Originally published in THE BOSTON GLOBE
Tuesday, June 23, 1998
"Finally, Congress tackles unfair tax burden on couples"
A marriage proposal
Martin and Kathleen Feldstein
"Several studies have shown that second earners are very sensitive to differences in the marginal tax rate.
At last, a long-standing anomaly in the US tax code that taxes marriage and discourages second earners from working may get corrected this year. Congress is considering legislation that would remove the so-called marriage penalty for at least some taxpayers. This tax cut is a key priority for Republicans, but there is strong opposition from congressional Democrats.
The marriage penalty refers to the perverse feature in the tax code that increases the tax burden for many people, especially low-income couples and couples with similar incomes, once they are married. But because there are some married couples who have a lower tax burden than they would have if they were single, there is no simple solution.
A basic principle of fairness in any tax system is that taxpayers who are identical in every way should pay the same tax. Unless a person's state of matrimony is a reason to impose a differential tax burden, our tax law violates this simple principle by having separate tax schedules, implying different tax obligations, for single individuals and for married couples.
Here's how the marriage penalty arises. To calculate taxable income, a single individual subtracts a personal exemption of $2,650 and a standard deduction of $4,150 from total gross income. A married couple determines their taxable income as a couple by combining their separate incomes, subtracting two personal exemptions ($5,300) and a standard deduction of $6,900, which is less than twice that of an individual. Furthermore, the tax brackets in the schedule that a married couple uses are not made twice as wide as for an individual. For example, a single taxpayer moves up from the 15 percent bracket to the 28 percent bracket at a taxable income of $24,651, while a married couple moves into the higher bracket at a taxable income of $41,201, considerably less than twice the changeover for the single taxpayer.
Now let's apply these rules to Mary and John, who each earns $30,000. As separate single taxpayers, John and Mary pay a total of $6,960 to the federal government. If Mary now marries John, their tax obligation to the federal government rises to $8,028. Mary and John pay an extra $1,068 in tax just because they got married. One reason for this is that they get a smaller standard deduction. Another is that their higher combined income moves them from the 15 percent marginal tax rate bracket that they were in as singles to the 28 percent marginal tax rate bracket.
That not only means a bigger tax bill but also a greater discouragement to work. Several studies have shown that second earners, particularly women, are very sensitive to differences in the marginal tax rate.
But let's say Mary marries Paul, who is earning $60,000, and she quits her job to become a homemaker. In this case, the couple's combined obligation to the federal government is again $8,028, but this time, it's less than the $11,692 that Paul was paying in taxes when he was single. That's a $3,664 bonus for getting married.
The only way for the tax code to be perfectly neutral with respect to marriage is to make no distinction between single individuals and married individuals. Couples would pay taxes separately on each person's income. Because many married persons, especially women, would no longer face a higher marginal tax rate, this change would have the important virtue of reducing disincentives to work.
But such complete tax neutrality with respect to marriage would impose a large additional tax burden on those families -- approximately half of married taxpayers -- who benefit from the current rules. The right time to move to complete neutrality would be in conjunction with a major tax reform bill in which the taxpayers who would lose out from marriage neutrality could be compensated by an overall reduction in tax rates.
If major tax reform is not politically realistic now, there is a middle ground that would reap the efficiency gains of neutrality without imposing a heavy new tax burden on half of married taxpayers: Give taxpayers the choice of filing as individuals or jointly as married couples. This would be an improvement for the 21 million American couples who now pay a marriage penalty but would not hurt the remaiming couples who now benefit from joint filing.
Giving people a choice would favor low-income and two-earner couples. It would also encourage more second earners to enter the labor force or to increase their working hours. The tax revenue resulting from that additional work would offset some of the revenue loss from removing the marriage penalty.
There are other ways to remove or reduce the marriage penalty. As Congress begins to focus on these alternatives, it should consider not only the increase in fairness and the foregone tax revenue but also the impact of the reform on the current work disincentives for married women and their husbands.
Martin Feldstein, the former chairman of the Council of Economic Advisers, and his wife, Kathleen, also an economist, write frequently together an economic.