What
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 married couple is less
than the standard deduction for two unmarried individuals--$1,400 less for
childless couples and $3,400 less 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. (Click if you're interested in another
marriage penalty on the working poor that no one seems upset about.)
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--accompanied by a $13 billion tax increase on unmarried taxpayers. That
works out to only about a $120 tax cut for the typical married couple (and a
$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 thought 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 rates 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.
If you
missed the link about the really big "marriage penalty"--the one created by the
earned-income tax credit, click .
