Introduction

A marriage penalty results when a married couple pay more taxes by filing jointly than they would pay if each spouse could file as a single person. A couple face the marriage penalty only when both spouses have earned income. Single-earner couples never pay a penalty and in fact always get a bonus from the Tax Code, paying less taxes than they would pay as singles.

Source of the Penalty: Progressive Tax Rates. The marriage penalty fundamentally results from progressivity of the Tax Code. 1 This can be seen in Table I, which presents the federal income tax schedule for 1998. It shows how marginal income tax rates rise from 15 percent to 39.6 percent. The earnings of the secondary worker (the lower-paid spouse) in effect come on top of the primary earner's. Thus a secondary worker may find that his or her earnings push the couple's total income into a higher tax bracket, resulting in a marginal rate higher than the secondary worker would pay if taxed as a single.

To see how this works, consider a husband with taxable income of $25,000 per year. Under both the single and joint tax schedules, he would pay 15 percent tax on that income. However, if his wife also makes $25,000, only the first $17,350 of her income would be taxed at 15 percent. The remaining $7,650 of her income would be taxed at 28 percent, because it puts the couple's total income above the $42,350 ceiling for the 15 percent bracket. Thus the couple would pay 13 percent more tax on that income (the difference between 15 percent and 28 percent) than the wife would if she were single. This couple's marriage penalty would be $994 per year.

Penalties and Bonuses. As Table II indicates, a couple may either get a tax bonus or pay a tax penalty on the same total income, depending on what the income split is between husband and wife. The couple in the earlier example paid the maximum marriage penalty on their $50,000 joint income because each spouse earned half the income. However, if one spouse earned substantially less than the other, the couple could have received a marriage bonus.

• If the husband earned $40,000 per year while the wife earned $10,000, instead of paying a penalty of $994 per year they would have received a bonus of $910.
  
• That is, they would pay $910 less in taxes as a couple filing jointly than they would pay if each were taxed as a single.

The marriage penalty is most likely to apply to couples whose incomes are roughly equal. As Table II indicates, no couple with equal incomes or incomes within 10 percent of each other receive a marriage bonus and most receive penalties. As noted earlier, no single-earner couples pay a marriage penalty and virtually all, regardless of income, receive a bonus.

Of course the data in Table II are hypothetical. They assume that all income is earned and that couples have no deductions other than the personal exemption and the standard deduction. In real life, people's incomes and deductions are more complicated. To get an idea of how marriage penalties and bonuses affect real people, the Congressional Budget Office (CBO) looked at Internal Revenue Service and Census data. The CBO found that the highest proportion of marriage penalties occurred when the higher-earning spouse made between $20,000 and $75,000 per year. As shown in Figure I, couples with incomes above and below these levels were more likely to receive a tax bonus for being married.

Impact on Black Families. Thus we see that marriage penalties are most likely to have an impact on couples with middle incomes whose incomes are roughly equal. Professor Dorothy Brown of the University of Cincinnati College of Law has argued that these two factors mean that blacks are more likely to suffer a marriage penalty, while whites are more likely to receive a marriage bonus. ² The reason is that among married couples, black women are more likely to work than white women. Furthermore, working black women on average provide a higher percentage of the couple's total income than working white women. According to a 1990 study by the U.S. Commission on Civil Rights: ³

• Seventy-five percent of black women work full-time, whereas only 62 percent of white women do.
  
• Working black women contribute 40 percent of family earnings, while working white women contribute just 29 percent.

History of the Marriage Penalty

Although the marriage penalty is inherent in progressive tax rates, its magnitude has gone up and down with changes in the tax law. When the income tax was established in 1913, no distinction was made between married and unmarried taxpayers. A single rate schedule applied to both.

The tax problems related to working women were far fewer in those days because only a small number of married women worked outside the home. Even single women were unlikely to hold a paying job at that time. ⁴

• In the census of 1900, only 769,000 married women were in the labor force, which totaled 27,640,000 workers.
  
• The female labor force participation rate was just 20 percent in 1900, compared to 86 percent for men.

Community Property. In the 1920s, a number of couples in community property states began filing separate tax returns, with each spouse claiming half the couple's total income. ⁵ This was justified on the grounds that under community property each spouse is deemed to own half the couple's joint earnings, regardless of who earned them. By contrast, in common law states, the earnings of a spouse generally belonged to that spouse. Among the states with community property laws at that time were Texas, Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington and California.

Initially, the Attorney General of the United States ruled that couples in community property states could split their income for tax purposes. This had the effect of reducing taxes for most couples. For example, if a husband had $20,000 of earnings and his wife had none, they would be taxed as if each earned $10,000. This generally put them in a lower tax bracket and lowered their joint tax liability. Had this practice been allowed to continue, it would have led states to adopt community property laws just to give their citizens a cut in their federal income taxes.

Congress and the Treasury Department attempted to thwart income splitting through legislation and regulations. Eventually, a case reached the Supreme Court. In Poe v. Seaborn (1930), the Court ruled that state community property laws did allow couples to split their incomes for federal income tax purposes. As expected, this led several states to change from common law to community property to give their citizens a tax cut at no expense to the state. The trend accelerated when tax rates shot up during World War II. By 1948 Oregon, Nebraska, Michigan and Oklahoma had changed their laws to become community property states. ⁶

Obviously, this situation led to a great deal of unfairness, with residents of some states paying significantly lower federal income taxes than comparable earners residing in other states. Table III indicates the magnitude of the marriage penalty for couples in common law states in 1947. As the table shows, some couples in common law states were paying 40 percent more in federal income taxes than they would have paid in a community property state. For example:

• A couple with a joint income of $25,000 would have paid $9,082 in federal income taxes in a common law state.
  
• The same couple would have paid only $6,460 in a community property state.

As Professor Michael Graetz of Yale recently noted, "This absurd situation did not engender great respect for the integrity of the income tax." ⁷

Income Splitting. Congress finally resolved this problem in the Revenue Act of 1948, which extended the principle of income splitting to all married couples. ⁸ This constituted a significant tax cut for most married couples. ⁹ As Table IV shows, the bulk of the benefits accrued to couples with middle incomes.

More significantly, almost every married couple saw a sharp reduction in their marginal tax rate - the tax that applies to the last dollar earned. A couple earning $51,000, for example, saw their marginal rate drop from 75 percent to 59 percent between 1947 and 1948. Figure II illustrates the impact. Again, those in the middle brackets, not the rich, were the principal beneficiaries.

In practice, the impact of lower tax rates was mainly on women. Since a married woman's earnings came on top of her husband's, she was in effect taxed at her husband's marginal tax rate on the first dollar of her earnings. Marginal tax rates as high as 90 percent after World War II strongly discouraged married women from working.

Although income splitting was highly beneficial to most married couples, it created a problem for single taxpayers. As a result of income splitting, a married couple now paid significantly less tax than a single earner with the same income. Congress tried to address this inequity in 1951 by creating a new tax rate schedule for single heads of households, which roughly split the difference between the married and single tax schedules.

Birth of the Marriage Penalty. However, singles continued to agitate for tax relief. By 1969 some single taxpayers were paying 42 percent more federal taxes than a married couple with the same income. That year Congress created a new tax schedule that was designed to keep the tax burden on singles and married couples with the same income within 20 percent of each other. Figure III shows the tax rate reductions for single taxpayers that were effective in 1971. This legislation created a significant marriage penalty for the first time. ¹⁰ As a result, some married couples now paid more taxes by filing jointly than they would have paid if both filed as individuals. ¹¹

Further contributing to the rise of the marriage penalty was the steep increase in the number of women in the labor force. As Figure IV shows, the number of women in the labor force grew by about 50 percent between the late 1940s and the early 1970s. The labor force participation rate for women has continued to rise since and in 1997 was almost double the rate of 1947. This is important because a marriage penalty occurs only when a husband and wife both earn income. As women began working in greater and greater numbers, the likelihood of a couple suffering a marriage penalty rose.

As awareness of the marriage penalty grew, increasing numbers of couples began to take matters into their own hands by getting divorced for tax reasons. One couple, David and Angela Boyter, received national publicity for getting divorced each December, allowing each to file as single for the year, then remarrying in January. ¹² Eventually the IRS cracked down on this charade, but not before moving Congress to action. ¹³ By 1981, there was strong political pressure to redress the marriage penalty problem, and a variety of proposals were put forward. ¹⁴

Recent Tax Changes. In the Economic Recovery Tax Act of 1981, Congress attempted to redress the marriage penalty by giving the lower-paid spouse a 10 percent tax deduction on income up to $30,000, for a maximum deduction of $3,000. While this provision did not eliminate the marriage penalty, it did provide substantial relief for most married taxpayers, as shown in Table V.

However, the secondary-earner deduction did not live long and was eliminated by the Tax Reform Act of 1986. But because the Tax Reform Act sharply reduced rates for most taxpayers, the net effect was to reduce the number of couples suffering a marriage penalty and the magnitude of the penalty. ¹⁵ Nevertheless, some couples were worse off, as shown in Table VI.

The most recent tax legislation with a major impact on the marriage penalty was the 1993 tax bill. ¹⁶ Interestingly, the provision of this legislation that exacerbated the marriage penalty was not the increase in tax rates but the expansion of the Earned Income Tax Credit (EITC). The EITC is a refundable income tax credit for workers with low earnings. It creates marriage penalties because it is phased out as incomes rise and because it is maximized for workers with two children. ¹⁷ No additional credit is available for three or more children in a single qualifying family. Depending on their income, therefore, a two-earner couple might significantly increase their joint EITC benefit by divorcing. And if they have more than two children, the benefits of divorce can be enormous. For example, in 1996, a two-earner couple with four children and $11,000 each in earnings would have increased their EITC payment from $1,375 to $7,120 by getting divorced, with each spouse claiming two children. ¹⁸ Table VII illustrates the impact of the 1993 tax legislation on couples at various income levels.

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