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 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 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.

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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