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

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Politicians often stress that marriage is a key institution that promotes family values. However, many aspects of the federal tax code do not promote marriage and may in fact provide disincentives and penalize marriage. As more women enter the labor force and female wages rise, the marriage penalty becomes increasingly important to horizontal tax equity concerns and for economic growth. Today, the United States is one of only seven Organisation for Economic Co-operation and Development (OECD) countries to employ joint taxation for married couples.1

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Severely Outdated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.
  • Although married individuals have the option of filing separate tax returns, filing under the tax status “married filing separately” imposes limits on tax deductions, narrower tax brackets and higher marginal tax rates.
  • The system forces many two-worker couples to choose between getting or staying married and having lower household income, or cohabitating or divorcing and having more take-home pay.
  • Marriage penalties are regressive, with the effect of joint-filing tax penalties highest on those with the low to middle incomes for which spouses incomes are roughly equal.
  •  Low-income families receiving the Earned Income Tax Credit are hardest hit. The EITC provides tax breaks to working lower-income taxpayers based on the number of qualified children, and is phased-out as household income rises.
  • Two non-married workers receiving the EITC could actually see their after-tax income decrease if they married.

Horizontal Inequity

The marriage penalty creates unfairness among households with the same income.

  •  For many middle-class families, the tax brackets for married couples filing jointly for any given tax rate is roughly twice the amount as a non-married worker.
  •  A single-earner household with an annual income of $60,000 could receive a $3,465 marriage bonus using the standard deduction, while a two-earner household with annual incomes of $30,000 each could receive a marriage penalty of $1,083.

Conclusion

  •  Current tax policies related to marriage highlight the need for fundamental reform of the outdated, overly complex, inefficient, and inequitable tax code that hinders economic growth, diversity, and competitiveness.
  •  These policies also highlight the problems inherent in Washington’s attempts at social engineering through the tax code.
  • The Bush 2003 tax cuts lessened the penalty for marriage, but didn’t fully “fix” the problem—but these cuts are set to expire at the end of 2012.
  • An ideal tax code would be completely neutral with respect to marriage.
  •  At a minimum, married taxpayers should be given the choice to file as married or single; this would eliminate the marriage penalty and end the tension between financial wealth and marital status.

* See table (p.7) comparing the effects of various proposals on tax liabilities of couples under current law, mandatory single filing (authors recommend this), and 50-50 income split. This table’s numbers are up-to-date using 2012 IRS tax rates.

Read the working paper as a PDF