THINKING ABOUT THE “MARRIAGE PENALTY”

President’s Advisory Panel on Federal Tax Reform

March 23, 2005

James AlmAndrew Young School of Policy Studies

Georgia State University

Overview: Who is the “individual” in the individual income tax?

• What Is The “Marriage Penalty”?

• Why Does It Arise?

• How Big Is It?

• Why Does It Matter?

• Do Other Countries Have A Marriage Penalty?

• Can It Be Reduced Or Eliminated?

What Is The “Marriage Penalty”?

• A “marriage penalty” exists when the income taxes of two individuals as a married couple are greater than their combined taxes as singles.

• There can also be a “marriage bonus”, if the income taxes of the married couple are lower than their combined taxes as singles.

Example: Marriage Penalty

As Single Taxpayers (2001):Individual Income Individual Tax$30,000 $3,383$30,000 $3,383 $6,766

As Married Taxpayers:Joint Income Joint Tax$60,000 $7,172 Marriage Penalty $406 (=7,172-6,766)

Example: Marriage Bonus

As Single Taxpayers (2001):Individual Income Individual Tax$0 $0 $60,000 $11,198 $11,198

As Married Taxpayers:Joint Income Joint Tax$60,000 $7,172 Marriage Bonus -$4,026 (=7,172-11,198)

Why Does It Arise?

• The quick answer:Because the family is the “unit of taxation” in a progressive individual income tax that allows income splitting of a married couple.

• A more complicated answer:Because the individual income tax imposes taxes based on family income, and imposes different marginal tax rates at different levels of income.

Why Does It Arise?• An even more complicated answer:

Because there are multiple, and conflicting, goals in the individual income tax:– Progressivity: Marginal tax rates should increase with income.– Equal Treatment of Married Couples: Married couples with equal

incomes should be taxed equally.– Equal Payments for Married and Single Taxpayers: A single

individual should pay the same taxes as a married couple with equal income.

– Marriage Neutrality: Taxes should not change with marriage.

• And there are many other programs in the tax and transfer system that create marriage penalties and bonuses.

How Big Is It?• Feenberg and Rosen (1995):

– 51 percent of married couples paid an average marriage penalty of $1,200, 38 percent received an average marriage subsidy of $1,400, and 11 percent were unaffected. Couples more likely to incur a marriage penalty are those with two earners with similar incomes.

• Alm and Whittington (1996):– 57 percent of married couples paid a marriage penalty of $1,200, 30 percent received a

marriage bonus of $1,100, and 13 percent were unaffected. Couples more likely to incur a marriage penalty are those with two earners with similar incomes.

• CBO (1997):– 42 percent of married couples paid a marriage penalty of $1,400, 51 percent received a

marriage bonus of $1,300, and 6 percent were unaffected. Couples more likely to incur a marriage penalty are those with two earners with similar incomes, and those with higher combined incomes.

• OTA (1999):– 48 percent of married couples paid a marriage penalty of $1,100, 41 percent received a

marriage bonus of $1,300, and 11 percent were unaffected. Couples more likely to incur a marriage penalty are those with two earners, and those with higher combined incomes.

Why Does It Matter?• There is evidence that individuals respond to

the marriage penalty/bonus:– In the decision to stay single versus to marry.– In the decision to cohabitate versus to marry.– In the decision to marry versus to divorce.– In the timing of the decision to marry.– In the labor supply decision.

• Even so, most of these responses are generally small, and taxes do not appear to be the driving force in marital decisions.

Why Does It Matter?• The marriage penalty introduces large,

variable and capricious inequities due to unequal treatment of taxpayers based solely on their marital status:– Between married couples with one earner and those with

two earners.– Between married couples and cohabiting couples.– Between married couples and single households.– Between married couples and “extended” households.

• And the marriage penalty affects revenues.

Do Other Countries Have A Marriage Penalty?

• International practice is varied.• Among the 32 OECD countries (for 2002),

the dominant practice is:– The use of progressive marginal tax rates.– The choice of the individual, not the family, as the unit

of taxation.• Joint filing is required in 7 countries, and is allowed in 6.• The individual is the required unit in the remaining countries.• Since 1970, 7 countries have moved from joint taxation to

individual taxation.

Can It Be Reduced Or Eliminated?

• Reducing or eliminating the marriage penalty requires eliminating one of the conditions that cause the penalty:– Imposing the tax on family income– Imposing the tax at progressive rates

• Recent tax changes (EGTRRA 2001 and JGTRRA 2003) reduce the marriage penalty for most households – but keep the marriage bonus by (among other things):– Increasing the standard deduction for married couples to double

that of singles– Increasing the width of the 10 and 15 percent brackets for married

couples to twice that of singles– Raising the EITC phaseout point for married couples.

Marriage Penalties and Bonuses in 2004

As Single Taxpayers (2004):Individual Income Individual Tax$30,000 $2,950$30,000 $2,950 $5,900

As Married Taxpayers:Joint Income Joint Tax$60,000 $5,900 Zero Marriage Penalty or Bonus

Marriage Penalties and Bonuses in 2004

As Single Taxpayers (2004):Individual Income Individual Tax$0 $0 $60,000 $9,750 $9,750

As Married Taxpayers:Joint Income Joint Tax$60,000 $5,900 Marriage Bonus - $3,850 (5,900-9,750)

Household Income = $30,000

($7,000)($6,000)($5,000)($4,000)($3,000)($2,000)($1,000)

$0$1,000$2,000$3,000$4,000

$0 $3,000 $6,000 $9,000 $12,000 $15,000

Secondary Earner's Wages

(Subsid

y)

Penalty

Old Law

EGTRRA

MARRIAGE PENALTIES/SUBSIDIES UNDER PRIOR 2001 TAX LAW AND EGTRRA FOR A MARRIED COUPLE WITH TWO CHILDREN (Carasso and Steuerle 2002)

Household Income = $60,000

($7,000)($6,000)($5,000)($4,000)($3,000)($2,000)($1,000)

$0$1,000$2,000$3,000$4,000

$0 $6,000 $12,000 $18,000 $24,000 $30,000

Secondary Earner's Wages

(Subsid

y)

Penalty

Old Law

EGTRRA

Some Piecemeal Reform Options

• Increase the standard deduction for married couples.

• Expand the tax brackets facing married couples.• Reinstitute the secondary earner deduction.• Expand the phase-out range of the EITC.• Flatten overall rate structures.• Allow optional individual filing.• Require individual filing – restore the individual

as the unit of taxation.

Some Fundamental Reform Options

• Eliminate progressivity – make the individual income tax a flat rate tax.

• Eliminate the individual income tax and replace it with a national sales tax or a VAT.

• But: There would still be marriage penalties and bonuses throughout other parts of the tax and transfer system.