What "Marriage Penalty?"

Phony figures in the tax debate

By Robert S. McIntyre

As they talk about tax simplification, both the Republican Congress and the Democratic president have been enthusiastic about creating disparities among taxpayers of similar incomes-- especially when it comes to treating investment income more favorably than wages. But now many in Congress are making a great cause of one particular differential: the one between married and unmarried couples. So strong is the pressure to do something about the so-called "marriage penalty" that the stalled tobacco bill gained momentum in the Senate this week from the inclusion of a provision to give an income tax break to low and moderate income married couples.

For most couples (those making up to about $60,000 a year), the main "marriage penalty" comes from the fact that the standard deduction for a couple is less than the standard deduction for two unmarried individuals--$1,400 less for childless couples and $3,400 for couples with children. If two roommates earn $20,000 each, this difference means they will pay $210 more in taxes if they are married than if they are not.

The Biggest Marriage Tax Is the Hardest One to Solve Though not as often discussed, the biggest "marriage penalty" of all stems from the "earned-income tax credit." This tax rebate for lower income working families is computed and phased out exactly the same for single parents as for couples with children. For example, two cohabiting single parents each making $15,000 can get as much as $2,870 apiece in tax rebates. But if they marry, their tax rebates are eliminated. As a result, in the worst cases, two-earner couples with four children and a joint income of $20-35,000 can face marriage penalties exceeding $5,000. Other EITC marriage penalties are less gigantic, but they can hit some two-job married couples with children making up to $50,000 with thousands of dollars in added taxes just for being married. Eliminating EITC marriage penalties could be prohibitively costly—$20-25 billion a year—unless offset by some pretty hefty tax hikes on a lot of the modest-income single parents the program is mainly intended to help, and it would probably make the EITC program even harder to administer. It's worth noting, however, that Congressional Republicans who want to spend even larger sums—with no offset—to reduce marriage penalties on the highest-income married people haven't entertained the idea of targeting marriage penalty relief to couples in the middle of the income scale.

Higher income couples typically itemize, so they are not affected by the standard deduction. But they face rate schedules that are different for singles and marrieds. If two partners earn $40,000 each, a decision to get married could, on its face, cost them more than $1,000.

But these kinds of calculations vastly overstate the marriage penalty. Totally eliminating the penalty would cost something like $42 billion a year. If Congress wants to reduce or eliminate this penalty, it must either do without the revenue or make up the difference in some other way. Since married couples pay about three-quarters of all income taxes, almost all ways of making up the revenue will place most of the burden right back on married couples.

For instance, that $42 billion could be covered by a 6 percent or 7 percent surtax on everyone. But then the $42 billion gross tax cut for marrieds would net out as only about a $13 billion cut for them-- acompnaied by a $13 billion tax increase on unmarried taxpayers. That works out to only about a $120 tax cut for the typcial married couple (and $67 tax increase on the typical single). So, unless you're prepared to load the entire tax increase on singles-- not likely-- you should take all those "marriage penalty" figures floating around the media and divide them by at least four.

In other words, it's not logical to measure the marriage penalty by comparing what married couples pay now with what they'd pay if overall federal taxes were a lot lower. Saying that taxes would be lower if taxes were lower is true, but not edifying. The correct comparison is with a revised tax system that raises as much as current law.

(Of course, there's the option of not making up the revenue and just passing a big tax cut for married couples. But that necessarily entails reducing government services from what they'd otherwise be, and the losses from that would probably be borne by marrieds and singles in roughly similar proportions to the benefits they'd get from the tax change.)

Consider another example. Blind taxpayers are allowed a larger standard deduction than sighted people ($1,050 more for a blind single, $1,700 more for blind married couples). This tax break costs a piddling $30 million a year, or about 24 cents per sighted taxpayer. But if we though of it as a "sight penalty" and calculated it as the added tax a person pays now for the privilege of being able to see, it works out to something like $208 per sighted taxpayer.

The "marriage penalty" dates back to 1969. Before that, the tax code's treatment of married and single taxpayers was straightforward. Each member of a married couple was considered to enjoy exactly half its total income, and each was taxed on that income at the same rate as single people. But this meant that a single person earning $80,000 would pay more taxes than two married people with the same total income (because more of the married couple's income would fall in the lower tax brackets). So in 1969 a new, more favorable singles rate table was adopted in response to protests that the system discriminated against them.

A couple in which one spouse earns all the income is still better off married than never married, at least for tax purposes. A couple whose earnings are roughly equal is better off unmarried than married. A married couple that divorces with a separation agreement to split their combined incomes, including investment income, down the middle gets the best tax deal of all. Under a progressive tax system, the only way to eliminate the marriage penalty is to go back to relatively higher taxes on singles. However you fiddle with the rates, there will always be a perceived "penalty" on somebody. But calculated honestly, the penalty is a lot smaller than people claim.

Back To Reports