THE MARRIAGE TAX PENALTY

Staff Working Paper

May 1981

The Congress of the United StatesCongressional Budget Office

PREFACE

Most two-earner married couples pay more Income tax than theywould if single. This paper, prepared at the request of ChairmanDan Rostenkowski of the House Committee on Ways and Means,examines the size of these so-called marriage penalties undercurrent law and after enactment of pending individual income taxproposals, including the Administration's across-the-board ratecuts and several of the proposals designed explicitly to reducemarriage penalties. It also compares the proposals in terms oftheir effects on work incentives. This paper does not includecomplete estimates of the revenue losses from the proposals or thedistribution of tax savings by income group. The staff of theJoint Committee on Taxation is preparing this information. Inaccordance with CBO's mandate to provide objective analysis, thisreport offers no recommendation.

The paper was written by Cynthia Francis Gensheimer, Ralph A.Rector, and Hyman Sanders of CBO's Tax Analysis Division, underthe direction of James M. Verdier. Patricia H. Johnston editedthe manuscript, and Linda Brockman and Shirley Hornbuckle typedit.

Alice M. RivlinDirector

May 1981

ii

CONTENTS

Page

PREFACE ii

CHAPTER I. INTRODUCTION 1

CHAPTER II. MAGNITUDE OF MARRIAGE TAX PENALTY 4

Current Law 4After Tax Reductions 4The Impact of Inflation 10

CHAPTER III. WORK INCENTIVES AND TAX RATES FOR SECONDARYWORKERS . 13

Current Law 14Effects of Tax Reductions 17

CHAPTER IV. CONCLUSION 21

APPENDIXES

APPENDIX A. EXPLANATION OF MUTUAL INCONSISTENCY OF THETHREE CONCEPTS OF TAX EQUITY 24

Mathematical Explanation 25

APPENDIX B. MARRIAGE PENALTIES UNDER CURRENT LAW ANDAFTER ENACTMENT OF 10 PERCENT DEDUCTIONSWITH VARIOUS FLOORS AND CAPS FOR TWO-EARNERMARRIED COUPLES 27

APPENDIX C. SAMPLE TABLE TO DETERMINE MARRIED EARNERS'CREDIT 30

iii

TABLES

TABLE 1.

TABLE 2.

TABLE 3.

TABLE 4.

REMAINING MARRIAGE PENALTIES OF SELECTED COUPLESUNDER CURRENT LAW AND AFTER VARIOUS TAX LAWCHANGES, FOR CALENDAR YEAR 1981

REMAINING MARRIAGE PENALTIES OF SELECTED COUPLESUNDER CURRENT LAW AND AFTER VARIOUS TAX LAWCHANGES, ASSUMING THAT NOMINAL WAGES KEEP PACEWITH INFLATION, FOR CALENDAR YEAR 1984

EFFECTS OF VARIOUS TAX LAW CHANGES ON AVERAGETAX RATES, FOR CALENDAR YEAR 1981

EFFECTS OF VARIOUS TAX LAW CHANGES ON MARGINALTAX RATES FOR CALENDAR YEAR 1981

11

15

16

iv

CHAPTER 1. INTRODUCTION

The structure of pending individual income tax cut proposalshas stirred debate on a number of tax issues, including theso-called marriage penalty. This is the additional ,tax manyworking married couples pay compared to what they would pay ifsingle. The penalty is the difference between the tax liabilityof the married couple and the combined tax liabilities of thespouses calculated using the schedule for single taxpayers. Thedebate on the marriage penalty centers on two issues:

o Would the dollar amount of the marriage penalty increaseor decrease for most couples after full implementation ofthe Administration's proposed 30 percent across-the-boardrate reductions?

o Would a targeted reduction in the marriage penalty inducea larger or smaller increase in the labor force than anacross-the-board rate cut of the same overall size?

This report discusses both questions using calendar years 1981 and1984 as the points of reference.

The marriage penalty and suggested ways of reducing it shouldbe considered in the context of a broader problem of which it ispart.l There are three basic, generally accepted principles ofincome taxation that cannot all be simultaneously attained—progressivity, equal taxation of families with equal incomes, andmarriage neutrality. (Marriage neutrality is achieved when anindividual's tax bill remains unchanged if he marries ordivorces.) The present system of taxation violates all but

For an excellent discussion of the history of the marriage taxpenalty and the difficulty of making the tax code marriage-neutral, see The Income Tax Treatment of Married Couples andSingle Persons prepared by the Joint Committee on Taxation forthe House Committee on Ways and Means and the Senate FinanceCommittee, 96:2 (April 1980).

progressivety.2 Perfect marriage neutrality, which implies elim-ination of the marriage penalty (and also the single penalty)could be accomplished only by giving up one of the other two prin-ciples. (See Appendix A for an explanation of why this is so.)It would come about if the tax system were made proportional,instead of progressive, or if the individual rather than thefamily became the unit of taxation, with one tax schedule applyingto all individuals.

Short of moving directly either to a proportional tax systemor to taxing individuals instead of families (called mandatoryindividual filing), the marriage penalty can never be. eliminatedwithout at the same time imposing a greater tax burden on singletaxpayers and/or taxing differently couples with the same combinedincome. Marriage neutrality could be improved, however, by com-promising on one of the other principles. Making the rate struc-ture less progressive could greatly reduce marriage penaltieswithout introducing any new complexity into the tax code and with-out greatly worsening penalties on single taxpayers.^ At thesame time, married couples with equal incomes would continue topay the same tax. The proposals to reduce the marriage penaltydirectly, which are the focus of this study, would preserve the

2. Prior to 1948, the income tax system was basically marriage-neutral and progressive, but treated married couples withequal incomes unequally. Since 1948, the system has retainedits progressivity and generally treated married couples withequal incomes equally. It has, however, no longer been marri-age neutral, at times containing single penalties or marriagepenalties of varying degrees. From 1948 to 1969, there was nomarriage penalty, but there were rather large singlepenalties. In other words, singles often paid much more taxthan if they had been married to nonworlcing spouses. Toalleviate this situation, the Congress in 1969 reduced but didnot completely eliminate the penalties for singles. Thischange in the tax system, however, created marriage penaltiesfor the first time.

3. This could be done by tailored widening of the tax brackets orby reducing tax rates. Not all rate cuts or forms of bracketwidening would substantially lessen marriage penalties,however. See Joint Committee on Taxation, Background andIssues Relating to Individual Income Tax Reductions (April 27,1981).

progressivity of the tax system but would stray further from theprinciple of equal taxation of families with equal income.

CHAPTER II. MAGNITUDE OF MARRIAGE TAX PENALTY

CURRENT LAW

Table 1 shows the dollar amounts of the marriage tax penaltyfor representative couples. The first line of Table 1, forinstance, shows the total tax liability and marriage penalty for acouple with a combined income of $15,000, 90 percent of which isearned by the primary worker (the spouse with larger earnings),and 10 percent by the secondary worker.1 The marriage penaltyfor this couple is minus $145. Since the penalty is negative inthis case, this working couple actually receives a marriage taxbonus—that is, by being married, the spouses pay less tax thanthey would if single. At the same combined $15,000 income levelbut with a more even distribution of earnings between husband andwife, the couple pays a marriage penalty. The second and thirdlines of Table 1 show this penalty as $197 for a couple with a67/33 income split, increasing to $240 for a 50/50 split.

AFTER TAX REDUCTIONS

Table 1 also shows the marriage penalties that would remainafter enactment of various tax reductions currently underconsideration.

Administration's Rate Cuts. The Administration's proposed 5percent across-the-board rate reduction for 1981 would reduceslightly the amounts of marriage penalties or bonuses for mostcouples. If the Administration's proposed 30 percent rate reduc-tion were put into effect immediately, it would lessen the penalty

The numerical examples assume throughout that the couples haveno investment income and no dependents. A couple's itemizeddeductions are assumed to be 23 percent of its combinedadjusted gross income. If this is less than the zero bracketamount (formerly called the standard deduction), however, thecouple is assumed not to itemize. In calculating eachspouse's tax liability as a single taxpayer, the same rule isused.

TABLE 1. REMAINING MARRIAGE PENALTIES OF SELECTED COUPLES UNDER CURRENT LAW AND AFTER VARIOUSTAX LAW CHANGES, FOR CALENDAR YEAR 1981a (In dollars)

Marriage Penalty*3

CombinedAdjustedGrossIncome

15,000Incomesplit90/1067/3350/50

25,000Incomesplit90/1067/3350/50

40,000Incomesplit90/1067/3350/50

60,000Incomesplit90/1067/3350/50

100,000Incomesplit90/1067/3350/50

TaxLiabilityUnderCurrentLaw

1,6241,6241,624

3,3993,3993,399

7,0527,0527,052

13,60213,60213,602

28,87828,87828,878

CurrentLaw

-145197240

-311168229

-577502822

-9021,5792,166

-2413,1723,760

5PercentGeneralRate

Reductionc

-147186229

-284164229

-526496780

-8901,5372,124

-4373,2704,086

30PercentGeneralRate

Reductionc

-104169213

-190171220

-363432667

-5771,3201,733

-1,2792,7623,597

10PercentTwo-EarnerDeduction"1

-1779383

-381-48-89

-7251482

-1,196620768

-7411,6722,260

MarriageTax

Credit6

-145-8-11

-311-224-382

-577-709-870

-902-1,085-1,488

-600-1,022-634

ModifiedMarriageTax

Creditf

-14500

-31100

-57700

-90200

-24100

Couples have no Investment income or dependents,adjusted gross income.

Itemized deductions are 23 percent of

b.

d.

f.

The marriage penalty is the difference between the tax the couple pays married and filingjointly compared to the sum of what the spouses would pay if single. A minus (-) signindicates a marriage bonus, that is, a married couple would pay less than if they weresingle.

The tax rates used in making these calculations are those of the Administration's proposedrate reductions, which only approximate precise 5 and 30 percent reductions, and which donot explicitly lower the maximum tax rate on earned income.

A deduction is allowed for 10 percent of the first $30,000 of earnings of the lesser-earning spouse.

A credit is allowed for the amount of marriage penalty that would occur if the couple hadno investment income, no dependents, and no itemized deductions.

A credit is allowed for the amount of marriage penalty that would occur if the couple hadno investment income, no dependents, and itemized deductions of 23 percent of adjustedgross income.

for nearly all couples, in some cases by as much as 20 percent(see Table I).2 Under the Administration's 30 percent tax cut,most two-earner couples would continue to pay marriage penaltiesof several hundred dollars, however, and some high-income coupleswould continue to pay penalties of several thousand dollars.

For calendar year 1981, the federal revenue loss from a 5percent rate reduction would be about $15 billion, and the lossfrom a 30 percent rate reduction would be about $80 billion (basedon an effective date of January 1, 1981).

Deduction for Two-Earner Married Couples. Allowing marriedcouples a deduction of ten percent of the first $30,000 of earn-ings of the lesser-earning spouse would do far more than eitherrate cut to lower marrriage penalties (see Table 1). The calendaryear 1981 revenue loss from this proposal would be about $6 to 7billion (based on an effective date of January 1, 1981). Thiskind of deduction was passed by the Senate Finance Committee lastsummer and endorsed by the Carter Administration. It would berelatively simple to administer, requiring only a few additionallines on the tax forms.

As most commonly proposed, the deduction would be allowed forall two-earner couples, regardless of the size of their penalty(if any). It would therefore greatly overcompensate for the mar-riage penalty in many instances, increasing existing marriagebonuses and creating bonuses for many couples who now pay a mar-riage penalty. At the same time, primarily because the deductionwould be capped at $3,000, it would still leave some high-incomecouples (mostly those in which both spouses make over $30,000)with penalties of over $1,000.

The large marriage bonuses created by the deduction could bescaled down if the deduction were applied only to the secondworker's earnings in excess of a fixed dollar amount, say $2,500,or if a deduction were allowed only for couples in which thelesser-earning spouse contributed at least 20 percent of thecouple's combined earnings. The latter approach, which roughly

2. A uniform 30 percent rate reduction would necessarily reduceall marriage bonuses and penalties by exactly 30 percent, butthe Administration's proposal would not, in fact, reduce alltax rates by exactly 30 percent.

targets the deduction on couples that now pay a penalty, is takenin H.R. 177, introduced by Representative Conable.3 The largepenalties remaining for high-income couples could be reduced byincreasing or removing the cap on the deduction.^ CBO has calcu-lated remaining penalties under several proposals with differentfloors and caps, and some of the results appear in Appendix B.

Marriage Tax Credit. A tax credit for two-earner marriedcouples would work differently from a two-earner deduction. Aftercompleting its return in the present manner, each couple wouldconsult a special tax table to determine the amount of credit itwould be entitled to, and then subtract that amount from its taxbill. (A sample marriage tax credit table is shown in Appendix

3. A disadvantage of this approach is that it produces so-called"notch" effects, where just a dollar of extra income going tothe lesser-earning spouse could mean the difference betweenqualifying and not qualifying for the deduction and receiving,in the most extreme cases, up to $1,000 of tax savings.

4. Removing the cap on the deduction would, however, grant veryaffluent two-earner couples large marriage bonuses. Themarriage penalty on earned income peaks at about $3,800 whenboth spouses have earnings of roughly $55,000. Furtherincreases in income on the part of either spouse do not affectthe size of the penalty, since they are taxed at the 50percent maximum rate regardless of the spouses' maritalstatus. Couples in which both spouses earned $55,000 would beentitled to a deduction of $5,500, for a tax savings of $2,750[$2,750 « (.50)($5,500)]. Since their marriage penalty undercurrent law is about $3,800, this would leave them with apenalty of about $1,050. Under an uncapped deduction, everydollar of extra income earned by the second earner wouldentitle the couple to additional tax savings. As the secondearner's income rose, this extra tax savings would offset moreand more of the initial $3,800 marriage penalty. Couples inwhich both spouses earned about $75,000 would be left with nomarriage penalties, and those with higher earnings would getever-increasing marriage bonuses.

C.)5 The entries in the table would be calculated by the IRS tobe the amount of penalty experienced by the couples with eachincome configuration, based on assumptions spelled out in theauthorizing legislation about investment income, itemized deduc-tions, and dependents. Couples who now receive a marriage bonuswould generally be entitled to credits of zero, so they would paythe same tax under the credit as they do under present law.6

Senator Moynihan and Representative Shannon have introducedbills for marriage tax credits (S.775 and H.R.2474). In bothcases, the table entries for the credit are implicitly calculatedon the assumption that taxpayers have no investment income and donot itemize deductions. Taxpayers with these characteristics—nonitemizers with no investment income—would have their penaltiesprecisely offset by this proposal, but nearly all other coupleswould be left with marriage penalties or bonuses. Table 1(second-to-last column) shows the rather large bonuses that wouldbe created by this proposal for couples who itemize their deduc-tions but have no investment income. The large bonuses come aboutbecause itemizers pay a lesser penalty than nonitemizers at thesame income level. The credit, which would offset the penalty ofnonitemizers, would, therefore, exceed the penalty of itemizers.

The credit could be redesigned in a way that would, onaverage, solve this overcompensation problem and just offset the

5. The one-page table in Appendix C is illustrative only.Because the income brackets in this table are relatively wide,a one dollar wage increase would, in some cases, entitlecouples to additional tax savings of over $1,000. Narrowerincome brackets would reduce these "notch" problems, but couldonly be achieved with a multipage table.

6. Depending on the assumptions used, in designing the credittable, some couples who now receive a marriage bonus couldactually be entitled to a credit. This would increase theirmarriage bonuses.

marriage penalty on earned income.' Instead of basing the crediton the marriage penalty of nonitemizers, the Congress could basethe credit on the amount of penalty paid by couples with theaverage amount of itemized deductions (currently about 23 percentof adjusted gross income). The credit could be set equal to zerofor couples who now enjoy marriage bonuses, leaving them withtheir current bonuses. The last column of Table 1 shows themarriage penalties remaining after enactment of this version ofthe marriage tax credit. Because the representative couples inthe table are assumed to take the average deductions for theirincome group, and because the credit is designed to offsetprecisely the penalty for the "average" couples, this creditleaves most of the representative couples with penalties of zero.While it is true that this version of the credit would justeliminate penalties on earned income for these average couples, itwould leave nonitemizers with some penalty and would createbonuses for married couples with larger than average deductions.

The credit table entries for S. 775 are calculated on theassumption that couples have one dependent, while H.R. 2474assumes two dependents. Since the greater the number ofdependents the smaller the marriage penalty, some couples with nochildren would be left with marriage penalties under bothproposals, and those with large families would get large bonuses.

Because the amount of each couple's marriage penalty dependson so many individual facts and circumstances—number of depen-dents, amount of itemized deductions, amount of investment incomeand tax shelter losses—no one credit table could ever eliminateall marriage penalties. If the number of tables were increased todeal with these differences, the credit would come closer to

The credit thus designed would offset only the penalty asso-ciated with earned income (as opposed to investment income).Since the work disincentives of the marriage penalty stem fromthe penalty on earned income and since it is difficult tosettle on a fair and universal rule for allocating investmentincome between husband and wife, most people feel it isimportant only to correct for the penalty on earned income.

eliminating all marriage penalties, but would be much more compli-cated for taxpayers to

THE IMPACT OF INFLATION

If there were no inflation between now and 1984 and nochanges in the tax law other than those considered in Table 1, theamounts of marriage penalty in the table would be valid for L984as well as for 1981. If inflation pushed up nominal wages betweennow and then, however (or if real economic growth resulted inhigher incomes), and no tax cuts were enacted other than thoseindividually considered in Table 1, "bracket creep" would alterthe real amount of the marriage penalty in all cases.

In Table 2, therefore, the numbers for 1984 are calculated onthe assumption that nominal wages increase with the inflation ratebetween 1981 and 1984.9 All numbers in Table 2 are expressed inconstant 1981 dollars so that it is possible to compare the dollar

8. One of the advantages of the simple, one-table credit is thatit achieves roughly the same result as optional single filing,without requiring couples to calculate their taxes two ways—as singles and 'as a married couple—in order to determinewhich is more advantageous. Clearly, as more and more credittables were added, this advantage would be eroded, and at somepoint the credit would be more complicated than optionalsingle filing.

9. The assumptions about the future rates of inflation are fromCBO's February 14, 1981 economic forecast. The inflation rateis assumed to be 11.3 percent in 1981, 9.5 percent in 1982,and 9.0 percent in 1983, for an overall inflation rate of 32.8percent between 1981 and 1984. To the extent that thedifferent tax cut proposals considered, here could, in and ofthemselves, affect the inflation rate, it is anoversimplification to consider only one rate.

10

TABLE 2. REMAINING MARRIAGE PENALTIES OF SELECTED COUPLES* UNDER CURRENT LAW AND AFTER VARIOUS TAXLAW CHANGES, ASSUMING THAT NOMINAL WAGES KEEP PACE WITH INFLATION,•> FOR CALENDAR TEAR 1984(In constant 1981 dollars)

Marriage Penaltyc in 1984 After

CombinedAdjustedGrossIncome

15,000Incomesplit90/1067/3350/50

25,000Incomesplit90/1067/3350/50

40,000Incomesplit90/1067/3350/50

60,000Incomesplit90/1067/3350/50

100,000Incomesplit

90/1067/3350/50

Tax Lia-bility UnderCurrent Law

1981

1,6241,6241,624

3,3993,3993,399

7,0527,0527,052

13,60213,60213,602

28,87828,87828,878

1984

1,8391,8391,839

3,9623,9623,962

8,4468,4468,446

15,85515,85515,855

31,25531,25531,255

MarriagePenalty0 UnderCurrent Law

1981

-145197240

-311168229

-577502822

-9021,5792,166

-2413,1723,760

1984

-14613279

-319216398

-614954

1,258

-4721,8872,554

3542,8082,857

30PercentGeneralRate

Reduction*1

-114111103

-198228326

-370789

1,012

-5881,5692,109

-1,3972,3693,219

10PercentTwo-EarnerDeduction6

-18213

-95

-399-48-2

-786386398

-772897

1.-426

-1461,6791,727

MarriageTax

Credit*

-146-74-214

-319-314-439

-614-745-990

-472-836-715

-599-500-452

ModifiedMarriageTaxCredit?

-14600

-31900

-61400

-47200

000

a. Couples have no investment income or dependents. Itemized deductions are 23 percent of adjustedgross income.

b. The inflation rate is assumed to be 11.3 percent in 1981, 9.5 percent in 1982, and 9.0 percent in1983.

c. The marriage penalty is the difference between the tax the couple pays married and filing jointlycompared to the sum of what the spouses would pay if single. A minus (-) sign indicates a mar-riage bonus, that is, a married couple pays less than if they were single.

d. The tax rates used in making these calculations are those that would prevail in 1984 after fullimplementation of the Administration's proposed rate reductions. These reductions only approxi-mate a precise 30 percent across-the-board reduction, and would not explicitly lower the maximumtax rate on earned income.

e. A deduction is allowed for 10 percent of the first $30,000 of earnings of the lesser-earningspouse.

f. A credit is allowed for the amount of marriage penalty that would occur if the couple had noinvestment income, no dependents, and no itemized deductons.

g. A credit is allowed for the amount of marriage penalty that would occur if the couple had noinvestment income, no dependents, and itemized deductions of 23 percent of adjusted gross Income.

amount of the marriage penalties of the representative couples in1981 (Table 1) with the dollar amount of the penalties in 1984assuming that the couples' incomes just kept pace with infla-tion.*0

In the absence of any tax cuts between now and 1984, bracketcreep would push up the tax liabilities of all couples. (Seecolumns 1 and 2 of Table 2 for tax liabilities under current lawfor 1981 and 1984.) A couple whose income was $15,000 in 1981would have income in 1984 of $19,926 if its income just kept pacewith inflation. On this income, the couple would pay a tax of$2,443 in 1984 dollars, which would have the purchasing power of$1,839 in constant 1981 dollars (see Table 2, column 2).11

This couple, whose 1981 tax bill is $1,624 (see Table 2, column1), would pay $215 more in tax (in real terms) in 1984 ($1,839minus $1,624 = $215). The same kind of calculation shows thatbracket creep alone would increase the marriage penalty for someand decrease it for others (compare columns 3 and 4 in Table 2).

If the only individual tax cut enacted between now and 1984were a general 30 percent rate reduction, and if CBO's assumptionabout inflation is correct, marriage penalties for some coupleswould actually be greater in 1984 than they are today (see Table2, column 5), and penalties for many affluent couples would stillamount to over a thousand dollars. On the other hand, Table 2shows that the bonuses and penalties of many other couples wouldbe reduced.

The last three columns of Table 2 show marriage penaltiesremaining in 1984 on the admittedly unrealistic assumption thatthe only tax cut enacted by then was some form of marriage penaltyreduction. The conclusions drawn above for the relative effectsof these proposals on marriage penalties in 1981 generally holdtrue for 1984 as well..

10. Under this assumption, the couple with a $15,000 income in1981, for example, would have an income of $19,926 in 1984.Since this income would have the purchasing power of $15,000in 1981 dollars, the couple is shown in Table 2 as stillhaving an income of $15,000 ($19,926 = $15,000 x 1.328).

11. $1,839 = $2,443/1.328.

12

CHAPTER III. WORK INCENTIVES AND TAX RATES FOR SECONDARY WORKERS

The work decisions of secondary workers are influenced to afar greater degree by marginal and average tax rates than are workdecisions of primary workers. Recent empirical evidence suggeststhat a 10 percent cut in marginal tax rates increases by 1 percentthe hours worked by married men and by 4 percent those worked bymarried women.1- This implies that total work hours would in-crease more if part of an individual income tax cut were usedspecifically to reduce tax rates for secondary workers (mostlymarried women) rather than using the entire cut for across-the-board rate reductions.^

For income tax purposes, the income of the secondary workeressentially is "stacked" on top of the income of the primary

Jerry Hausman, "Income and Payroll Tax Policy and LaborSupply," National Bureau of Economic Research Working PaperNo. 610 (December 1980), pp. 25-26. Even in the face of high.marginal and average tax rates, an increasing share of marriedwomen has entered the work force over the past decade. Thisdoes not refute Hausman's findings, however, since there mighthave been an even larger surge in labor force participationhad tax rates been lower.

Hausman studied the labor supply responses of married menversus married women. Since statistically most husbands areprimary workers (the spouse with larger earnings), Hausman'sresults can be used to support the proposition that marriagepenalty reductions (which are directed at secondary workers,rather than specifically at wives) encourage more work effortthan across-the-board rate cuts of the same size. Throughoutthe following discussion, for the sake of expository ease, theterm "married woman" is used to represent the secondary earner(the spouse with smaller income), even though many wives earnmore and are more permanent members of the labor force thantheir husbands.

13

worker. The tax rate applying to the first dollar of thesecondary worker's earnings is, therefore, the rate applying tothe last dollar of the primary worker's earnings. This is a muchhigher rate than the rate the wife would pay if not married. Awoman married to a highly paid executive can, for example, face afederal income tax rate of 50 percent on her first dollar ofearnings.^

In order to understand how the present rate structure or con-templated changes to it might affect the work decisions of marriedwomen, it helps to consider several different tax rates. If awife does not currently have a paying job and is deciding whetherto accept a specific job offer, she will decide partly on thebasis of whether the take-home pay would make it worthwhile. Themost relevant tax rate in this case is the average tax rate onthis income. If a woman was deciding whether to pursue careeradvancement and a salary increase, or deciding whether to leave apart-time job in favor of a full-time job, the relevant tax rateis the tax rate on the added income from the raise. This isapproximately the wife's marginal tax rate on her presentearnings.

CUSSENT LAW

Table 3 shows the average tax rates representative wiveswould face if they took paying jobs. Under current law, forinstance, a secondary worker with a potential income of $1,000married to someone making $9,000 would face an average tax rate of17 percent on her earnings. If she got a job paying $9,000 a yearinstead of $1,000, her average tax rate would be 18 percent.

Table 4 shows the marginal tax rates that would apply to payraises of secondary workers. For example, if both spouses earn$9,000 a year, the secondary worker would face a tax rate of 21percent on a dollar of pay raise under current law (column 1,Table 4). A woman earning $5,500 a year and married to a man

3. Adding in social security taxes and state income taxes wouldraise her beginning tax rate even higher.

14

TABLE 3. EFFECTS OF VARIOUS TAX LAW CHANGES ON AVERAGE TAX RATES, FOR CALENDARYEAR 1981a

Average Tax Rates For Secondary Workers (In Percents)^Adjusted Gross

Income(In Dollars)

PrimaryWorker

9,0009,0009,000

18,00018,00018,000

27,00027,00027,000

50,00050,00050,000

SecondaryWorker

1,0004,5009,000

2,0009,00018,000

3,00013,50027,000

5,50025,00050,000

CurrentLaw

171818

171921

222528

333637

5PercentGeneral

RateReduction0

161717

171820

212427

323537

30PercentGeneralRate

Reduction0

121313

131416

161821

252729

10PercentTwo-EarnerDeductiond

151615

151618

192124

293134

ModifiedMarriageTax

Credit6

. 171416

171718

222122

332730

The estimated calendar year 1981 revenue losses from these proposals are about$15 billion from a 5 percent rate reduction, about $80 billion from a 30percent rate reduction, $6 to $7 billion from a 10 percent two-earner deduc-tion and roughly $5 to $10 billion from a marriage tax credit (based on effec-tive dates of January 1, 1981).

b. Couples have no investment income or dependents,percent of adjusted gross income.

Itemized deductions are 23

The tax rates used in making these calculations are those of the Administra-tion1 s proposed rate reductions, which only approximate precise 5 and 30 per-cent reductions, and which do not explicitly lower the maximum tax rate onearned income.

A deduction is allowed for 10 percent of the first $30,000 of earnings of thelesser-earning spouse.

A credit is allowed for the amount of marriage penalty that would occur if thecouple had no investment income, no dependents, and itemized deductions of 23percent of adjusted gross income.

15

TABLE 4. EFFECTS OF VARIOUS TAX LAW CHANGES ON MARGINAL TAX RATES FOR CALENDAR YEAR 1981*

Adjusted Marginal Tax Rates for Secondary Workers (In percents)^Gross Income(In

PrimaryWorker

9,0009,0009,000

18,00018,00018,000

27,00027,00027,000

50,00050,00050,000

dollars)SecondaryWorker

1,0004,5009,000

2,0009,00018,000

3,00013,50027,000

5,50025,00050,000

CurrentLaw

181821

242832

283743

434950

5 PercentGeneral RateReduction0

171720

232730

273541

414750

30 PercentGeneral RateReduction0

131315

182123

212732

323640

10 PercentTwo-EarnerDeduction41

161619

222529

253339

394450

ModifiedMarriageTax Credit6

181619

241930

282434

433449

Primary Workers'Marginal Tax Rate(In percents)

Current ModifiedLaw

181821

242832

283743

434950

Credit6

181919

243030

283434

434949

a. The estimated calendar year 1981 revenue losses from these proposals are about $15 billion from a5 percent rate reduction, about $80 billion from a 30 percent rate reduction, $6 to $7 billionfrom a 10 percent two-earner deduction and roughly $5 to $10 billion from a marriage tax credit(based on effective dates of January 1, 1981).

b. Couples have no investment income or dependents. Itemized deductions are 23 percent of adjustedgross income.

c. The tax rates used in making these calculations are those of the Administration's proposed ratereductions, which only approximate precise 5 and 30 percent reductions, and which do not explic-itly lower the maximum tax rate on earned income.

d. A deduction is allowed for 10 percent of the first $30,000 of earnings of the lesser-earningspouse.

e. A credit is allowed for the amount of marriage penalty that would occur if the couple had noinvestment income and had itemized deductions of 23 percent of adjusted gross income.

earning $50,000 a year would face a marginal tax rate of 43percent.

EFFECTS OF TAX REDUCTIONS

Administration's Rate Cuts. The 5 and 30 percent across-the-board rate reductions would lower (by 5 and 30 percent respec-tively) the marginal tax rates of both primary and secondaryworkers (see columns 2 and 3 of Table 4.) They would also loweraverage tax rates by approximately 5 and 30 percent respectively(see columns 2 and 3 of Table 3).

Two-Earner Deduction. The deduction of 10 percent of thefirst $30,000 of earnings of the secondary worker would leave un-changed the average and marginal tax rates of primary workers.For secondary workers whose incomes fall below the $30,000 cap,however, the deduction would have the effect of reducing bothaverage and marginal tax rates by 10 percent.^ For those withincomes above $30,000, average tax rates would drop by less than10 percent, and marginal tax rates would almost always be un-changed. ̂ An uncapped 10 percent deduction would be equivalent toa 10 percent rate cut targeted on secondary workers and wouldelicit about the same work response on the part of secondaryworkers as would a 10 percent across-the-board rate cut.6

4. The primary worker's marginal rate could drop slightly andthe marginal rate reduction for the secondary worker could beslightly more than 10 percent if, by chance, the couple'scombined income put them just over a tax bracket delineator,so that with the deduction they slid down a bracket. Bracketswiden as incomes increase, making this extra reductionextremely unlikely, at high combined incomes.

5. The only possible marginal rate reduction in this case wouldoccur if the deduction happened to bring the couple's taxableincome down a bracket. At the high combined income levels atwhich the cap becomes binding, however, brackets are very wide(partly because of the 50 percent maximum rate on earnedincome), making this rate reduction highly unlikely.

6. The revenue loss of the capped marriage deduction would beabout $6 to 7 billion in 1981, compared to a revenue loss ofabout $15 billion for a 5 percent across-the-board rate cut(both based on effective dates of January 1, 1981).

17

Marriage Tax Credit. Allowing couples a marriage tax creditwould be roughly equivalent to letting them file as singletaxpayers. As currently conceived, the marriage credit is, infact, equivalent to optional single filing for couples who have noinvestment income and who do not itemize deductions.

*• l J "̂7. Credit = max JO, T̂ (Ŷ + ̂ ) - [Tg tfj) + T̂ Ŷ ) ]j

sd *•where Tm (Y) » tax on income of Y, calculated on the married

s,j ' (m) schedule, with the standard deduction (sd)Ts (Y) = tax on income of Y, calculated on the singleft (s) schedule, with the standard deduction (sd).

Yft = earnings (e) of husband (h).e,

Yw = earnings (e) of wife (w).

But if the couple has no investment income and doesn't itemizedeductions, then their tax bill would be

5a e e f sJ £. e s^ e. Ĵ = 1Tm ^

which is optional single filing.

The analogy between the marriage credit and optional singlefiling is not as precise for couples with investment income oritemized deductions. One of the strengths of the marriagecredit proposal is that it skirts the problem of allocatinginvestment income and itemized deductions between spouses. Atthe same time, however, only couples in which each spouse'sinvestment income equals his excess itemized deductions(deductions in excess of the zero bracket amount) currentlypay exactly the marriage penalties that would be offset by thecredit.

If the couple's investment income exceeds excess itemizeddeductions, the marginal tax rate of the secondary workercould be greater than the rate taken directly from the singlesschedule. This is because each additional dollar of familyearnings, regardless of whether earned by husband or wife,could push the investment income (minus deductions) into ahigher tax bracket.

18

Couples who now get a marriage bonus would generally beentitled to marriage tax credits of zero. Therefore, thesecouples' tax bills would be unchanged from current law, as wouldtheir average and marginal tax rates. In the case of couples whonow pay a marriage penalty, however, a marriage tax credit wouldlessen, to a great exent, the link between husband's and wife'stax rates.8 Each would essentially pay tax separately on his orher earnings, using the rates from the schedule for single tax-payers . The marriage tax credit plans introduced in the Congressand the modified version described above have very similar effectson marginal and average tax rates, so only the rates for themodified version are reported in Tables -3 and 4. As seen in thesetables, the credit would not change tax rates for secondaryworkers in couples that now receive a marriage bonus (generallythe first couple in each income grouping). It would, however,sharply lower average and, particularly, marginal tax rates formost other secondary workers.9

Since the tax credit proposal would be similar to optionalsingle filing, it would alter the tax rates for primary workers aswell as those for secondary workers. Primary workers in thosecouples now paying a penalty also would essentially pay taxaccording to the single schedule. Because of this, some primaryworkers would face higher marginal tax rates than they do undercurrent law. The last two columns in Table 4 show the tax rate onthe last dollar of the primary worker's earnings under current law

8. The tax rate on the couple's investment income would still beinfluenced by the earnings of both spouses, however.

9. An unusual characteristic of the marriage credit proposal isthat marginal tax .rates of secondary workers rise, fall, andthen rise again as the secondary worker's income increases.The marginal tax rate on the first dollar of the woman'searnings is the marginal rate on the couple's combinedincome. This relationship holds until the wife's earnings arelarge enough so that the couple pays a marriage penalty. Atthat income, the wife's marginal rate drops down to the rateshe faces on the single schedule on her income alone. Furtherincreases in her income push her rate up the singles' marginalrate schedule until the rate reaches a plateau at the maximum50 percent rate on earned income.

19

and what the rate would be if a credit were enacted. The secondline of Table 4, for instance, shows that the primary worker inthis example would experience an increase in marginal tax ratefrom 18 percent under current law to 19 percent under the credit.In the third line, the primary worker would actually experience adrop in his marginal rate—from 21 percent to 19 percent. Becausethe primary worker in the first line is from a couple that wouldget a credit of zero, his marginal rate would be unaffected.Primary workers' work decisions are less sensitive to marginalrate changes than are those of secondary workers. Therefore, ifthe credit caused a decrease in total hours worked by primaryworkers, the effect would probably be small compared to theincrease in hours worked by secondary workers. ̂

10. The model that Hausman used to estimate the responsesof primary and secondary workers to a 10 percent rate cutcould be adapted to produce labor supply responses to themarriage credit, but as yet this has not been done.

20

CHAPTER IV. CONCLUSION

Concern about the marriage tax penalty has generally beenfocused either on tax equity or on the labor force participationof married women or both. Those concerned with tax equity arebothered by the fact that many people pay more tax if they marrythan they would if they did not marry. Some also feel that thetax system should not encourage divorce (or encourage people tolive together without marrying). Tables 1 and 2 show that theproblem of large marriage penalties for most working couples willpersist over the next few years if only the Administration's 30percent across-the-board rate reduction is enacted. Although theAdministration's rate cut would generally reduce marriage penal-ties, the penalties could be reduced further if part of theindividual tax cut were devoted specifically to that purpose.The proposed 10 percent deduction for two-earner couples wouldgreatly lessen marriage penalties, but would not eliminate them.The marriage tax credit (in a somewhat different form that thatintroduced in the Congress) would come closer to eliminatingmarriage penalties than would the Administration's rate cuts bythemselves or the deduction for two-earner couples.

Those concerned with the labor force participation of marriedwomen are bothered by the very high average and marginal tax ratesfor many married women whose working decisions are influenced bytax rates far more than are the decisions of primary workers. Taxrates facing secondary workers would be reduced 5 percent by a 5percent rate cut, 30 percent by a 30 percent rate cut, and 10percent by a 10 percent two-earner deduction. A marriage taxcredit would reduce .average and marginal tax rates for mostsecondary workers, but the percentage reductions would vary.

Tax rates facing primary workers would be reduced 5 percentby a 5 percent rate cut, 30 percent by a 30 percent rate cut, butwould not be changed by a 10 percent two-earner deduction, andwould actually be increased in some cases by a marriage taxcredit. Although the hours worked by married women would increaseas a result of any of the proposals, overall hours worked bymarried men and women would increase more if a portion of the taxcut was targeted on marriage penalty reduction rather than if the

21

whole tax cut was devoted to an across-the-board rate reductionwith the same revenue loss.

None of the targeted proposals to reduce marriage penaltiesis likely to provide a lasting solution that will please all tax-payers. The proposals simplest to administer would do the leastprecise job of offsetting marriage penalties and often wouldcreate larger marriage bonuses (and hence larger single penal-ties) . In addition, people who believe that the family should bethe basic unit of taxation are often critical of these targetedproposals since they produce a situation in which married coupleswith equal incomes would pay different amounts of tax. (At anycombined income level, couples whose income is divided most evenlybetween husband and wife would pay the least tax.) Ultimately,perfect marriage neutrality can only be achieved by changing to aproportional tax (or a progressive flat-rate tax with personalexemptions) or by taxing individuals rather than families.

22

APPENDIXES

APPENDIX A. EXPLANATION OF MUTUAL INCONSISTENCY OF THE THREECONCEPTS OF TAX EQUITY

The following explanation is excerpted fromJane Bryant Quinn, "The Marriage Penalty,"Newsweek (August 28, 1978), p. 72.*

An equitable tax system, Harvey S. Rosen of Princeton Univer-sity observes, is generally expected to meet three tests: (1) thetax should be progressive, taxing a person's first dollar ofincome at a lower rate than the extra dollars he piles on top; (2)your tax burden shouldn't be changed by marital status; (3) otherthings being equal, families with the same incomes should pay thesame tax. Any two of these goals can be achieved at the sametime, Rosen says, but not all three. As long as we accept pro-gressivity, we have to choose either point 2 or point 3 but notboth.

Clash of Principles

This calls for an example. First take point 2, that maritalstatus shouldn't make any difference to your tax. Under thisprinciple, each person's income would be taxed individually, andat the same rate. A person with a $20,000 taxable income wouldowe the same amount, whether married or single. But look at whatthis does to family income: a $20,000, single-earner family is ina higher tax bracket than a family where the man makes $15,000 andthe wife $5,000. The latter, in turn, pays more than the familywhere each makes $10,000. That's three different $20,000 fami-lies, each paying a different tax. A clear violation of point 3.

Now let's explore point 3, that all families with the sameincome should pay the same level of tax. Couples with taxableincomes of $20,000 owe the same amount, regardless of who earnswhat; similarly, single-person households with $20,000 would pay

1. Copyright 1978 by Newsweek Inc. All rights reserved. Re-printed by permission.

24

at the same rate as marrieds (although they would normally havefewer exemptions). This contradicts point 2. Working coupleswould pay less if they stayed single.

Prior to the Tax Reform Act of 1969 there was no marriagepenalty. When a working couple married and filed a joint return,their combined tax was generally the same before and after mar-riage. Point 2 triumphant, but point 3 up the creek. A singleperson paid up to 41 percent more than a married person with thesame income.

This tremendous inequity was eased by Congress in 1969. Thetax advantage of joint filing was reduced, so that the extra taxpaid by singles wouldn't rise more than 20 percent above the mar-ried amount. The change in rates created a marriage penalty forworking couples—not intentionally, but as an arithmetical by-product of a progressive-tax system.

Spreading the Grief

The present law is actually fairer than the old one, despitethe marriage penalty, because it spreads the grief around. In theold days, only singles paid an excess tax. Today, singles stillpay at a higher rate than marrieds, but the differential isn't ashigh. Working couples pay a marriage penalty. Only traditional,single-earner families (or families where one earner makes verylittle) come out relatively ahead.

MATHEMATICAL EXPLANATION2

The logical inconsistency can be shown mathematically asfollows: Consider four individuals, A, B, C, and D. Assume thatA and B have equal incomes, C has an income equal to the combinedincomes of A and B, and D has no income. Let T(A), T(B), and T(C)be the tax burdens of the three individuals with income. If thetax system is not proportional,

T(C) j* T(A) + T(B). (1)

2. Reprinted from The Income Tax Treatment of Married Couples andSingle Persons, prepared by the Joint Committee on Taxationfor the House Committee on Ways and Means and the SenateFinance Committee, 96:2 (1980), p. 26, footnote 1.

25 .

Now assume A and B marry each other, as do C and D, and let T(AB)and T(CD) be the tax burdens of the married couples. The prin-ciple that families with the same income should pay the same taxrequires that

T(AB) - T(CD), (2)

and marriage neutrality requires both that

T(A) + T(B) - T(AB) (3)

and that

T(CD) = T(C). (4)

Substituting (3) and (4) into (2) yields

T(A) + T(B) - T(C)

This, however, contradicts equation (1), indicating that equations(2) and (3) can only both be true in a proportional tax system.

26

APPENDIX B. MARRIAGE PENALTIES UNDER CURRENT LAW AND AFTER ENACT-MENT OF 10 PERCENT DEDUCTIONS WITH VARIOUS FLOORS ANDCAPS FOR TWO-EARNER MARRIED COUPLES

APPENDIX B. MARRIAGE PENALTIES* UNDER CURRENT LAW AND AFTER ENACTMENT OF 10 PERCENTDEDUCTIONS WITH VARIOUS FLOORS AND CAPSb FOR TWO-EARNER MARRIED COUPLES FORCALENDAR TEAR 1981 (In dollars)

CombinedAdjustedGrossIncome

15,000Incomesplit90/1080/2067/3350/50

25,000Incomesplit90/1080/2067/3350/50

30,000Incomesplit90/1080/2067/3350/50

40,000Incomesplit90/1080/2067/3350/50

50,000Incomesplit90/1080/2067/3350/50

60,000Incomesplit90/1080/2067/3350/50

100,000Incomesplit90/1080/2067/3350/50

CurrentLaw Penalty

-145124197240

-31134168229

-411-47183383

-577-54502822

-740120

1,0681,455

-902297

1,5792,166

-2411,6713,1723,760

No Floor;$2,500Cap

-177619383

-331-104-48-89

-495-215-94-37

-725-3501482

-955-310358 ,380

-1,196-291620983

,---..

-741671

1,9222,510

No Floor;$3,500Cap

-177619383-

-331-104-48-89

-495-215-94-37

-725-3501482

<

-955-310358380

-1,196-291620768

-741671

1,5222,010

No Floor$5,000

Cap

-177619383

-381-104-48-89

-495-215-94-37

-725-3501482

-955-310358380

-1,196-291620768

-741671

1,5221,260

»No FloorNo Cap

177619383

-381-104-48-89

-495-215-94-37

-725-3501482

-955-310358380

-1,196-291620768

-741671

1,5221,260

$2,000; Floor;

No Cap

-145103135125

-325-500

-41

-439-159-3819

-651-27688156

-869-224444466

-1,098-193707854

-641771

1,6221,360

$3,000Floor;No Cap

-145124156146

-311-2224

-17

-411-131-1047

-614-239125193

-826-181487509

-1,049-144756897

-591821

1,6721,410

H.R.177 =

-145619383

-311-104-48-89

-411-215-94-37

-577-3501482

-740-310358595

-902-291620

1,198

-241671

2,1722,760

(Continued)

APPENDIX B. (Continued)

a. The marriage penalty is the difference between the tax the couple pays married filingjointly compared to the sum of what the spouses would pay if single. A minus (-) signindicates a marriage bonus, that is, a married couple pays less than if they weresingle* Couples have no investment income or dependents. Itemized deductions are 23percent of adjusted gross income. If this is less than the zero bracket amount, theyare assumed not to itemize.

b. A deduction of 10 percent of the earnings of the lesser-earning spouse exceeding thefloor, up to a maximum deduction equal to the cap. Under a 10 percent deduction witha $2,000 floor and $5,000 cap, for instance, a couple in which one spouse earned$40,000 and the other earned $60,000 would be allowed a deduction of $3,800 [$3,800 -•10($40,000-$2,000)]. A couple in which both spouses earned $60,000 would be allowedthe maximum deduction of $5,000, since .10($60,000-$2,000) - $5,800, which exceeds the$5,000 cap.

c. A 10 percent deduction would be allowed for couples in which each spouse contributedat least 20 percent of the combined earnings. The maximum would be $2,000.

29'

APPENDIX C. SAMPLE TABLE TO DETERMINE MARRIED EARNERS' CREDIT

APPENDIX C. SAMPLE TABLE TO DETERMINE MARRIED EARNERS' CREDIT

Earned Incomeof Spouse No.(In thousandsof dollars)

05101520253035404550

2 Earned Income of(In thousands

0

00000000000

5

01861981700000000

10

0198351515591622637627454439389

15

0170515843

1,1281,3941,6191,6811,7361,7211,691

20

00

5911,1281,6262,0522,3492,6392,6942,6992,699

25

00

6221,3942,0522,5493,0743,3643,4393,4743,474

Spouse No. 1of dollars)

30

00

6371,6192,3493,0743,5643,8743,9794,0144,014

35

00

6271,6812,6393,3643,8744,1744,2794,3144,314

40

00

4541,7362,6943,4393,9794,2794,3344,3694,369

45

00

4391,7212,6993,4744,0144,3144,3694,3944,394

50

00

3891,6912,6993,4744,0144,3144,3694,3944,394

This table is from S.775, introduced by Senator Moynihan. The credit is theamount of marriage penalty a couple with one child would experience if they had noinvestment income and did not itemize deductions. Couples who would, under theseassumptions, currently have a marriage bonus would get a credit of zero.

31