Keep Marital Status Out of the Tax Code

Congressional Republicans claim that the income tax system is unfair because it penalizes married couples. President Clinton claims that congressional efforts to eliminate the marriage penalty would give a windfall to married couples who are not now penalized. Who is right? Both are, and there is a solution that addresses both problems.

Two features of the tax code create the puzzle. First, our progressive tax system taxes income at increasing marginal rates. For example, a single person pays 15% tax on his or her first chunk of taxable income, 28% tax on the next chunk and 31% on the following chunk. The income cut-off points that divide the marginal tax rates are higher for couples than for singles, but they are less than twice as high.

Second, the standard deduction allows taxpayers to exclude a certain amount of income from taxable income. The standard deduction is higher for married couples than for singles, but not twice as high.

The system leads to two inequities. If a person with income marries a person with no income (or one who drops out of the work force), the couple pays less in taxes than the income earner would pay as a single. The couple has the same income as the income-earner would have had as a single, but they enjoy a larger standard deduction and higher tax-rate cut-off points than the income earner would alone. This is the marriage bonus.

If two people with identical amounts of income get married, they pay more together than they would as singles. The couple’s joint income is twice as high as either spouse’s income would have been as a single, but the couple does not enjoy twice the standard deduction or tax-rate cutoffs of a single person. This is the marriage penalty.

Congressional Republicans basically want to raise the standard deduction and tax-rate cut-off points for couples to twice the level of singles. Doing so would eliminate the marriage penalty but increase the marriage bonus for single-earner couples.

Equity demands that taxes not depend on whether or not one chooses to marry. The current system makes marriage a tax benefit for some and tax penalty for others. The Republican solution solves one side of the problem but makes the other worse.

Both problems could be solved, and the tax code thus made “marriage neutral,” with a very simple plan: Each spouse’s income is taxed at the same marginal rate at which it would be taxed if he or she were single.

This is the way the tax code used to be structured, prior to the advent of the joint tax return after World War II. Two singles who marry would pay precisely the same tax after getting married as before--no penalty, no bonus. Nearly everyone would agree that it would be grossly inequitable if employers determined a worker’s salary based on his or her marital status. Why should the same principle not apply when the government sets the rate at which that salary is taxed?

Singles might argue the result is unfair to them, because the costs of maintaining a household for two are not usually twice as high as maintaining a household for one. This problem could be addressed directly by giving a single person a standard deduction that is somewhat more generous than the deduction that couples enjoy (as the current system already does). Consequently, a person’s tax rate would not be so affected by marital status.

A person’s standard deduction, however--which is intended to exempt from taxation the money necessary for basic necessities--would be affected by marriage, as well it should, because marriage affects the cost of those basic necessities.

It should be noted that there is no possible tax system invulnerable to all charges of inequity. Under the proposal offered here, a married couple in which one spouse earns all the income would be taxed at a higher rate than a married couple with the same total income split equally between the two spouses.

But this plan eliminates the problem of tax status being based on the very personal decision of whether to marry.