The Heritage Foundation

Backgrounder #1424 on Taxes

March 28, 2001

March 28, 2001 | Backgrounder on Taxes

Why Congress Should Renew Its Efforts to End the Marriage Penalty

Each year, more and more married couples have to pay a "marriage penalty"--extra federal income taxes that they would not pay as single adults--and each year the calls for marriage penalty relief grow in strength and popularity, both in Congress and across the nation.1 Last year, Congress took action to end this pernicious and unfair part of the tax code by passing the Marriage Penalty Tax Relief Act of 2000 (H.R. 6) by a vote of 269-159 in the House and 61-38 in the Senate. Though President Bill Clinton vetoed the measure, the 270-158 vote in the House to override his veto showed strong bipartisan support for eliminating the marriage penalty.

With the election of President George W. Bush, the outlook for enacting marriage penalty relief has improved significantly. President Bush has introduced his own version of tax reform to address the marriage penalty and is unlikely to veto a sound bipartisan bill passed by Congress this year.

Members of Congress from both parties should renew their efforts to eliminate the marriage penalty as embodied in various provisions of the tax code. Married couples should not pay more simply because they are married. The tax code should not encourage couples, especially in the lower income brackets, to remain unmarried in order to save more of their hard-earned money. As soon as possible, Congress should build on the proposals in H.R. 6 to:

  • End the marriage penalty for joint filers who use the standard deduction by increasing the deduction to twice that available to single filers;

  • End the marriage penalty in the tax tables by expanding the size of the joint filer marginal tax brackets to twice that of single working adults; and

  • End the marriage penalty in figuring the earned income tax credit (EITC) by expanding the income phase-out range to twice that of single EITC recipients.

HOW THE MARRIAGE PENALTY WORKS

A marriage penalty occurs when the total tax paid by a married couple exceeds the sum that they would pay if each filed as a single taxpayer. In other words, two unmarried working taxpayers who live together would have a lower total tax bite than they would if they married and filed a joint return. Couples are more likely to be affected by the marriage penalty when they both work and the second earner contributes at least 30 percent of the total income.2

Each year, more couples are affected by the marriage penalty because of the steady growth in the number of dual-earner families. In 1995, the Congressional Budget Office estimated that 42 percent of all couples suffered the penalty.3 This year, the estimate is over 43 percent.4

The demographics of couples who suffer a marriage penalty have changed as well. In 1998, for the first time since the Census Bureau began recording such information, the majority of married couples with children were dual earners.5 Because they have children, these couples face additional marriage penalties in the form of lower tax credits and exemptions such as the child tax credit or the EITC. Thus, they not only pay a penalty for being married, but also have this penalty compounded by having children.

The majority of marriage penalties are caused by the fact that the tax code treats married couples differently from two single adults in four distinct areas: (1) rate brackets, (2) amount of standard deduction, (3) phase-out levels, and (4) EITC eligibility. While there are other areas in the tax code that treat married couples unfairly, these four areas have the largest effect on their taxes.

WAYS TO END THE MARRIAGE PENALTY

President George W. Bush campaigned on the need to enact a comprehensive tax cut to give back to Americans part of the overtax they now pay, and reducing the marriage penalty was a prominent part of his proposal. On February 9, 2001, the President sent Congress a plan to cut taxes by $1.6 trillion over 10 years, which included marriage penalty relief in the form of a dual-earner deduction. All married couples who report taxable income on separate W-2 forms--in other words, who have two wage or salaried jobs--could claim this deduction. The deduction would equal 10 percent of the lesser-earning spouse's salary, up to a maximum of $3,000. The Joint Committee on Taxation estimates that the savings for married working households from this deduction would be $88 billion over 10 years.6

Though implementing such a change in current tax law would be a step in the right direction, however, it would do nothing to remedy the marriage penalties inherent in the tax code. It would merely bandage over differences in brackets, standard deductions, phase-outs, and so forth by providing married taxpayers with an offsetting deduction.

Congress's effort last year to end the marriage penalty is a better approach. The reasons: The congressional plan would attempt to fix some of the basic second-earner inequities in the tax code, and the President's proposal would add to the code's complexity.

H.R. 6, the Marriage Penalty and Family Tax Relief Act of 2001, was introduced in the 107th Congress on March 15, 2001, by Representative Jerry Weller (R-IL). It also would take a strong step toward fundamental tax reform by addressing the penalty in the standard deduction and reducing the penalty that emerges from differences in marginal rates, but it could be improved so that it addresses all aspects of the marriage penalty.

The Standard Deduction

For tax year 2000, the standard deduction is $7,350 for joint filers and $4,400 for single filers. If two single taxpayers who use the standard deduction on their individual returns were to marry and use the joint filer standard deduction, they would have to pay taxes on the difference between these standard deductions.

In other words, the standard deduction for two single working adults is $8,800, while married taxpayers (or joint filers) can claim a standard deduction of only $7,350. This leaves a taxable difference of $1,450. For a couple in the 15 percent tax bracket, this difference creates a tax penalty of over $217.50.

How to Fix the Penalty in the Standard Deduction. Congress should renew its effort of last year by immediately increasing the standard deduction for joint filers to equal twice that of single filers. This would eliminate the bias against married couples who do not itemize on their tax returns. The staff of the Joint Committee on Taxation estimates that the savings to married couples would be more than $66 billion over 10 years.7

Rate Brackets

Millions of married taxpayers pay a penalty because the tax brackets of joint filers are not equal to twice that of single filers. In tax year 2000, a single filer would enter the 28 percent bracket at $26,250 of taxable income. A married couple pays the 28 percent marginal tax rate at $43,850.

Thus, married couples pay the 28 percent marginal tax rate on an extra $8,650 of income simply because they file jointly. In contrast, two single filers living in the same household would be able to pay the 15 percent tax on up to $52,500 of their taxable incomes. In other words, married taxpayers with taxable income in the 28 percent bracket must pay a penalty of $1,124.50 more than what two single taxpayers pay. This tax penalty equals the amount the average married couple spent on gas in 1999.8

How to Fix the Penalty in Marginal Tax Rates. Congress should increase all of the marginal rate brackets of joint filers to equal twice that of single filers. This would eliminate the penalty in the tax brackets for married couples. At a minimum, Congress should renew its effort of last year and double the first bracket of 15 percent as quickly as possible for joint filers.

Phase-Out Rates

Married taxpayers also pay higher federal income taxes because the phase-out rates of several income tax provisions are not twice those of single filers. Many elements of the tax code, such as personal exemptions or some deductions, are gradually eliminated as income rises. A marriage penalty occurs when the elimination or phase-out range for married couples who file jointly is lower than it would be if the married couple were made up of two single filers.

One example of this inequity is the child tax credit enacted in 1997. The value of the tax credit for single filers with an eligible child begins to phase out at $75,000. However, joint filers with an eligible child see a reduction in the value of the child tax credit at $110,000.

Another example is the difference in the taxation of Social Security benefits for seniors. Up to 85 percent of Social Security is taxable if a married couple's modified gross income exceeds $44,000. For single filers, however, the threshold for the 85 percent rate is only $34,000--well over half of the joint filer threshold.

How to Fix Penalties in Phase-Out Rates. Congress should set phase-out levels for married couples at twice those of single filers. This is especially important for provisions in the tax code that concern children. As long as the tax code contains credits and exemptions, parents should not lose them simply because they are married. Congress should correct the current bias against married couples in these types of exemptions and credits and also make any phase-outs for married couples in future tax legislation twice those available to single filers.

Earned Income Tax Credit

The tax code also penalizes hundreds of thousands of low-income working families just for being married. The earned income tax credit is a wage subsidy operated out of the tax code as a spending provision. Since the EITC's phase-out is based on the combined income of a married couple, two low-income married wage earners have their payments reduced at a faster rate than they would if they were single.

The problem is that the EITC is based on the number of children and income rather than on marital status. Thus, if two single parents who benefit from the EITC marry each other, their benefits almost always will be reduced based on their combined income.

This reduction creates an obvious incentive for the couple to remain single. For example, if two single parents each making $13,000 have one child, their EITC benefit in 2000 would be well over $2,000 each. But if they marry, their combined EITC payments would decline from over $4,000 to just over $1,000. Their decision to marry would cost them over $3,000--more than 10 percent of the total family income.

How to Fix the Penalty in the EITC. Congress should extend the phase-out of the EITC for married families. Moreover, it should phase out the credit for married couples at a lower level than it does for single parents. It is essential for Congress to ensure that low-income families do not lose their EITC benefits simply because they are married.

WHAT CONGRESS SHOULD DO

Congress should follow the President's lead and reform the tax code to eliminate the pernicious and unfair provisions that penalize working married families. It should renew its solid effort of last session and improve on the President's recommendations. In particular, Congress should end the marriage penalties by:

  • Increasing the joint filer standard deduction to twice that of singles;

  • Expanding the joint filer rate brackets to twice those of single working adults;

  • Phasing out key provisions of current tax law at the same rates as for single filers and at the same income levels as for two single taxpayers; and

  • Treating married EITC recipients the same as single EITC recipients are treated.

CONCLUSION

The tax code should treat all taxpayers fairly and equally. Couples should not be forced to pay more taxes simply because they change their marital status. Indeed, the correct way to end the marriage penalty would be to ensure that married couples are treated as two comparable single filers.

Increasing the joint standard deduction, marginal tax brackets, and phase-outs in the current tax code to twice those of single filers would make the tax code more equitable. Modifying the phase-out rate of the EITC so that couples do not see their benefits reduced by marriage would remove the incentive for low-income parents to remain unmarried.

Finally, new solutions to the marriage penalty problems in tax law must not further complicate the already cumbersome and complex code. Income splitting would add complexity, since married couples would have to compute their taxes at least two different ways and assign different economic assets to each spouse. A dual-earner deduction would require taxpayers to complete yet another line on their tax form.

Congress and the President have the will, the opportunity, and the means to make the code fairer. It is time to do so.

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

Endnotes

1. Congressional Budget Office, For Better or Worse: Marriage and the Federal Income Tax, June 1997; see also Rea S. Hederman, Jr., "Comparing Four Major Marriage Penalty Proposals Before Congress," Heritage Foundation Backgrounder No. 1382, July 7, 2000.

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

3. Congressional Budget Office, For Better or Worse: Marriage and the Federal Income Tax; Hederman, "Comparing Four Major Marriage Penalty Proposals Before Congress."

4. Gregg Esenwein, "Income Taxation of Married Couples: Background and Analysis," Tax Notes, February 19, 2001, p. 1085.

5. See U.S. Bureau of the Census press release, October 24, 2000, at http://www.census.gov/Press-Release/www/2000/cb00-175.html

6. Joint Committee on Taxation, Estimated Revenue Effects of Various Provisions Described as the George W. Bush Tax Reduction Proposal, Report No. 00-1 075, 106th Cong., 2nd Sess., May 2000.

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

8. U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 1999.

About the Author

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