September 10, 1998 Marriage Penalties and Bonuses in the Income Tax
by Iris J. Lav and Alan Berube
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"Marriage penalty" tax relief is high on the agenda this fall as Congress returns from recess. In this year's budget resolutions and in a variety of subsequent pronouncements by House and Senate
Republican leaders on tax cut plans, providing relief from the "marriage penalty" has been mentioned as a priority.
Marriage penalty relief means that federal income taxes would be reduced for married couples who currently owe more tax than they would owe if they were able to file as single individuals. Many marriage penalty reduction proposals, however, are very costly and provide the bulk of their tax relief to higher-income couples who least need it. In addition, a number of proposals increase marriage bonuses for couples that already receive such bonuses under current law.
- Most proposals that significantly reduce marriage penalties are expensive. A proposal by Representative Jerry Weller (R- IL) that is co-sponsored by a majority of House members would allow couples the choice of filing jointly or as two single individuals. This proposal would cost $20 billion a year. Another proposal (also introduced by Representative Weller and referenced in this paper as Weller II) would set the standard deduction for married couples at twice the value for single filers and set the width of the tax brackets (the amount of income taxed at each progressive tax rate) for couples at twice the width of the brackets for single taxpayers. This Weller II proposal would cost $32 billion a year.
- More limited marriage penalty reduction proposals also can carry a significant cost. Various proposals to increase the standard deduction for married couples such as measures proposed by Representatives Nancy Johnson (R-CT) and Sam Johnson (R-TX), Representative Jim McDermott (D-WA), and Senator Phil Gramm (R-TX) cost between $4 billion and $9 billion a year.
- High cost marriage penalty reduction provisions might be incorporated into a tax bill in ways that make them appear less expensive, such as with a gradual phase-in. While gradually phasing in these provisions could reduce their cost over the next five or even ten years, the full cost ultimately would be felt when the provisions take full effect.
- Many marriage penalty reduction proposals provide the bulk of their benefits to higher-income families. Weller I and Weller II would each provide over 80 percent of their tax benefits to couples earning more than $50,000 a year. An alternative approach, restoring the two-earner deduction that existed prior to the Tax Reform Act of 1986, also would provide more than 80 percent of its benefits to taxpayers with incomes exceeding $50,000. Yet couples with incomes exceeding $50,000 make up less than half of all joint filers and 20 percent of all taxpaying households.
Most proposals that seek to reduce marriage penalties below their current level do not create a tax code unbiased toward marriage. Instead, they introduce further inequities between single taxpayers and married couples or among married couples with different earnings patterns.
- The current tax system does not penalize marriage overall. The tax code provides more marriage bonuses than marriage penalties that is, there are more couples whose taxes are reduced as a result of marriage than there are couples for whom marriage increases their taxes. Among all families filing joint tax returns, the Congressional Budget Office finds that 51 percent receive marriage bonuses and 42 percent experience marriage penalties. CBO has reported that in 1996, the amount of marriage bonuses exceeded the amount of marriage penalties by $4 billion.
- Moreover, this CBO estimate of marriage bonuses and penalties may undercount the extent to which the current tax system results in marriage bonuses. In deriving this estimate, CBO assumed that prior to marriage, the first child of the couple was on the tax return of the higher-earning spouse, the next child was assigned to the lower-earning spouse, and all additional children were assigned to the higher-earning spouse.
If marriage penalties and bonuses are calculated under an alternative CBO assumption that all children are claimed by the lower-earning spouse prior to marriage, 57 percent of families have marriage bonuses and 39 percent experience penalties. Under this alternative assumption, marriage bonuses exceed marriage penalties by $30 billion rather than $4 billion. The actual situation is probably somewhere between these two sets of assumptions, although it is likely to be closer to the $30 billion than $4 billion marriage bonus estimate. A Congressional Research Service report points out that it may be more realistic to assume that children are claimed by the lower-earning spouse prior to marriage because 85 percent of children who live with one parent live with the mother.
The Johnson and Johnson Proposal
A proposal to be introduced by Representatives Nancy Johnson (R-CT) and Sam Johnson (R-TX) reportedly reduces marriage penalties by increasing the standard deduction for married couples. The details of the Johnson and Johnson proposal are not available as of this writing.
This report looks at various other marriage penalty reduction proposals that expand the standard deduction. As compared to more far-reaching marriage penalty reductions proposals such as "Weller I" and "Weller II," a standard deduction increase targets a greater proportion of benefits on middle-income taxpayers. Most higher-income taxpayers have enough expenses to itemize their deductions and do not use the standard deduction.
A downside of this approach is that increasing the standard deduction for married couples does not distinguish between couples that need marriage penalty relief and those that do not. As a result, it would substantially increase the size of current-law marriage bonuses for many couples currently receiving such bonuses under current law.
Moreover, a standard deduction increase does nothing to relieve the marriage penalties experienced by low- and moderate-income families that arise from the phase-out of the Earned Income Tax Credit. Additional, specific provisions such as those included in Senator Phil Gramm's amendment to the McCain tobacco legislation or the McDermott/Neal bill described in this report are required to extend the marriage penalty tax relief to working families receiving the EITC. It is unclear at this time whether the Johnson and Johnson proposal includes such provisions.
- Some of the proposals to reduce marriage penalties would further increase the bonuses married couples receive under current law. For example, under the Weller II proposal, which sets the width of the tax brackets and the size of the standard deduction for married couples at twice the values that apply to single filers, a person earning $64,000 who marries a person with no income could see his tax bill decline more than $5,000, a drop of more than 40 percent. Under current law, such a couple already receives a tax bonus if they marry.
- Under this proposal, a married couple with income of $64,000 would pay 41 percent less income tax than a single person with the same income. Such large discrepancies are likely to be viewed as unfair. If enacted into law, they could give rise to future demands for additional tax relief for single taxpayers.
- The Weller I proposal, which provides couples the option of filing jointly or as two single individuals, would not lead to inequities between single people and married couples as Weller II does, but Weller I would create new inequities in the tax code's treatment of different types of married couples.
Under current law, couples with the same income and circumstances always pay the same amount of tax. Under Weller I, however, married couples with the same income, same number of dependents, and same expenses would pay different amounts of tax, and the discrepancies in tax burdens between couples with the same incomes could be quite large. For example, under the Weller I proposal, a family in which a husband earns $64,000 and the wife does not work would pay $1,400 more in taxes than a couple in which both members work and each earns $32,000. Such discrepancies would likely be perceived as inequitable and could cause single-earner couples to petition for comparably lower tax bills.
Research suggests that marriage penalties and bonuses in the tax code have little effect on marriage rates. To the extent that studies find any effect of tax considerations on the decision to marry, the effect on marriage decisions for every tax dollar foregone has been found to be small. For example, the findings of a recent study by economists James Alm at University of Colorado and Leslie Whittington at Georgetown University imply that eliminating half of the marriage penalties a slightly greater percentage than are eliminated by Weller II might over time lead to an increase in the proportion of women between the ages of 15 and 44 who are married from 52.9 percent to 54.2 percent. If the Weller II bill were to produce that result, however, the increased marriages would come at a very high price the cost to taxpayers would be $380,000 over 10 years for each additional woman who marries.
For these reasons, the case for marriage penalty relief at this time is not strong. If policymakers choose to go down this path, however, there are various ways that marriage penalty relief can be better targeted to the lower- and moderate-income taxpayers for whom marriage penalties represent a larger share of income than they do for higher-income couples. The ways to target relief include: setting specific income limits on who can use marriage penalty relief provisions; allowing a deduction for second-earners with modest wages; changing a provision of the tax code used most heavily by lower- and moderate-income taxpayers; and including specific language and provisions that change the marriage penalties associated with the phase-out of the EITC.
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