The Marriage Penalty
A Disgrace to the Human Race
by
Micah Frankel
Associate Director, The Smith Center
In 1977, President Jimmy Carter, a proponent of social engineering and progressive tax rates, referred to the US tax code as a "disgrace to the human race." One of the consequences of social engineering and envy in our tax code is the marriage penalty, which requires two married wage earners to pay more in taxes as compared with two similarly situated single individuals. The higher tax burden resulting from filing jointly represents a penalty, which has the effect of increasing unmarried cohabitation, discouraging marriage, and hastening divorce. In sum, it is antifamily. As Justice John Marshall once stated "the power to tax is the power to destroy," marriages and families included.
In the United States, taxation is much more than just a means of raising revenue for the government. It is also one of the major means by which the federal government attempts to achieve various social and economic objectives. These include politically imposed "corrections of the distribution of income" achieved by transferring wealth from the productive to the unproductive, discouraging the wealthy from working or engaging in other productive activities, discouraging members of poor families from getting jobs, getting married or meeting their parental responsibilities, punishing certain productive activities (home offices), and encouraging unproductive ones (low-income housing tax-shelters).
Lawmakers recognize that taxes affect people's behavior. Along these lines, it is common for lawmakers to affect social engineering through the tax code. For example, deductions and tax credits are often enacted to encourage certain types of socially desirable behavior such as giving to government approved charities and building government approved low-income housing. Likewise, taxes are also used to discourage socially undesirable types of behavior. Examples include taxes on alcohol to discourage drinking and taxes on tobacco to discourage smoking.
Due to the marriage penalty, it is common for two-wage earners to postpone marriage (and just cohabitate) to avoid the penalty. Divorce lawyers have stated that it is not uncommon for two-wage earner couples to divorce as quickly as possible before the new tax year to avoid the marriage penalty. This significantly reduces the prospect of reconciliation and breaks up marriages that could have been saved. Certain taxpayers such as Angela and David Boyler, have even divorced at the end of the year and remarried at the start of the new year just to avoid the marriage penalty! In sum the marriage penalty has the effect of raising "revenue" for the government at the cost of increasing social instability.
A Brief History
The seeds for the marriage penalty were sown in 1948, when Congress enacted a joint filing status with a separate tax rate schedule in effort to establish equity between married taxpayers in common law states and those in community property states. Before 1948, all taxpayers filed individually, using the same graduated tax rate schedule. Couples in community property states had an advantage over couples in common law states because community state couples were allowed to split their income so that their total income would be taxed at lower marginal tax rates. That is, given the progressivity of marginal tax rates, when the community property state couple's income was split, a greater portion was taxed at the bottom (lower) marginal rates leading to a lower overall tax bill. Couples in common law states did not have this income splitting option, so their overall tax bill was up to 40 percent higher than similarly situated couples in community property states.
Congress designed the joint filing status to create a marriage bonus. As a result, a taxpayer filing individually could pay 42 percent more in taxes than a similarly situated couple filing jointly.
Twenty years later in an effort to quell the complaints of unmarried taxpayers, Congress passed the Tax Reform Act of 1969 with the goal of keeping single filer and joint filer rates within 20 percent of each other. To accomplish this, Congress set the standard deduction and bracket breakpoints for single filers at about 60 percent of those for joint filers. This created a marriage penalty for two-wage earner couples.
The sponsors of this Tax Act in Congress claimed that due to the economic benefits of marriage, married couples should be required to file their taxes on a schedule of tax rates that treats them less favorably than single tax payers. In sum, Congress intentionally created the marriage penalty to prevent a single-earner family from paying less in taxes than a single taxpayer with the same amount of income.
Of course in 1969, Federal government spending and taxation were much lower as compared with today and as a result dual wage earner families were not as common as they are today. Due to increased federal government consumption of the GDP and the taxes necessary to sustain it, double-income families are becoming the norm and consequently the marriage penalty is now affecting 25 million families.
The Causes of the Marriage Penalty
The marriage penalty is simply the excess amount of taxes that married individuals pay compared with two similarly situated single individuals. That is, the increase in a couple's taxes due to filing jointly as opposed to each spouse filing individually. It is primarily caused by three items (1) graduated marginal tax rates, (2) the standard deduction, and (3) tax deductions and credits that are income tested. These three items are explained below.
With graduated marginal tax rates, the more you earn, the higher the percentage of your earnings you pay in taxes. Married couples are subjected to higher marginal tax rates at lower income thresholds than are similarly situated unmarried individuals. For example, in 1998, the 28 percent tax bracket begins at $25,350 for single taxpayers and $42,350 for married couples. To eliminate the marriage penalty, the bracket should start at $50,700.
The standard deduction, which is set by Congress is a specified amount by which a taxpayer who does not itemize deductions may reduce his taxable income. By design, the standard deduction for a married couple filing jointly is considerably less than for two single taxpayers. To be marriage-neutral, the standard deduction for married couples should be double the standard deduction for single individuals.
Many tax deductions and credits are income-tested. If you earn more than the threshold amounts you lose your eligibility for these deductions and credits. Similar to the standard deduction, the threshold amounts for a married couple filing jointly is considerably less than for two single taxpayers. For example, with the Roth IRA, the phase-out takes effect at a $95,000 income level for single taxpayers. To be marriage-neutral, the phase-out should take effect at double the income for married taxpayers, or $190,000. But it begins to bite at $150,000.
A Numerical Example
A simple example taken from the Congressional Budget Office (CBO) illustrates the effects of the standard deduction and graduated tax rates on the marriage penalty.
The Jackson Family: Married versus Single
| Jessie | Jackie | Total (unmarried) Filing Separately | Combined, Filing Jointly | |
| Adjusted Gross Income | $37,500 | $37,500 | $75,000 | $75,000 |
| Less personal exemptions | ($2,550) | ($2,550) | $5,100 | $5,100 |
| Less standard deduction | ($4,000) | ($4,000) | $8,000 | $6,700 |
| Taxable income | $30,950 | $30,950 | $61,900 | $63,200 |
| Taxable at 15 percent | $24,000 | $24,000 | $48,000 | $40,100 |
| Taxable at 28 percent | $6,950 | $6,950 | $13,900 | $23,100 |
| Tax Liability | $5,546 | $5,546 | $11,092 | $12,483 |
| Marriage Penalty | $1,391 |
The marriage penalty ($1,391) is simply the difference between what the married couple pays by filing jointly ($12,483), compared to what they would have to pay if each spouse filed as a single person ($5,546 + $5,546).
The above table makes obvious two major reasons for the marriage penalty. First, the standard deduction for married couples ($6,700) is less than the combined standard deduction ($4,000 + $4,000) for the single filers. Second, the higher 28% marginal tax rate sets in earlier for the married couple ($40,101) than it does for the combined single filers ($48,000 = $24,000 + $24,000).
A 1998 study by American Institute of Certified Public Accountants (AICPA) found that the combination of the two factors mentioned above (the standard deduction and progressive tax rates) account for 55.6 percent of all marriage penalties. The earned income credit accounted for an additional 19.5 percent of marriage penalties. The remaining 24.6 percent of marriage penalties result from other social engineering provisions in the Internal Revenue Code. These include the loss of eligibility for many credits and deductions, social security benefits taxation, capital loss limits, IRAs, dependent care credits, child credit, mortgage interest deductions, medical expenses, education tax incentives, the self-employment tax, the Alternative Minimum Tax and many more.
For the tax year 1996, the CBO found that 21 million or 42 percent of all married couples incurred marriage penalties, with an average penalty of $1,400. For the 1998 tax year, 25 million married couples were slapped with a marriage penalty. The CBO also found that the marriage penalty disproportionately affected couples where the higher-earning spouse made between $20,000 and $75,000. In addition, the CBO found evidence that the effects of the marriage penalty "may cause second earners to work fewer fours or not to work at all, thus reducing economic efficiency."
The table below is based on the Congressional Budget Office's statistics for 1998. It counters the common class envy argument that the marriage penalty only affects the wealthy. CBO and AICPA data show that because tax brackets, phase-out ranges, and eligibility caps are not indexed for inflation, the percentage of lower to middle income families showing the marriage penalty will increase in the future.
| Income Category | Percentage of Tax Returns Filed Showing Marriage Penalty |
| Less than $20,000 | 12% |
| $20,000 $50,000 | 44% |
| $50,000 - $100,000 | 54% |
| $100,000 and above | 54% |
Political Inaction
During his tenure as President Bill Clinton has vetoed or threatened to veto all tax bills which have the goal of eliminating the marriage penalty. The latest example occurred earlier this year.
On January 27, 2000, Bill Clinton in his State of the Union Address declared: "I propose to reduce the marriage penaltyWe can do these things without forsaking the path of fiscal discipline that got us to this point here tonight."
In an effort to satisfy the President, the House and Senate passed H.R. 4810 which partially eliminates the marriage penalty with an estimated reduction in the government surplus of $89 billion over 5 years. H.R. 4810 was a mere shell of a previous version, which would have lowered the government surplus by $248 billion over 10 years. The watered down version was passed to placate President Clinton, who had threatened to veto two previous bills which he claimed were too costly. "I want to get something on his desk that is signable," stated House Speaker Dennis Hastert as he bent over backwards to please the President.
The bill which reached the President, H.R. 4810, enlarged the bottom 15 percent income tax bracket for all married taxpayers making it is twice the amount for single filers. The next highest bracket (28 percent) was left unchanged to blunt Democratic Party claims that the bill is skewed toward higher-income taxpayers. H.R. 4810 also increased the standard deduction for married couples from $7,350 to $8,800. In addition, the bill increased the income cap by $2,500 for lower-income couples who claim the earned income tax credit, and the $500 per-child credit. This essentially rebates payroll taxes to lower-income families. H.R. 4810 reduced the marriage penalty but did not eliminate it, especially for high-income taxpayers.
Nevertheless, on July 21, 2000, Bill Clinton stated: "in the interest of fiscal responsibility, I will veto this (reduction of marriage penalty) and any subsequent legislation that threatens our ability to pay down the debt and strengthen Medicare and Social Security." At the same time, both President Clinton and White House spokesman Joe Lockhart said the President would have signed the bill if it included more spending on prescription drug benefits for Medicare! A stunned Dennis Hastert pointed out that this flies in the face of the President's statement regarding paying down the debt and strengthening Medicare and Social Security. Spending more on prescription drug benefits for Medicare would further reduce the surplus or increase the debt and weaken the financial viability of Medicare.
Democratic Senate Minority Leader Tom Daschle echoed the President saying "there are other ways to spend that money (than return it to the taxpayers)". House Democratic Whip David Bonior called the bill a "two-fisted assault on the U.S. Treasury." This provides further evidence that many politicians feel that they can spend your money better than you can, even when the Federal government is enjoying record surpluses.
Other Democrats have argued that it is equitable for married couples to pay more in taxes because they (married couples) save on many expenses by cohabitating.
Elimination of the Marriage Penalty
The progressive structure of the US tax code is the chief culprit behind the marriage penalty. Consequently, the best way to eliminate the marriage penalty is through a flat tax such as the one proposed by Dick Armey in the U.S. House of Representatives.
After eight decades, our current arcane, anachronistic, burdensome, unfair, inefficient, long-winded, contradictory, perplexing, complicated, enigmatic, inevitably political tax system has grown to 17,000 pages of disjointed and incoherent laws-regulations that are held together only by the enforcement powers of the IRS.
With a flat tax incorporating one low rate for all income and no targeted tax breaks, taxpayers will be able to file their taxes on a simple, ten-line form the size of a postcard. Enormous resources would be released for productive pursuits. Incalculable amounts of the nation's intellectual brainpower are devoted to the dead-end task of coping with current tax code. Over one-half million people in the U.S. make their living off it, whether in lobbying, lawyering, tax preparing, or accounting. Americans would save the five and one-half billion hours a year they currently spend filling out tax forms. The flat tax would also be easier to collect, as compliance costs would drop dramatically.
According to Congressman Armey, the flat tax would not only eliminate
the marriage penalty but it would entrust ordinary Americans to arrange
their own economic affairs. It would expand their personal freedom. And
it would be fair, it would treat everyone the same.