Taxing Marriage: Microeconomic Behavioral Responses to the Marriage Penalty and Reforms for the 21st Century

Jason J. Fichtner, Jacob Feldman | Sep 17, 2012

Key Issues Covered:

  • Taxes: Extenders, Fairness, Skewed Incentives, Need for Fundamental Reform
  • Jobs, Economic Competitiveness and Diversity
  • Social Consequences: Dis-incentivizing Marriage, Incentivizing Cohabitation, Divorce—particularly among low-income

Summary:

Academic research suggests that a successful revenue system should be simple, equitable, efficient, and predictable. But as the coming “taxmageddon”—or the expiration of a host of long-standing ‘temporary’ tax laws—underscores, the current tax code fails on all counts. By severely distorting market decisions and the allocation of resources, it also impedes both potential economic growth and potential tax revenue.

Among the tax laws set to expire at the end of the year is the ‘fix’ (or the “marriage tax credit”) applied in 2003 to the tax provisions related to marriage. This working paper examines the effects of the joint-income filing requirement (and the “marriage tax penalty” it imposes), and weighs potential long-term solutions.

Key Points:

The joint-income filing requirement imposes significant financial penalties on two-earner married couples, discouraging both marriage and work.

Severely Outdated

  • The current marriage tax laws are holdovers from when men worked and women stayed home. They reflect the consequences of Congress’ long-standing failure to reform the tax code.
  • The percentage of households with two earners has increased from 34 percent to 77 percent over the past 40 years.
  • The code penalizes stay-at-home spouses from entering the workforce or returning to work.
  • While a single person entering the workforce would pay a 10-percent tax rate on their first dollar earned, a married person entering the workforce would face a 25-percent tax rate if their spouse has $60,000 of taxable income.
  • The code actually incentivizes non-working spouses to stay home and not work because of the “marriage bonus.”
  • Women are most often impacted—marriage tax penalties discourage working women from getting married; marriage tax penalties and bonuses discourage married women from working.