There is a growing consensus in Congress that any tax bill this year should include elimination of the so-called marriage penalty. A marriage penalty exists when a two-earner married couple pay more federal income taxes than they would pay if each spouse were taxed on his or her individual income. Marriage penalties especially affect those whose incomes are roughly the same. Single-earner couples, by contrast, never pay a penalty and in fact usually receive a bonus from the tax code; that is, they pay less taxes by filing jointly than they would pay if taxed as singles.
The marriage penalty results primarily from progressivity of the tax code. In effect, the lower-paid spouse is taxed at the primary earner’s marginal tax rate. For example, if one spouse had taxable income of $40,000 per year, he or she would be taxed 15% on the first $25,350 of that income and 28% on the balance if taxed as a single. But if his or her spouse earned $20,000, they would be taxed at 28% on all their income.
Although there is general agreement on the goal of eliminating this penalty, there is none on the means. Initially, there was strong support for simply allowing couples to file jointly or singly, whichever way they came out ahead. Legislation to accomplish this has been introduced by Reps. Jerry Weller (R-Ill.) and David M. McIntosh (R-Ind.). Although conceptually simple, the Weller-McIntosh plan has two major drawbacks. First, it would reduce federal revenue by $29 billion per year. Second, it would require many married couples to do their taxes three times (each individually and as a couple) to see which way they pay less taxes. There also is the difficulty of dividing income from jointly owned investments and deductions accruing to both spouses, such as home mortgage interest.
These problems led to a second approach to addressing the marriage penalty. Rep. Wally Herger (R-Marysville) proposes allowing the lower-paid spouse an additional deduction of 10% of income up to $30,000, for a maximum deduction of $3,000. This replicates a provision of the tax law enacted in 1981 but repealed in 1986. It reduces the marriage penalty for all couples and eliminates it for many in a way that in practice is simpler and less costly than the Weller-McIntosh legislation. It is estimated that the Herger bill would lower federal revenue by about $9 billion per year.
Another approach has been put forward by Sen. Lauch Faircloth (R-N.C.). Not satisfied with simply eliminating the penalty, Faircloth wants to extend bonuses to all married couples by allowing couples to be taxed as if each spouse earned half of the joint income. Thus if one spouse earned $40,000 and the other earned $20,000, they would be taxed as if each were single and earned $30,000. The legislation--estimated to reduce federal revenue by $32 billion per year--is preferred by pro-family groups, which object to the other bills that target tax relief primarily at working women. They are concerned that this will encourage more women to work, thus weakening the family structure. Research confirms that the marriage penalty does discourage many women from working outside the home.
The effect of the Faircloth bill, however, will be to increase the tax subsidy to couples simply for being married, regardless of whether they have children. And it would sharply increase the disparity between the taxation of singles and of married couples with the same income. For example, under the Faircloth bill, a couple with a taxable income of $50,000 would pay 30% less than a single person with the same income even though they already pay 21% less under current law.
Faircloth would in effect abolish the joint tax schedule and replicate the tax situation from 1948 to 1969. It was changed because Congress thought it was unfair to tax singles so much more heavily than married couples. It was when Congress tried to fix this problem by lowering tax rates for singles that it created the marriage penalty.
It is not apparent what social benefit is achieved by subsidizing marriage per se. By contrast, there is a significant economic cost from the marriage penalty. This suggests that the Weller-McIntosh or Herger bills are better approaches. Those who are concerned about the impact of taxation on the family would do better to seek tax benefits for children rather than to target childless couples.