The Heritage Foundation

Backgrounder #1382 on Taxes

July 7, 2000

July 7, 2000 | Backgrounder on Taxes

Comparing Four Major Marriage Penalty

During the month of May, Senate opponents of marriage penalty relief successfully filibustered an effort to enact legislation aimed at reducing this source of inequity in the tax code. In July, the Senate will have another opportunity to address the marriage penalty when it considers a bill passed by the House, additional measures introduced in the Senate, a Democratic alternative approach, and a proposal put forth by the President in his fiscal year (FY) 2001 budget. The Republican leadership of the Senate has indicated that it plans to make the marriage penalty the only issue the Senate considers when it takes up the first budget reconciliation bill.

The four major proposals now before the Senate specifically address the bias in the Internal Revenue Code that forces married workers to pay more in taxes than they would if they were not married but still lived together. These measures substantially ease the marriage penalty and demonstrate that the President and Members of Congress from both parties recognize the need to reduce this bias. The challenge will be for them to agree on the specific legislative vehicle to accomplish their shared goal while still satisfying each party's revenue goals. Among the options, the approaches taken by the Senate and House bills would provide some immediate tax relief to married families. The Senate should not squander this opportunity to begin to eliminate the unfair treatment of marriage in America's tax code.

FOUR RECENT PROPOSALS TO END THE MARRIAGE PENALTY

The Senate will soon consider the Marriage Tax Penalty Relief Act of 2000 (H.R. 6), which the U.S. House of Representatives passed in February to provide $182.3 billion in marriage penalty tax relief over the next 10 years.1 It also should consider the Marriage Tax Relief Act of 2000 (S. 2346) introduced by Senator William Roth (R-DE), chairman of the Senate Finance Committee, as well as an amendment proposed by the Democratic members of that committee to lessen the marriage penalty. Finally, President Bill Clinton proposed some relief for working married couples in his FY 2001 budget. Despite their common intent, there are key differences in the approaches these proposals would take to end the marriage penalty.

What Is the Marriage Penalty?

The marriage penalty occurs when the total tax paid by a married couple that files a joint return exceeds the amount they would pay if they were single taxpayers filing separate returns. In other words, two unmarried working taxpayers who live together generally will see a lower combined total income tax bite than they would if they are married and file joint returns.

The Congressional Budget Office (CBO) estimates that the marriage penalty in the tax code currently affects about 22 million couples, or 43 percent of all married couples who pay an average of $1,480 more per year in taxes.2 Working married couples are more likely to be affected by this penalty when the second earner contributes at least 30 percent of the total household income.3 As the number of working couples rises, so too will the number of couples who will suffer from the marriage penalty unless Congress takes steps to reduce this inequity in the code.

The major portion of the excess tax liability on married working couples arises from two distinct elements of the tax code that treat married couples and single working adults differently: the standard deduction and the tax rate brackets. In addition, a spending program administered by the Internal Revenue Service (IRS), the earned income tax credit (EITC), also imposes a significant marriage penalty. Although there are other areas in the code that treat married couples unfairly, these three areas have the largest effects.

The Standard Deduction

The standard deduction for a working married couple filing a joint return is only 1.67 times the standard deduction that a single worker claims, not twice that deduction as one would expect. For example, a single worker for the tax year 2000 can take a standard deduction of $4,400, but a married working couple filing a joint return is allowed to take a deduction of $7,350. If they were single cohabiting adults, and each claimed the $4,400 deduction, they would see a cumulative standard deduction from their household income of $8,800--in effect, they could protect an additional $1,450 from being taxed. Thus, the venerable standard deduction that is built into today's code actually penalizes marriage.

Two-earner married couples suffer precisely because the deductible amount for the second earner ($2,950) is lower than that of a single wage earner ($4,400). This inequity could be erased by increasing the standard deduction for married couples who both work and who file joint returns to twice the deduction taken by single taxpayers.

Two bills under consideration in the Senate, H.R. 6 and S. 2346, propose such a reform. Each one would increase the standard deduction for joint filers to twice that of single workers, effective in 2001. This change would save taxpayers an estimated $66.2 billion over 10 years.4

President Clinton's proposal would increase the standard deduction of single and joint filers. His proposed deduction would include either the basic standard deduction for a single worker plus the amount of the earned income of the lower-earning spouse, or an amount that is twice the basic standard deduction of single filers, whichever is less. His proposal would increase the standard deduction for single filers by $250, for head of household filers by $350, and for joint returns by $500. The plan would be phased in over five years at a savings to the taxpayers of $46.7 billion over 10 years.5

The Democratic amendment takes a different approach in ending the bias in the standard deduction, which is explained below.

Tax Rate Brackets

Married couples also suffer a penalty because the tax rate bracket for filing a joint return is less than twice the single taxpayer's comparable tax bracket rate. Thus, a married two-earner couple filing a combined return would start paying the 28 percent tax on income sooner than they would if they were not married and both filed as single taxpayers. Single workers in 2000 will fall into the 28 percent tax bracket with earnings of $26,250; married couples filing a joint return for 2000 will fall into the 28 percent bracket at $43,850--which means the second earner begins paying the higher tax rate after earning only $17,600 of income (e.g., $26,260 + $17,600 = $43,850).

This bias continues throughout the rate brackets. Couples who have only one earner are treated much less harshly because they pay the 15 percent tax rate on roughly $17,000 more of their income than they would have if the spouse with earnings filed as a single taxpayer.

H.R. 6 and S. 2346 both propose to broaden the 15 percent bracket on taxable income for joint returns to twice the income bracket for single taxpayers. This means that the starting point for the 28 percent bracket for married taxpayers who file jointly would always equal twice the starting point for the 15 percent bracket. S. 2346 proposes broadening the joint filers' 15 percent bracket over a period of five years between 2002 and 2006. In H.R. 6, the brackets would begin to widen in 2003, and the phase-in period would end in 2008.

Adjusting the income level where the 28 percent rate takes effect according to the provisions of S. 2346 would save taxpayers $122.6 billion over 10 years, compared with a savings of $104.7 billion over 10 years from the changes recommended in H.R. 6. The difference in these savings amounts is due to the different phase-in periods.

Both bills would provide tax relief to married couples in the 28 percent bracket. However, since neither bill's provisions would correct the differing rate structures for tax brackets above 28 percent, filers in the higher brackets would continue to suffer the marriage penalty.

The President's proposal does not address this aspect of the marriage penalty. The Democratic amendment takes an alternative course to end this aspect of the marriage penalty, as explained below.

The Earned Income Tax Credit
The tax code also reduces the value of taxpayer-provided wage subsidies that flow to low-income tax filers through an IRS-administered program known as the earned income tax credit (EITC). Even though the EITC is a spending program, it can have the same adverse consequences as a marriage penalty imposed on taxpayers. Hundreds of thousands of low-income working families see their EITC subsidies disappear just because they are married, and married couples often become ineligible for the wage supplement faster than do their single counterparts.6 For example, married couples lose their EITC subsidies more quickly than do single working adults living together, since the phase-out of the credit is based on their combined incomes. Widening the EITC phase-out for married couples to twice that of single workers would help to end the marriage penalty for low-income families.

Each of the proposals put forth by the President and the Senate Finance Committee under Chairman Roth, as well as those included in H.R. 6, would take steps to widen the phase-out level of the EITC for married couples. Each one also would increase the qualifying levels for EITC recipients, although they would do so by varying amounts. S. 2346 would be the most expensive, expanding by $2,500 the amount of income eligible for the wage supplement. H.R. 6 would expand the eligibility level by $2,000, and the President's plan would increase it by $1,450. President Clinton's proposal would increase the beginning point of the phase-out range for dual-earner families by this amount when each spouse has at least $725 in earned income. H.R. 6 and S. 2346 have no such restrictions on eligible earnings.

The President's plan also calls for an increase in the phase-out rate for families with two or more children. This extension of the EITC does not affect the marriage penalty but does affect the overall cost to taxpayers, redistributing $25.9 billion to low-income families over 10 years.7 By comparison, the provisions in H.R. 6 would increase the program's cost by $11.4 billion over 10 years, while the Roth bill would increase EITC costs by $14.4 billion over that same period.8

The amendment offered by the Senate Finance Committee minority would end this type of marriage penalty as well.

The Democratic Amendment's Approach
The proposal introduced by minority members of the Senate Finance Committee offers a different approach to giving couples relief from the marriage penalty. Instead of working within the current tax system, this proposal would allow couples to choose to file as single adults instead of filing jointly, and to use the deductions, exemptions, and tax brackets of single filers.9 This approach ends the marriage penalty, but does so in a way that provides no tax cut to single-earner couples. Couples would split their income based on who earned it, and unearned income would be attributed to the spouse who owned the asset that produced the income. Deductions and credits would be proportionate to income, and each spouse would get a personal exemption.

Congress, by enacting a reform that allows married couples to file as single workers, could fix the inequities inherent in today's standard deduction and tax rate brackets. The Democratic approach, for example, would allow a couple to receive EITC benefits if their combined total income is less than twice that of the current phase-out amount. Such a reform would encourage couples to calculate their taxes both jointly and as single filers to determine which status has a lower tax liability. The Joint Committee on Taxation estimates that the total savings to taxpayers from this proposal would be over $165 billion over 10 years.10

Addressing the Alternative Minimum Tax
The Roth bill also includes a provision to help families that currently pay more in taxes under the requirements of the alternative minimum tax (AMT). Certain families, whether headed by a married couple or a single parent, will lose money under today's system because of ceilings for various family tax credits, such as the child tax credit or the HOPE scholarships. The provision proposed by Senator Roth would allow these non-refundable personal tax credits to be fully available to all families regardless of income. The credits would not lose value under the alternative minimum tax. This provision is not considered marriage penalty relief, but it would save approximately $44.6 billion over 10 years.11

WHAT THE SENATE SHOULD DO

By reducing the marriage tax penalty by a total of $248 billion over 10 years, S. 2346 would give married families the most tax relief in the shortest amount of time. Although this bill does not completely end the marriage penalty, it would reduce much of the bias against marriage in today's code without further complicating it.

By comparison, H.R. 6 would reduce the marriage penalty by slightly more than $182 billion over 10 years. Both of these bills would save more money for married families than the Senate minority amendment and the President's proposal. The Democratic approach would help reduce the marriage penalty as long as there is no income cap on allowing married couples the option to file jointly or as singles; however, income caps are a part of this approach, and this further complicates the most visible drawback of their initiative: It would force married couples to calculate their taxes at least twice, adding to the code's complexity. Finally, the President's proposal would not ease the price of the penalty for millions of married families.

These four approaches give the Senate adequate alternatives to consider in deciding how and when to end the penalty on marriage. It is time for the Senate to follow the House's lead and craft an effective piece of legislation that would give millions of married families immediate tax relief.

CONCLUSION

The marriage penalty is simply bad tax policy. America's tax code should be neutral and neither encourage nor harm marriage. The current system forces millions of couples to pay more in taxes simply because they are married. The idea of equity or fairness in the tax code is undermined by this penalty.

Moreover, every instance of discrimination in the code creates winners and losers, with harmful economic consequences. The marriage penalty, for example, lowers the incentive for a lesser-earning spouse to work, since that income will be taxed at a higher rate on the margin. This discriminatory tax treatment has the effect of making it more difficult for some people to achieve their economic objectives than other people.

Members of Congress from both political parties as well as the President agree that the marriage penalty is both harmful and unfair. The Senate should not allow the opportunity to fix the code presented by its consideration of these four proposals to slip away.

Rea S. Hederman, Jr., is a Policy Analyst in the Center for Data Analysis at The Heritage Foundation.

Endnotes

1. Joint Committee on Taxation, JCX-11-00 , 106th Cong., 2nd Sess ., February 2, 2000.

2. Congressional Budget Office, Budget Options , March 2000, Chapter 2.

3. Marriage Tax Relief Act of 2000 , Report No. 106-253, Committee on Finance, U.S. Senate, 106th Cong., 2nd Sess., April 4, 2000.

4. Joint Committee on Taxation, JCX-11-00 , and Senate Finance Committee, Marriage Tax Relief Act of 2000 .

5. Joint Committee on Taxation, JCX-20-00 , 106th Cong., 2nd Sess., March 6, 2000.

6. Senate Finance Committee, Marriage Tax Relief Act of 2000 .

7. Joint Committee on Taxation, JCX-20-00 .

8. Joint Committee on Taxation, JCX-11-00 , and Senate Finance Committee, Marriage Tax Relief Act of 2000 .

9. Couples today can choose to file as "Married Filing Separately," but the tax brackets are more narrow than the joint or single brackets. This is not a reasonable option, since couples will pay more in taxes than they would as either joint or single filers.

10. The most recent scoring on the Democratic amendment is $55 billion over five years in compliance with the Byrd Rule. The thrust of this paper is to look at the marriage penalty proposals over a 10-year period and to look at some earlier versions of the various proposals before the Senate Finance Committee markup on June 28, 2000.

11. Senate Finance Committee, Marriage Tax Relief Act of 2000.

About the Author

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis