difference
of $1,450. For a couple in the 15 percent tax bracket, this
difference creates a tax penalty of over $217.50.
How to Fix the Penalty in the Standard
Deduction. Congress should renew its effort of last year by
immediately increasing the standard deduction for joint filers to
equal twice that of single filers. This would eliminate the bias
against married couples who do not itemize on their tax returns.
The staff of the Joint Committee on Taxation estimates that the
savings to married couples would be more than $66 billion over 10
years.
Rate Brackets
Millions of married taxpayers pay a
penalty because the tax brackets of joint filers are not equal to
twice that of single filers. In tax year 2000, a single filer would
enter the 28 percent bracket at $26,250 of taxable income. A
married couple pays the 28 percent marginal tax rate at
$43,850.
Thus, married couples pay the 28 percent
marginal tax rate on an extra $8,650 of income simply because they
file jointly. In contrast, two single filers living in the same
household would be able to pay the 15 percent tax on up to $52,500
of their taxable incomes. In other words, married taxpayers with
taxable income in the 28 percent bracket must pay a penalty of
$1,124.50 more than what two single taxpayers pay. This tax penalty
equals the amount the average married couple spent on gas in
1999.
How to Fix the Penalty in Marginal Tax
Rates. Congress should increase all of the marginal rate
brackets of joint filers to equal twice that of single filers. This
would eliminate the penalty in the tax brackets for married
couples. At a minimum, Congress should renew its effort of last
year and double the first bracket of 15 percent as quickly as
possible for joint filers.
Phase-Out Rates
Married taxpayers also pay higher federal
income taxes because the phase-out rates of several income tax
provisions are not twice those of single filers. Many elements of
the tax code, such as personal exemptions or some deductions, are
gradually eliminated as income rises. A marriage penalty occurs
when the elimination or phase-out range for married couples who
file jointly is lower than it would be if the married couple were
made up of two single filers.
One
example of this inequity is the child tax credit enacted in 1997.
The value of the tax credit for single filers with an eligible
child begins to phase out at $75,000. However, joint filers with an
eligible child see a reduction in the value of the child tax credit
at $110,000.
Another example is the difference in the
taxation of Social Security benefits for seniors. Up to 85 percent
of Social Security is taxable if a married couple's modified gross
income exceeds $44,000. For single filers, however, the threshold
for the 85 percent rate is only $34,000--well over half of the
joint filer threshold.
How to Fix Penalties in Phase-Out
Rates. Congress should set phase-out levels for married couples
at twice those of single filers. This is especially important for
provisions in the tax code that concern children. As long as the
tax code contains credits and exemptions, parents should not lose
them simply because they are married. Congress should correct the
current bias against married couples in these types of exemptions
and credits and also make any phase-outs for married couples in
future tax legislation twice those available to single filers.
Earned Income Tax Credit
The
tax code also penalizes hundreds of thousands of low-income working
families just for being married. The earned income tax credit is a
wage subsidy operated out of the tax code as a spending provision.
Since the EITC's phase-out is based on the combined income of a
married couple, two low-income married wage earners have their
payments reduced at a faster rate than they would if they were
single.
The
problem is that the EITC is based on the number of children and
income rather than on marital status. Thus, if two single parents
who benefit from the EITC marry each other, their benefits almost
always will be reduced based on their combined income.
This
reduction creates an obvious incentive for the couple to remain
single. For example, if two single parents each making $13,000 have
one child, their EITC benefit in 2000 would be well over $2,000
each. But if they marry, their combined EITC payments would decline
from over $4,000 to just over $1,000. Their decision to marry would
cost them over $3,000--more than 10 percent of the total family
income.
How to Fix the Penalty in the EITC.
Congress should extend the phase-out of the EITC for married
families. Moreover, it should phase out the credit for married
couples at a lower level than it does for single parents. It is
essential for Congress to ensure that low-income families do not
lose their EITC benefits simply because they are married.
CONCLUSION
The
tax code should treat all taxpayers fairly and equally. Couples
should not be forced to pay more taxes simply because they change
their marital status. Indeed, the correct way to end the marriage
penalty would be to ensure that married couples are treated as two
comparable single filers.
Increasing the joint standard deduction,
marginal tax brackets, and phase-outs in the current tax code to
twice those of single filers would make the tax code more
equitable. Modifying the phase-out rate of the EITC so that couples
do not see their benefits reduced by marriage would remove the
incentive for low-income parents to remain unmarried.
Finally, new solutions to the marriage
penalty problems in tax law must not further complicate the already
cumbersome and complex code. Income splitting would add complexity,
since married couples would have to compute their taxes at least
two different ways and assign different economic assets to each
spouse. A dual-earner deduction would require taxpayers to complete
yet another line on their tax form.
Congress and the President have the will,
the opportunity, and the means to make the code fairer. It is time
to do so.
Rea S.
Hederman, Jr., is a Policy Analyst in and Manager of
Operations for the Center for Data Analysis at The Heritage
Foundation.