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Monday, November 16, 2015

Let’s Give Them Somethin’ To Talk About—A Tax Fix

Presidential candidates are now talking about how to get rid of the unpopular marriage penalty that stems from the lack of federal income tax brackets that are double for married couples. Thus, married couples with 2 income earners are more quickly pushed into higher tax brackets than if they had remained single. Meanwhile, 1-income households benefit from marriage because their lone income gets the larger brackets intended for 2 incomes.

Take a woman who earns $75,000 in 2015. Her marginal taxation rate is 25%. Once she marries a man earning $80,000 and becomes the secondary income earner in the marriage, her marginal taxation rate jumps to 28% by virtue of the marriage alone, even if both of their incomes stay the same. This reach of this marriage penalty keeps expanding, most recently with the U.S. Supreme Court’s decision recognizing same-sex marriage, which often has 2 income earners.

Different solutions have been offered to neutralize the tax marriage penalty, but they are difficult to implement. For example, it would be hard to stop taxing people based on their marital status because married couples are treated as one economic unit in other legal contexts. And, doubling the tax brackets for all married people would maximize the marriage bonus for one-income marriage households who do not need double tax brackets, perhaps why this solution has been adopted only at the lower income tax rates.

My proposed solution is to create a fifth tax filing status for 2-income married couples, whose tax brackets are double those of single filers. Currently, the only options are for 1) single filers, 2) married people filing jointly, 3) married people filing separately, and 4) head of households. A fifth filing status for married two-income earners—with double brackets—would allow continued treatment of families as a single unit under the tax code, without creating a marriage penalty or a marriage bonus for couples who do not have two incomes.

To prevent one spouse from working a nominal job to trigger the double brackets to accommodate a spouse’s significant income, spouses might have to earn some percentage of each other to qualify for the double brackets. This targets the marriage penalty without creating an expensive marriage bonus.  

You can read the law review article version of my proposal here.

Posted by Margaret Ryznar on November 16, 2015 at 11:35 AM | Permalink


P.S. Extending Suzanna's point, one can think about allowing a taxpayer to be able to pick any filing status, perhaps even the single status. I'll have to think about that further, but my initial reaction would be to favor the easiest fix that is most targeted to the problem--I'm not sure there is much will to change anything beyond fixing the marriage penalty in the narrowest sense.

Posted by: Margaret Ryznar | Nov 17, 2015 5:12:33 PM

Brad, yes, fair point. I suppose I view the marriage penalty fix like another deduction or credit in the sense that we have so many tax deductions and credits, and they all cost the Treasury money, but we choose to forego that tax revenue because we have a public policy that we value. Suzanna, you are right that the marriage penalty hits equal earners in particular. But, the married filing separately status is not always the solution because it is often going to result in a worse tax situation than married filing jointly-mainly because certain deductions are off the table. So, we need a better solution.

Posted by: Margaret Ryznar | Nov 17, 2015 5:05:21 PM

> The cost of eliminating the marriage penalty is a drop in the bucket, so no major overhaul is really needed.

From your paper it looks like it was around $29B in 1996, that's on total individual income tax revenue of $656 billion, so around 4%. That's not a huge amount, but I don't know that I'd call it a drop in the bucket either.

Posted by: Brad | Nov 17, 2015 3:34:29 PM

Why not just allow married couples to choose whether to file jointly or separately, but if they file separately they are treated as if they were not married -- that is, as if they were each single? (My understanding is that under the current scheme, a married couple filing separately pays more than two unmarried individuals with identical earnings/deductions). Also, the main problem with the "marriage penalty" is not that it penalizes marriage over non-marriage, but that it penalizes couples in which both spouses earn about the same amount -- that is, couples who do not follow the traditional male-breadwinner, female-nonworker/low-income worker. In other words, the tax scheme assumes that women will not have high-paying careers (and that's what's wrong with it!)

Posted by: Suzanna Sherry | Nov 17, 2015 12:20:44 PM

Thanks for that link--I hadn't seen that.

Posted by: Margaret Ryznar | Nov 17, 2015 3:49:02 AM

"It's not been shown that the country would benefit from a policy of incentivizing [...] procreation"

Population and GDP are reasonably well correlated: http://www.nature.com/ncomms/2013/130604/ncomms2961/fig_tab/ncomms2961_F5.html

Posted by: Pranav | Nov 17, 2015 3:45:42 AM

The cost of eliminating the marriage penalty is a drop in the bucket, so no major overhaul is really needed. That's why I'm optimistic that it is politically feasible to do something about it, especially if we can keep the fix narrow.

Posted by: Margaret Ryznar | Nov 16, 2015 6:50:16 PM

Maybe the cost can be partially or totally offset by eliminating the unlimited estate tax exemption for spouses.

Posted by: Brad | Nov 16, 2015 6:08:36 PM

Yes, that has definitely been proposed and placed on people's radars, and very recently too. But, that's obviously a bigger and more controversial change, which I'm not sure we'll make. So, I offer a more modest tweak that can make the tax system a bit more marriage neutral.

Posted by: Margaret Ryznar | Nov 16, 2015 4:55:00 PM

The logical thing to do is to tax everyone as an individual, with neither benefit nor penalty attached to marriage, cohabitation or singlehood. There is no public policy justification for incentivizing marriage or family. It's not been shown that the country would benefit from a policy of incentivizing either marriage or procreation. Indeed, the interests of national defense suffer because the armed forces favor and subsidize marriage and breeding, devaluing the services of the individual soldier when it comes to housing, insurance and other privileges.

The unfair spousal benefits in Social Security and Medicare are likewise ripe for eliminating.

Posted by: Jimbino | Nov 16, 2015 4:41:43 PM

That's a good question. In terms of how much it costs couples, I've seen the average marriage penalty estimated at $1,400 per year per couple. We should and do care about the marriage penalty for several reasons. First is the theoretical fairness issue--why should the tax bill go up simply by reason of marriage? Disincentivizing marriage in even the slightest way goes against all of our public policy. Second is the practical issue that the marriage penalty is yet another obstacle in a secondary income earner's way, and when you count daycare on top of it, it starts to look like an expensive proposition to simply keep working. Again, this goes against all of our public policy. Thus, I would suggest that we should neutralize the marriage penalty.

Posted by: Margaret Ryznar | Nov 16, 2015 3:54:30 PM

Is this really that big a problem? For the couple in your example, if my math is right, the marriage penalty would amount to about $9.50 per month for a couple making $155,000 a year if they took no deductions at all. They'd save almost that much by getting to share a Netflix account. Once you factor in a standard personal deduction of $12,400, the married couple falls out of the 28% bracket and winds up almost exactly where they were before they got married (in fact, it appears they save about 15 cents).

Obviously the higher the incomes get the more the penalty becomes a real thing, but how concerned are we really about the tax penalty incurred when two people who each are individually in the 90th percentile of HOUSEHOLD income get married and jump into the top 1%?

Posted by: Griff | Nov 16, 2015 12:33:09 PM

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