THINKING ABOUT THE MARRIAGE PENALTY

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THINKING ABOUT THE MARRIAGE PENALTY

• Presidents Advisory Panel on Federal Tax Reform
• March 23, 2005
• James Alm
• Andrew Young School of Policy Studies
• Georgia State University

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Overview Who is the individual in the
individual income tax?

• What Is The Marriage Penalty?
• Why Does It Arise?
• How Big Is It?
• Why Does It Matter?
• Do Other Countries Have A Marriage Penalty?
• Can It Be Reduced Or Eliminated?

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What Is The Marriage Penalty?

• A marriage penalty exists when the income taxes
  of two individuals as a married couple are
  greater than their combined taxes as singles.
• There can also be a marriage bonus, if the
  income taxes of the married couple are lower than
  their combined taxes as singles.

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Example Marriage Penalty

• As Single Taxpayers (2001)
• Individual Income Individual Tax
• 30,000 3,383?
• 30,000 3,383?? 6,766
• As Married Taxpayers
• Joint Income Joint Tax
• 60,000 7,172
• ? Marriage Penalty 406 (7,172-6,766)

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Example Marriage Bonus

• As Single Taxpayers (2001)
• Individual Income Individual Tax
• 0 0 ?
• 60,000 11,198?? 11,198
• As Married Taxpayers
• Joint Income Joint Tax
• 60,000 7,172
• ? Marriage Bonus -4,026 (7,172-11,198)

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Why Does It Arise?

• The quick answer
• Because the family is the unit of taxation in
  a progressive individual income tax that allows
  income splitting of a married couple.
• A more complicated answer
• Because the individual income tax imposes taxes
  based on family income, and imposes different
  marginal tax rates at different levels of income.

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Why Does It Arise?

• An even more complicated answer
• Because there are multiple, and conflicting,
  goals in the individual income tax
• Progressivity Marginal tax rates should increase
  with income.
• Equal Treatment of Married Couples Married
  couples with equal incomes should be taxed
  equally.
• Equal Payments for Married and Single Taxpayers
  A single individual should pay the same taxes as
  a married couple with equal income.
• Marriage Neutrality Taxes should not change with
  marriage.
• And there are many other programs in the tax and
  transfer system that create marriage penalties
  and bonuses.

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How Big Is It?

• Feenberg and Rosen (1995)
• 51 percent of married couples paid an average
  marriage penalty of 1,200, 38 percent received
  an average marriage subsidy of 1,400, and 11
  percent were unaffected. Couples more likely to
  incur a marriage penalty are those with two
  earners with similar incomes.
• Alm and Whittington (1996)
• 57 percent of married couples paid a marriage
  penalty of 1,200, 30 percent received a marriage
  bonus of 1,100, and 13 percent were unaffected.
  Couples more likely to incur a marriage penalty
  are those with two earners with similar incomes.
• CBO (1997)
• 42 percent of married couples paid a marriage
  penalty of 1,400, 51 percent received a marriage
  bonus of 1,300, and 6 percent were unaffected.
  Couples more likely to incur a marriage penalty
  are those with two earners with similar incomes,
  and those with higher combined incomes.
• OTA (1999)
• 48 percent of married couples paid a marriage
  penalty of 1,100, 41 percent received a marriage
  bonus of 1,300, and 11 percent were unaffected.
  Couples more likely to incur a marriage penalty
  are those with two earners, and those with higher
  combined incomes.

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Why Does It Matter?

• There is evidence that individuals respond to the
  marriage penalty/bonus
• In the decision to stay single versus to marry.
• In the decision to cohabitate versus to marry.
• In the decision to marry versus to divorce.
• In the timing of the decision to marry.
• In the labor supply decision.
• Even so, most of these responses are generally
  small, and taxes do not appear to be the driving
  force in marital decisions.

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Why Does It Matter?

• The marriage penalty introduces large, variable
  and capricious inequities due to unequal
  treatment of taxpayers based solely on their
  marital status
• Between married couples with one earner and those
  with two earners.
• Between married couples and cohabiting couples.
• Between married couples and single households.
• Between married couples and extended
  households.
• And the marriage penalty affects revenues.

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Do Other Countries Have A Marriage Penalty?

• International practice is varied.
• Among the 32 OECD countries (for 2002), the
  dominant practice is
• The use of progressive marginal tax rates.
• The choice of the individual, not the family, as
  the unit of taxation.
• Joint filing is required in 7 countries, and is
  allowed in 6.
• The individual is the required unit in the
  remaining countries.
• Since 1970, 7 countries have moved from joint
  taxation to individual taxation.

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Can It Be Reduced Or Eliminated?

• Reducing or eliminating the marriage penalty
  requires eliminating one of the conditions that
  cause the penalty
• Imposing the tax on family income
• Imposing the tax at progressive rates
• Recent tax changes (EGTRRA 2001 and JGTRRA 2003)
  reduce the marriage penalty for most households
  but keep the marriage bonus by (among other
  things)
• Increasing the standard deduction for married
  couples to double that of singles
• Increasing the width of the 10 and 15 percent
  brackets for married couples to twice that of
  singles
• Raising the EITC phaseout point for married
  couples.

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Marriage Penalties and Bonuses in 2004

• As Single Taxpayers (2004)
• Individual Income Individual Tax
• 30,000 2,950?
• 30,000 2,950?? 5,900
• As Married Taxpayers
• Joint Income Joint Tax
• 60,000 5,900
• ? Zero Marriage Penalty or Bonus

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Marriage Penalties and Bonuses in 2004

• As Single Taxpayers (2004)
• Individual Income Individual Tax
• 0 0 ?
• 60,000 9,750?? 9,750
• As Married Taxpayers
• Joint Income Joint Tax
• 60,000 5,900
• ? Marriage Bonus - 3,850 (5,900-9,750)

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MARRIAGE PENALTIES/SUBSIDIES UNDER PRIOR 2001 TAX
LAW AND EGTRRA FOR A MARRIED COUPLE WITH TWO
CHILDREN (Carasso and Steuerle 2002)
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Some Piecemeal Reform Options

• Increase the standard deduction for married
  couples.
• Expand the tax brackets facing married couples.
• Reinstitute the secondary earner deduction.
• Expand the phase-out range of the EITC.
• Flatten overall rate structures.
• Allow optional individual filing.
• Require individual filing restore the
  individual as the unit of taxation.

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Some Fundamental Reform Options

• Eliminate progressivity make the individual
  income tax a flat rate tax.
• Eliminate the individual income tax and replace
  it with a national sales tax or a VAT.
• But There would still be marriage penalties and
  bonuses throughout other parts of the tax and
  transfer system.